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EU, China will both get LNG from US, without Russian gas being sidelined, say experts

In order for US gas to compete with its Russian rival, analysts recommend the crude oil price must remain at the current high level

MOSCOW, July 27. /TASS/. Pledges by US President Donald Trump to boost supplies of liquefied natural gas (LNG) to Europe can come to fruition. Exports of American LNG to Europe are on track to quintupling and even soaring ten-fold in the coming years, according to experts interviewed by TASS.

However, in order for US gas to compete with its Russian rival, analysts recommend the crude oil price must remain at the current high level. Moreover, they predict that China is going to consume the bulk of American gas.

American dream

The European Union (EU) has agreed to step up LNG imports from the United States, Trump said earlier this week following his talks with European Commission President Jean-Claude Juncker, who confirmed the plans and announced the EU’s intention to build more terminals for this purpose. In 2017, the US supplied 3 bln cubic meters of gas to Europe, which is considered to be a small portion, considering that Europe’s total consumption reached around 500 bln cubic meters last year. The US is going to deliver another 8.4 bln cubic meters by 2020 pursuant to long-term contracts (there are four of them in total).

"For the US, the European market is more attractive than Asia’s since its exporters stand to gain because of lower logistics expenses with minimal price differential with the Asia-Pacific Region," Vygon Consulting’s Yekaterina Kolbikova explains. According to her calculations, US exports of LNG to Europe can climb to 15 bln cubic meters by 2020 and to 25 bln by 2030 if the share of supplies remains unchanged.

Alexander Sobko, an analyst at the Energy Center of the Skolkovo Business School, holds a similar point of view. "If the sides agree on the price issue, the European market can get 10-30 bln cubic meters of American LNG in the future, which will be a compromise of sorts. The US keeps out of the construction of Nord Stream 2, while receiving a small extra market for its LNG," he pointed out.

Amid current high oil prices the American LNG can already compete with its Russian rival in terms of the price (the gas price is pegged to oil futures - TASS), Sobko said. Meanwhile, if crude prices backtrack Russian gas will follow dropping in price. In order to compete with Russian gas down the road, the Americans need to cut the price of their projects at the production and liquefaction stages by another 10-15%, he noted.

Expert at the Analytical Credit Rating Agency (ACRA) Vasily Tanurkov agrees that the supplies of American gas to Europe can surge, adding though that the European market is not going to become the core one for the United States. "The point here is not that Russian gas is cheaper, but rather LNG prices in Asia are way higher. That said, the bulk of American LNG will be consumed by China, while the demand for gas there is going to surge by leaps and bounds in coming years," he said.

No threat in place

The increase of US supplies poses no threat of squeezing Russian gas out of the market, experts promise.

"Russia’s advantageous position on the gas cost curve in Europe will enable it to boost its market share further if the product is in demand politically," Kolbikova said. According to Vygon Consulting, the price of gas supplies from the Bovanenkovo field that is to be a resource base for the Nord Stream 2 project is $156 per 1,000 cubic meters. Meanwhile, the price of LNG exports from the United States totaled around $255 per 1,000 cubic meters in 2017 with the average gas price in Europe of $200 per 1,000 cubic meters.

According to Tanurkov, American LNG will most likely be intended to make up for gas shortfalls during times of peak demand, and be delivered to countries that do not receive pipeline gas from Russia, he said.

Traditionally, the top LNG buyers in Europe are Spain, Britain and France. "But the potential of LNG demand growth in those countries is rather limited when compared with the soaring demand in Asia, and US gas will compete with exports from Qatar and North Africa rather than with Russian pipeline gas," Tanurkov explained.

The capacity of European LNG terminals is currently estimated at 200 mln tonnes, although their loading does not exceed 27%, experts said. "Theoretically, Britain could buy more American LNG since it has free LNG capacities and requires gas imports, though what we see now is just the opposite. Even the American LNG that was purchased by the UK’s Centrica under a long-term contract to be supplied to the British Isles, has been partially resold," Sobko concluded.