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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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  • Andrew Allison

    If the Europeans were serious about about reducing their dependence on Russian gas, they would outbid the S. Americans and Asians.

    • Kev

      That would amount to shooting themselves in the foot economically.

  • Kevin

    Gazprom’s power is a ndermined by the availability of alternative suppliers and the ability to import their gas. The actual amount Europe import’s doesn’t really matter, it’s their capacity to switch suppliers that undercuts Gazprom’s leverage. Thus to determine Gazprom’s leverage you should look at Europe’s LNG import capacity, not how much it is actually importing at any given moment.

    • Kev

      They have plenty of capacity, which goes idle for a lack of demand. LNG simply can’t compete on price.

  • Kev

    1. Liquefied natural gas is vastly more expensive than gas delivered via pipeline. If you’re European it simply makes no sense buy American LNG unless you’re willing to pay a substantial premium for your Russophobia, and so far nobody except the Baltic republics is willing to do so.

    2. Russia has never disrupted supplies to Europe. The only disruptions were caused by Ukrainians siphoning gas for their own needs (i.e. stealing it), which should only add pressure on Europeans to allow Nord Stream 2.

    3. Gazprom has grown its market share in Europe since 2014, and currently accounts for over 30% of EU’s natural gas consumption with lots of room for growth, as European domestic production continues to decline.

    • CapitalHawk

      Natural gas isn’t easily moved outside of pipelines, which is why LNG terminals exist. As a result, prices in geographically isolated areas (like North America and Europe) can vary substantially. For example, for the last 6 years the price per MMBTU in the US has moved between roughly 1.50 USD to 5.00 USD. In Europe, during that period, it has been as high at 13 USD per MMBTU, which can be quite a gap. Whether it is profitable to arbitrage that gap has everything to do with the cost of compression, transport and de-compression. The fact that companies in the US are building or modifying their terminals to allow the export of LNG from the US tells me that the smart people believe it will be profitable.

      • Kev

        Liquefaction terminals exists to reduce the volume of gas (turning it into liquid), so that it can be loaded onto a ship. You still need to build a pipeline, once you’ve turned LNG into gas again.

        The whole procedure is vastly more expensive than operating a pipeline, to say nothing of the cost of all associated infrastructure. Which is why piped gas will always win, unless we are talking about situations where building a pipeline is simply not an option, not feasible etc.

        Lithuania invested a ton of money to build its own regasification terminal, now they are paying twice as much for gas as they used to pay Gazprom.

    • CaliforniaStark

      It is in Europe’s interest to diversify its source of natural gas, and it is doing so. Am not seeing the Nord Stream 2 being built, Besides Polish objections, there is a question whether it violates EU requirements for diversifying the source of natural gas supplies. Gazprom is now facing a competitive market for natural gas, and can no longer manipulate the price — its past conduct has left a bad test in European mouths. If the price is high enough, like in late 2016, LNG can be price competitive. The expansion of the Panama Canal resulted in U.S. LNG being able to take advantage of a much higher price in the Asian markets late last year — so a lot of LNG was sent there through the Panama Canal. The U.S. entering the LNG world market is going to be a game changer.

      • Kev

        Did you read my post? Europe is not diversifying, it’s growing more dependent on Gazprom by the year. Europe did its calculations and doesn’t think that LNG is worth it.

        As for Poland and it’s objections, don’t make me laugh! They threw a similar tantrum when the first pipeline was build. Nobody cared then, and no one cares now.

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