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American LNG Will Not Win Europe Away From Gazprom

Источник изображения: sputnik-news.ee

The second half of August will mark the arrival of the first shipment of US LNG into Lithuania. How cost-effective are these shipments to the consumers? Why Latvia and Estonia don’t want to buy the “blue fuel” from Lithuania? Will the LNG be able to push Russian pipeline gas out of the European market? RuBaltic.Ru asked all these questions to the leading expert of National Energy Security Fund Igor YUSHKOV.

— Mr Yushkov, the first shipment of US liquefied natural gas (LNG) into Lithuania will happen in the second half of August. What is the justification of these shipments, when the Norwegian LNG is just around the corner and Qatar expressed its readiness to ship liquefied gas to Lithuania?

— There really is no lack of LNG on the market and you can buy it from anyone. Lithuania currently has a long-term contract with Norway’s Statoil and the sides abide by the contract. The deal includes renting the Norwegian liquefied gas terminal, so Lithuania had strong ties with Norway in this field. However, we must understand that any LNG tanker is more expensive than pipeline gas. And it was that Statoil contract that showed this, because Lithuania is trying to pick the minimal amounts, which are written in the contract and buys the rest on the spot market or via the pipe.

Initially, the only Lithuanian voluntary buyer of LNG  was the LITGAS state company, and everyone else didn’t want to buy liquefied natural gas because it was more expensive. They even had to pass a law that forced consumers to buy part of their gas from the LNG terminal. But all of the rest was pipeline gas. Because it is cheaper.

LNG from USA is the same story again: countries buy it to demonstrate their political loyalty to the United States. Everyone who ships American LNG are traders. So they don’t care who they ship to, as long as they get their money. The main shipments of American LNG are to South America and Asia. They have a more marginalized market. Europe has low prices, so they can’t really compete with Gazprom.

And a thousand “cubes” (cubic meters – t.n.) of Gazprom gas in Europe costs around 180 USD, while American LNG has to cost 270 USD for the same amount, in order to at least break even with the shipping and receiving services.

With such a difference in price, it is obvious that the procurements happen mostly due to political motives.

However, some shipments of LNG can be bought even cheaper, for example, if some consumer refused and the trader urgently needs to sell off the remaining LNG. When discussing political motivation, we can recall Poland receiving one tanker, which they bought in order to please Trump.

It is completely different from the countries that buy LNG, because they don’t have access to the Russian pipeline gas – Portugal and Spain for example.

So the story will probably go like this: they will buy one tanker, tell everyone to admire how they diversify, buying LNG in addition to pipeline gas, and from different LNG sources as well.

Still one must understand that this doesn’t change the price. America doesn’t have state companies. No discounts, no cheap gas for them, they will only sell where the consumers pay a good price. If Lithuania is ready to pay that kind of money, then the LNG will come from everywhere, including from America.

The main thing here is what price will the Lithuanians pay for it. But of course they will say that it is a commercial secret that won’t be disclosed.

— So it means that USA will not be a big provider of liquefied natural gas in Europe in the immediate future?

— Clearly USA won’t be the biggest provide in Europe. And not just in the immediate future, but in general, this is hard to imagine. Because Russia shipped 178 billion “cubes” of gas to Europe in 2016, and this year it has increased by 10%, with shipments being up to 190-200 billion “cubes.”

The maximum planned by the Americans is to ship around 100 billion “cubes” of overall LNG export by 2022. The majority of that is going to Asian and South American markets, because the LNG prices are higher there. The Americans are not even trying to beat Russia in Europe.

It is a completely different story that United States sanctions are mostly political, but they don’t miss out on opportunities to fill their pockets. USA starts pressuring Russia on the European gas market by banning the construction of new pipelines. The next step could very well be limiting trade in order to trigger a gas deficit in Europe. If there will be a deficit, then the gas prices will rise and they could ship American LNG at a good price.

So getting cheap Russian pipeline gas off the market is another goal for the sanctions. So the prices in Europe would rise.

This is why the Europeans started protesting the newest sanctions. They were not looking out for Russia, but their own interest. So the prices in Europe would be low, then the consumers would be happy. The Americans are really not presenting any competition to Russia in Europe.

The Americans pulled off a trick: the company didn’t sell ready liquefied gas, instead it sold the ability to hold specific amounts of it in its factory to traders, mostly European ones. So, they sold a million ton LNG to one side, two million a year to another. So the traders already gave their money to them and now the Americans don’t care who gets the LNG or whether it will sell at all. Now it is up to the traders to find a buyer.

This is why traders may sell it at a loss, to at least somewhat cover their expenses. This is why LNG sometimes ends up on the European market, because currently when they can’t sell it at a high price, then they will at least sell it to Europe to cut losses. This does not mean that shipments are profitable for the seller.

— The Baltics prime-ministers had another round of gas negotiations. The meeting ended with good intentions of creating a regional LNG infrastructure. Lithuanian PM Skvernelis has yet to convince his neighbors in the need to buy gas from the LNG terminal in Lithuanian Klaipėda. Will Latvia and Estonia buy gas from Lithuania?

— This is where the price will matter. Latvia and Estonia see what this LNG story has turned into in Lithuania and Poland. Everyone sees that Poland buys the bulk of its supplies from Qatar, but during the contract signing, it was twice as expensive as Gazprom’s gas. Right now Qatar gas is more expensive by almost a half of the price. Latvia also sees the colossal losses they would have if they bought LNG instead of Russian gas, so they are in no hurry to get into that mess. In general, on one hand they still keep buying Russian gas, and on the other, the EU demands they have more than one supplier. 

Both Latvia and Estonia are thinking about building their own terminals, but the consumers know that they won’t get it cheaper than they do from Russia.

So there are two options: either build their own terminal or continue consuming Russian gas.

Buying LNG from their Baltic neighbor is a less lucrative option, because they would have to pay their neighbor for the transit and the supplier for the gas. LNG would be even more expensive than their neighbor got it. So the choices are either building your own terminal or staying with the Russian option.

They can’t buy all of their gas from Russia, because the European Commission insists that EU countries must have at least 3 sources for diversity. We will see how all of this will end. Currently, Latvia and Estonia see that Russian gas is super cheap and they will continue buying it.

— Can Russia increase its presence on the European LNG market? How attracted for Europe are the Yamal LNG, Pechora LNG and Baltic LNG projects, that are currently almost ready?

— Here we have to see what Gazprom will be trading on, for example with the Baltic LNG. If it will ship out the whole amount unto the spot market, then the spot trading platforms will decide the price at that moment. It will be difficult for Gazprom trade in long-term contracts, because then it would be competing with itself, because it will be offering LNG to countries that are already getting Russian pipeline gas. And obviously, pipeline gas is cheaper than LNG. So the Baltic LNG, in my opinion, will be aimed at regions that the pipe can’t reach. Like Portugal and Spain, partially the United Kingdom. Also the Baltic LNG will competing on the spot market, so I think it will also be aiming for South America.

It is possible to attract Europeans to Russian LNG. Especially with the launching Yamal LNG factory, which is almost completely booked. But it is booked by traders who agreed to buy certain amounts a year. And it is unknown who would the traders sell to. There is no clear idea on where the LNG will be shipped.

One of the traders is the French company Total. it is quite possible that the gas from Yamal will go into France and other European countries, but with the caveat that it will be not Russia trading the gas, but a French company. Maybe the Europeans will be less scared of that gas, seeing it as international and not Russian.

— Today liquefied natural gas in EU is about 12% of the overall import of the blue fuel. Will the LNG share grow in the European gas market?

— The joint power of European LNG terminals is around 8 billion “cubes.” That is how much liquefied natural gas Europe can take. But only 12-15% is in use. And with that they are building new terminals. The Europeans think that if they build the infrastructure, terminals, then the tanker full of cheap gas will magically arrive, with the terminal just attracting cheap gas. But that is not happening.

There is no cheap LNG and I doubt it would appear any time soon.

Something could change only if oil prices suddenly went up. Because the Russian long-term gas contracts are tied to oil prices. If oil suddenly goes up to 100 USD for a barrel, then the gas price in Europe will be 350-400 USD for a thousand “cubes.” Now that would be a big completion of LNG and pipeline gas in Europe. And it would be quite stiff competition at that. But while the price is 180 USD for a thousand “cubes”, the European market is unattractive for LNG suppliers.

LNG is expensive on its own. The production cost is higher than common pipeline gas. Especially with all new projects. Australia and American are also launching new projects – and those are at least developed deposits. They are ready and the infrastructure is there.

Russia is of course building new pipelines: Nord Stream, then the second one a Turkish Stream. But that requires smaller investments. The aforementioned Yamal LNG… the plant and development of the deposit cost 27 billion USD, while the Nord Stream 2 costs 9 billion USD. So Russian investments in pipelines are less than LNG investments. So there will be no major changes here.

Translated by Pavel Shamshiev

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