The global LNG supply options are broadening with new LNG export projects – both under construction and proposed – mushrooming especially in Australia, the US, Canada, Papua New Guinea, Mozambique, Tanzania et cetera. Conceivably, a severe competition in the global LNG market is in the not so distant future. What impact this “golden age of gas” – as dubbed by the IEA – will have on global natural gas pricing – what is still a very regionalized affair with LNG exporters fetching the highest prices in the Asian market – is very much up in the air. However, clear are the additional benefits for energy security globally.
According to the BP Statistical Review of World Energy (June 2014), Russian natural gas production volume came in at 604.8 billion cubic meters (bcm) in 2013, second only to the US with a total of 687.6 bcm. Moreover, as for natural gas exports via pipeline, Russia registered a substantial overall year-over-year increase of 17.1 bcm to 211.3 bcm in 2013, thereby strengthening its position as the largest natural gas exporter in the world. However, it is notable that European LNG imports dropped by 16.8 bcm to 51.4 bcm in 2013, while Asian LNG imports in 2013 rose by 13.5 bcm to 238.1 bcm. These figures indicate that demand growth is driven by the Asia-Pacific region and, at the same time, illustrate Asia’s importance in current and especially future international LNG trade.
New LNG Suppliers and Future Demand Center
Source: IEA
With respect to the above chart, the IEA cautions in its World Energy Investment Outlook 2014 that even though the “over $700 billion invested in LNG infrastructure helps to globalise gas markets, (…) the high cost of transporting gas dampens importers’ hopes for much cheaper gas.” This crucial point has also been stressed in reference to Europe by Elizabeth Rosenberg, Senior Fellow and Director of the Energy, Environment and Security Program at the Center for a New American Security, in a recent testimony before the Senate Committee on Energy & Natural Resources:
“The expectation of U.S. LNG exports entering the global gas market, whether cargoes will land in Europe or travel to other destinations, gives additional leverage to Europeans in future price negotiations with Gazprom. (…) However, even while U.S. LNG will help to diversify supply sources in Europe, and thereby help reduce the cost of some Russian gas, it will not drive down the price of gas substantially. The cost of U.S. gas plus liquefaction and transatlantic transport fees will mean it only slightly undercuts European gas prices, and therefore will only slightly drive down European equilibrium prices.”
Interestingly, she also added that “another benefit to European energy security derived from U.S. LNG export is the signal it will send to investors to build new LNG receiving and gas pipeline infrastructure. This will help make the European market more efficient and more resilient in the face of a potential supply disruption from one source or supplier.
”Now, this raises the fundamental question whether US LNG could actually take on Russia and its pipeline-based natural gas market dominance in Europe. Note, it will still take years for US liquefied natural gas to reach European shores due to issues ranging from US regulatory approvals to lacking LNG import terminals. The latter seemingly small detail may actually become very important because given that exporting LNG is intended to be a profit-generating business for private companies, an anxious European Union should put EU funds to work and build the necessary infrastructure instead of just deliberating on the abstract concept of European energy security. This would show real commitment – something investors like to see before they in turn risk their money – and also that Europe is finally willing to pay a premium for real European energy security. So, what is the status quo of European LNG import terminals?
LNG Terminals In Europe
Source: Thierry Deschuyteneer, Gas Infrastructure Europe (GIE) via Institut Français des Relations Internationale
The chart above shows the potential of growing long-term availability of LNG in Europe if the EU and the respective European countries are willing to move forward on planned as well as LNG import terminals under study, and are also willing to pay a premium vis-à-vis piped Russian gas for the greater good of enhanced energy security. According to GIIGNL 2013 data, cited by Thierry Deschuyteneer of Gas Infrastructure Europe (GIE), Spain leads Europe in LNG imports with 27 per cent, followed by the UK (20 per cent) and France (18 per cent). In this context, a CRS report on ‘Europe’s Energy Security: Options and Challenges to Natural Gas Supply Diversification’ notes that “the interconnection between Spain and France could be expanded to allow Europe to take advantage of Spain’s excess import capacity for LNG.” Additionally, existing import facilities exhibit low levels of utilization rates as reflected further in low LNG import numbers to Europe in 2013, which continued downward trajectory since 2011.
LNG Imports to Europe in Decline
Source: Thierry Deschuyteneer, Gas Infrastructure Europe (GIE) via Institut Français des Relations Internationale
LNG imports to Europe decreased by 39 bcm from a high of about 82 bcm in 2011, which translates to a precipitous 52 per cent decline, due in large part to increased Japanese LNG demand post Fukushima and changing price dynamics. Also note that none of the existing LNG import terminals are in a position to serve the vulnerable Southeastern flank of Europe – a part of Europe, which in particular needs energy supply diversification in order to hedge against Russia potentially cutting off gas supplies in addition to solving a general undersupply of natural gas in the region.
Strategically, using the crisis in the Ukraine now to push ahead with plans of constructing LNG import terminals in Europe’s Southeastern region may pay huge dividends in the long run in terms of decreasing the dependence on one single energy supplier (Russia) given the tremendous natural gas potential in the Eastern Mediterranean (offshore) with even possible links to the Middle East and the Caspian Basin, thereby bypassing Russia.
This also seems to be the US government’s strategy in the region, as Amos Hochstein, recently named acting special envoy and coordinator for international energy affairs and now leading the State Department’s Bureau of Energy Resources, outlined in a recent Senate Foreign Relations Committee testimony:
“[There is a] critical need for Europe to improve its energy infrastructure by constructing new pipelines, upgrading interconnectors to allow bidirectional flow, and building new LNG terminals to diversify fuel sources. (…) European countries must pursue diversification of sources away from a dependence on a single supplier. I am not suggesting that countries should eliminate Russian imports – that is neither necessary nor reasonable and Russia will remain a central player in the region – but introduction of alternative supplies will promote competition in the energy market. This will ultimately increase energy security while also benefitting consumers. (…) It is unlikely the Southern Corridor would become a reality without State Department engagement. We strongly support the creation of the Greece-Bulgaria Interconnector, which will allow gas from the Southern Corridor to supply Southeast Europe rather than just enter Central and Western Europe via Italy. For the same reason we support proposals to build an extension of the Southern Corridor from Albania all the way to Croatia, once enough gas becomes available, ultimately supplying neighbors Hungary, Ukraine, and others. (…) These efforts are already producing successful projects such as the recent announcement of the Hungary-Slovakia interconnector. We also support proposals to build LNG terminals at critical points on European coasts, from Poland to Croatia to the Baltics.”
In conclusion, while Russia will undoubtedly remain a major player in the European natural gas market, Russian gas will have to ‘fight’ for market share against surging LNG imports and may eventually get pushed out of the market by either cheaper suppliers or the willingness of European countries to pay a premium in return for more perceived energy security.
Fittingly, Robert Bensh, an energy security expert, elaborated in an interview to Oilprice.com not only on Russia’s Achilles’ heel in Europe but also described how Russia could attempt to keep LNG imports to Europe in perpetual decline:
“Gazprom’s Achilles’ heel (…) is the prospect of losing the European market to LNG. And it eventually will, at least in part, though it won’t be tomorrow. (…) LNG is always about $1 less than Gazprom. The U.S. wants to sell their LNG, period. Asian prices are higher, anywhere from $3-$4 higher. But long, steady supply will always get sold. Unless Gazprom comes down in its prices, to make LNG uneconomic, there will always be an LNG marketplace in Europe. There will always be enough supply to meet demand in Europe. All Gazprom has to do is drop its prices down $1 and LNG will be uneconomic. (…) For now, U.S. LNG does not impact Europe – we’re not transporting enough in the next five years.”
