Pipeline Politics
LNG Isn’t Freeing Europe from Gazprom Yet

Europe has a long history of a heavy reliance on Russian natural gas, but that experience is also marred by instances of Moscow tying gas contracts to geopolitics and occasionally disrupting supplies in order to quiet its restive Western customer base. But a major global increase in supplies of liquified natural gas (LNG) have given hope to many across Europe that the days of long-term, high-price, take-or-pay contracts with Gazprom may be numbered. By building LNG import terminals, the continent is opening itself up to a market that importantly only needs ship access to secure deliveries, rather than the overland pipelines that Russia has effectively used to solidify its market share in the region.

But Gazprom was able to solidify its market position in Europe in 2016, and analysts expect it will take another six months before LNG starts to seriously start weakening that grip. That’s because, as Reuters reports, gas supply disruptions in Asia and Africa have diverted the attention of LNG suppliers in Australia and the United States away from Europe and towards South America:

Attacks on pipelines in Nigeria and dwindling resources in Trinidad, once stalwarts of the LNG export market, took supplies off the open market and gave new U.S. LNG producers an opening to plough shipments into South America, not Europe. […]

However, Gazprom will not get a free pass indefinitely, as the situation begins to turn again from the middle of 2017, [Ira Joseph, Pira Energy’s head of global gas and power] and [FACTS Global Energy senior analyst Kittithat Promthaveepong] say.

At that point, new LNG production growth from the United States and Australia should start spilling over into Europe as new markets will struggle to absorb surpluses fast enough.

We noted last February that the first shipment of American LNG was sent to Brazil, and that seemed to set the tone for the destination of liquified U.S. shale gas for the rest of the year, with just two shipments making it to Europe thus far. The global LNG market is not nearly as interconnected as the market of its cousin hydrocarbon, oil, and it’s evidently going to take some time before new suppliers like the United States connect with new buyers, like those in Europe seeking to diversify away from Russian gas.

Still, the writing is probably on the wall for Gazprom in Europe. The Russian state-owned gas company will still have an important role to play in Europe’s energy security going forward, but as the availability of LNG continues to rise and countries become increasingly capable of importing it, Putin’s ability to bully customers into accepting potentially onerous contracts with political strings attached is weakening.

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