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U.S. Gas Cutting into Gazprom's Bottom Line

If Western sanctions will only have an effect on Russia’s energy outlook in the long term, there is one factor that is likely to exact a more short-term cost. And Gazprom, the Russian state-owned gas company, is already feeling the pain. The Financial Times reports:

Russia’s Gazprom could lose 18 per cent of its revenues as a result of competition from US liquefied natural gas exports, according to a New York-based think-tank.

European consumers can expect to pay 11 per cent less for their gas as a result of the downward pressure on world prices created by rising US LNG exports, hitting revenues of the Russian state-controlled gas group, according to an analysis published on Monday by the Center for Global Energy Policy at Columbia university.

The US shale revolution, caused by advances in production techniques from reserves that were previously not commercially viable, has boosted the country’s gas production and created expectations that the country could become a significant exporter of LNG, at prices that will be competitive in world markets.

So far, Putin has appeared both unimpressed and unhindered by Western sanctions. He has escalated the crisis in Ukraine whenever it suits him, he continues lie through smirking teeth about it, and meanwhile he is showing his power over the oligarchs at home.

To the extent that his power is based on the strength of Russia’s energy sector, however, Putin’s position could be deteriorating. U.S. exports of natural gas, especially as LNG export terminals are completed over the next few years, are going to shoot up. If the energy export-reliant economy crumbles, that spells real trouble for Putin.

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  • Duperray

    US oil imports decline but are still there. US Gaz exports are still nil. While Russia exports large volumes of gas and oil that anybody can find on Internet. How come an unvisible supplier / buyer could curb world energy prices? It is obviouysly still present economic global downturn which makes prices jitter, to be soon corrected when producers adjust their outputs, as always before.
    It seems that some newsmen exult so much about Russia desperately desired demise that any bit of event is magnified and biased towards same propaganda target.
    This devaluates all papers and former analysis. Where is american realism, pragmatism?

    • Alex K.

      US LNG will be exported as soon as 2016. When US gas shale production decreased US demand for imported LNG, suppliers redirected their tankers to European re-gasification points, bringing down LNG prices on the continent. When the US starts exporting LNG, new supply will come to Europe inevitably bringing down prices.

      As for crude, it is priced at the margin and minor supply growth can lead to major price dips. US production is set to increase and OPEC output depends critically on Saudi Arabia, Kuwait and the UAE. If the US can convince the KSA to keep the tap open, Brent can realistically drop to $90/bbl, which won’t spell an end to Putin’s regime at once but will be highly problematic for his inflated military and social spending.

      • Duperray

        Good points. Let’s try to quantify some: As far Internet is OK, peak US LNG yearly import was 22Bm3 in front of total US use of ~650Bm3. So, import termination effect is lost in “noise”, overall because most LNG contracts are long term. LNG US export have yet to impact and seen from Putin’s office, new China delivery occurs almost simultaneously with US growing exports. Another point: Lng traffic started through Algeria and France, Spain, with short sea lane. US exports could occur but due to Americas’ gas glut, exports shall necessarily go Far-East, with about 30 times longer sea lanes: Impact is that each tanker annual deliveries are almost cut by 20 or 25 times, hence capacity and costs increase for buyer, not enough to prevent US competing with others towards Japan’s supply, but really uncompetitive versus algerian inland sea deliveries (less than 350 miles..). The big loser which would not be able to alternatively use US Lng is Europe because present russian gas price is about 45% cheaper than algerian Lng… EU officials now fear that when China pipe works, risk is either lack of russian capacity or buyers competing with China to get gas deliveries. For a couple of years, EU has already reduced its Lng imports due to Japan sudden thirst satisfied at any price. Piped gas price looks stable.
        Regarding Oil, keeping excess production for years has been performed under Reagan’s order to Saudis around 1980 for the know reasons. I dont think Obama has the guts to re-do this even if he dreams to knock down his russian friend because – as much as 1980’s low oil prices were good for US industry – any price cut now would immediately cut part of US oil export profits, to industry displeasure.
        I would bet, producers would stabilize barrel within same level, if not increase.

        • Alex K.

          The LNG market is still fragmented and dominated by long-term contracts but there is an increasingly important spot component to it and, therefore, it is not immune from marginal pricing. 22 bcm pa was hardly noise compared with LNG imports to Europe in 2007, about 50 bcm. Even an extra 10 bcm pa of LNG supply will improve Europe’s bargaining position against Gazprom.

          Europe’s problem is its gas network is still underdeveloped. Spain is currently paying $10/mln btu for Qatari LNG while Britain, only $7/mln btu. Gazprom’s average price to Germany is also close to $10/mln btu. But Poland, Lithuania, Spain and much of Italy still cannot get the cheap gas from the UK and Belgium because of infrastructure constraints. Completing a fully fungible network won’t do away with Russian gas imports (that can only be done with indigenous shale) but Gazprom will lose its trump card, i.e. its ability to bully Eastern European countries fully reliant on Russian supplies.

          Gazprom is planning two pipelines to China. One, the Power of Siberia, will source gas from currently undeveloped East Siberian fields, and will not be connected to Gazprom’s existing pipelines. It won’t have any impact on Russian westbound exports. It is estimated that the price will be close to Gazprom’s current EU average, which isn’t that great if the fields and pipeline suck in $40-50 bln in capex. I don’t think this will be completed before 2017 – unless China physically builds it, I’d say 2018-19 looks more realistic.

          The second project is the Western Route, which is supposed to connect West Siberian fields to northwestern China. Now this one can potentially give Gazprom great leverage over EU customers. Too bad there’s no contract and limited interest from the Chinese. It might well be a non-starter, as it actually has been since 2006 or so when the Western Route was first mooted.

          As for crude, US oil companies won’t go bust if oil drops to $85-90/bbl and Obama does not care much about them anyway. He has just cut ExxonMobil off its most ambitious Arctic project.

  • Kevin

    It may hurt the Russian treasury in a few years, but because we do not plan to ratchet up or down exports based on Russian political or military actions it probably won’t deter Putin fron invading his neighbors. In fact he may decide he needs to do so quicker in order to grab resources before falling export revenues hit his treasury. Even if he transformed into the perfect liberal leader, respecting his neighbors’ sovereignty and his population’s civil rights, we would still export gas and cut into his treasury.

  • GlobalTrvlr

    “European consumers can expect to pay 11 per cent less for their gas as a result of the downward pressure on world prices created by rising US LNG exports,” ??? We export no LNG at this time. There have been a lot of applications to build facilities, a few approved, but none that are operational or approved to ship once operational.

  • Alex K.

    “So far, Putin has appeared both unimpressed and unhindered by Western sanctions.”

    The man and his team may be constitutionally short-termist. I would even suggest that short-termism runs deep in the Russian psyche, where “surviving this winter” trumps other dreams and priorities. The sanctions may have wounded the Putin regime – even fatally so – but a large wounded animal can run for miles and stomp on smaller creatures before it drops dead. Worse, the Kremlin beast may not even realize the depth and gravity of his wound.

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