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Is US liquefied gas capable of ousting Russian gas from European market?

November 19, 2015, 18:59 UTC+3 Alexandrova Lyudmila
© EPA/FILIP SINGER

MOSCOW, November 19. /TASS/. Liquefied natural gas from the United States will hardly succeed in ousting Russian fuel from the European market to any significant extent, but Gazprom will have to conduct a very flexible price policy anyway, experts believe. Their opinions of how real the related risks are vary a great deal.

The supplies of US liquefied natural gas to Lithuania are scheduled to begin in February 2016, and to the whole of Europe, by 2019. The overall amount is likely to exceed 60 million tonnes (84 billion cubic meters of gas), Reuters said. In the meantime, Russia’s share of the European market is as large as 30%.

"True, the fear Russia may be faced with competition in the European gas market is justified to an extent," the Svobodnaya Pressa (Free Press) portal quotes the dean of the international energy business department at the Russian Oil and Gas University, Yelena Telegina, as saying. "Export development prospects are being implemented already and the supplies are scheduled to gain momentum by 2017. It is going to be a major challenge to the customary providers of gas by and large.

"True, pipeline gas for Europe is far less costly. But Europe has consciously opted for reducing the presence of Russia on its market. I believe that in this aspect politics are more important than economics. To my mind certain losses are unavoidable," she said.

"US gas is low-priced at home, but transportation costs would make it more expensive than Russia’s pipeline gas, pegged to the price of oil," the chief adviser of the Russian government’s Centre of Analysis, Leonid Grigoriev, said. "If Lithuania or any other country is prepared to pay more just for the sake of buying gas elsewhere, and not from Russia, this is not exactly what one calls a normal economy." In relation to Russia’s export interests these amounts will remain insignificant for the time being, Grigoriev said. Besides, Russia provides gas under contracts concluded for 10-15 years ahead, so all amounts will have to be consumed.

Russia has nothing to worry about for the time being, says Associate Professor Ivan Kapitonov, of the Russian presidential academy RANEPA. "It is anyone’s guess if the rest of Europe decides to follow in Lithuania’s footsteps," he told TASS. "Cardinal changes in the European market are very unlikely. We provide more than 150 billion cubic meters of gas. Let’s imagine the United States provides another 20 billion. Gazprom’s positions are unlikely to be seriously affected."

Research fellow at the Centre for World Energy Market Studies at the Energy Institute, Svetlana Melnikova, thinks otherwise. Risks for Russian exporters do exist and they will begin to materialize as early as 2016, she told TASS.

"The United States’ first pilot project Sabine Pass is scheduled to deliver the first portion of liquefied natural gas. In all, the country will have five such gas production facilities with a total capacity of 84 billion cubic meters. A large share of future products has been distributed and contracted, with 30% percent addressed to the European countries, and 70% to Asian ones. But all of those agreements and calculations were based on higher prices of hydrocarbons in 2011-2014, when the price scissors between the US and European markets were at about $200, and between the US and Asia-Pacific markets, about $400. In the current situation this price gap has been narrowing and US-provided gas no longer looks as lucrative as it used to be. According to our calculations performed on the basis of the Cheniere Energy company’s methodology, in the current price situation all supplies of US gas to any of the target markets would be loss-making. For instance, 1,000 cubic meters of US gas is $70 above the average European price."

One should not rule out that US natural gas may begin to be sold at prices below production costs, Melnikova said. "It is important that the LNG projects’ operators had sold gas to the European and Asian consumers in advance, thereby securing themselves against all price-related risks. Those who concluded such contracts in Asia and Europe and major international companies will have to bear the main burden of uncertainty. All amounts have been sold for 20 years ahead and what the consumers will have to do then is a big question.

If US liquefied natural gas begins to be traded below production costs, most probably it will get to the European market, where it will be competing with Russian, Melnikova believes. "As a result Russia will be forced to opt for a more flexible price policy. Whereas before it was possible to disregard the possibility of an extra ten to twenty billion cubic meters hitting the market, now this amount may prove tangible. Should it appear on the market, prices will start rolling down."

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