Last month US President Donald Trump signed a bill that confirmed a set of sweeping new sanctions against Russia. This bill sparked some sharp reactions in Europe. A number of governments and energy companies expressed concerns that these sanctions could pave the way for Washington’s pre-eminence in Europe’s natural gas market. However, such worries are vastly overblown. Due to a medley of factors, Washington’s presence in Europe’s natural gas market will likely remain limited for years to come.
The controversy over the sanctions bill largely stems from a section which states that the US President could penalise companies that do business with Russian energy companies. More specifically, the bill reads that sanctions could be applied if an entity makes significant investments or otherwise supports the development of Russian pipelines.
At the same time, a legion of voices claimed that the sanctions are but a ploy to weaken competitors and promote American LNG exports to Europe. Although this argument might seem compelling because US energy companies are indeed eager to capitalize on its “shale gas boom” and expand the list of its LNG destinations, a closer look at the natural gas market dynamics reveals that the concerns are driven by a misunderstanding of a number of commercial factors.
First, piped natural gas in Europe is significantly cheaper than LNG imported from the US. Even though gas at the US Henry Hub currently costs around $3 per million British thermal units (mmBtu) and piped gas in Europe on average costs about $4-5 per mmBtu, the price of US LNG in Europe soars to almost $6 per mmBtu after all associated fees for shipping, liquefaction and gasification are factored in.
Piped natural gas in Europe is significantly cheaper than LNG imported from the US
Moreover, due to higher profit margins, Asia is a far more attractive destination for US LNG exports than Europe. In August, for example, the price of natural gas stood at $4.533 per mmBtu in one of Europe’s largest spot trading hubs, the United Kingdom’s National Balancing Point, yet it was $5.40 per mmBtu at the Japan Korea Marker – one of Asia’s leading LNG price benchmarks.
Second, it is unlikely that American LNG will dominate Europe’s gas market because it has to vie with a legion of other exporters. Not too long ago LNG trade was a niche industry, but right now there are 19 LNG exporter countries and almost every year there are new participants joining the pack. Due to the generally flexible nature of LNG spot trading, which contrasts greatly with the often Byzantine natural gas pipeline contracts, these exporters compete on a more or less equal playing field where the supplier with the best commercial offer gets the contract. Under these conditions it is difficult for a single exporter to completely dominate the market of a country, let alone an entire region.
Furthermore, due to lower extraction costs, LNG exporters like Qatar are currently much better positioned than the US to satisfy Europe’s natural gas demand. Thanks to fortuitous geography, Doha has access to enormous natural gas fields like the offshore North Dome in the Persian Gulf, which bestows Qatar with the lowest LNG production costs in the world. With the delivery cost of just over $5 per mmBtu, it has a significant competitive edge over other major LNG exporters.
To be sure, in the years to come US LNG will feature more prominently in the European gas market, but so will other LNG exporting countries. In 2016, global LNG production stood at 265 million tonnes (MT), but it is estimated that by 2025 it will grow to 375 MT. This increase in the supply side, combined with a build-up of transport infrastructure, decreased natural gas production within Europe and the pursuit to diversify sources, will all contribute to a future where LNG will play an ever greater role in Europe’s energy mix. Yet even under these circumstances, piped gas will likely remain king in terms of the overall market share held by it.
The recent clamour over Washington’s sanctions against Russia acting as a vehicle to promote US LNG dominance over Europe’s natural gas market seems like an awful lot of ado about nothing. This is because US LNG exports face a competitive disadvantage against both piped gas in Europe and other LNG exporters that have lower delivery costs. Also, lower spot market prices in Europe will unlikely turn the region into a prime target for US LNG. In due time, we will witness more LNG tankers sailing towards the shores of Europe, but these tankers will certainly be flying the flags of more than one country.