Europe’s Energy Wars: Tankers Against Pipelines (II)

Europe’s Energy Wars: Tankers Against Pipelines (II)

See Part I

Today Russia’s pipeline gas supplies to Europe face no competition, but the situation may change soon with the US, Qatar and Australia exporting liquefied natural gas (LNG) to the Old Continent.

The shale gas extraction has significantly grown in the United States. This fact has been hyped in the media. A tanker carrying liquefied natural gas from Cheniere Energy's Sabine Pass export facility in Louisiana is en route to Portugal. The Wall Street Journal (WSJ) reports that the event marks the first shipment in a trade relationship that could shake up the European market currently dominated by Russia.

The ship is estimated to arrive at the Port of Sines in Portugal on April 26. The WSJ cites Trevor Sikorski of London-based consultancy Energy Aspects. According to him, the impact of US gas in Europe «will be gradual, but it does start to change everything». «The new LNG will put downward pressure on prices, and losing both volume and value could be a hard pill to swallow» for Russia, the expert says.

Indeed, the United States started to export gas for the first time in half a century, but the US supplies transported by sea will not replace Russia’s exports in the foreseeable future. These are the reasons why:

First, the United States is shipping gas overseas for the first time in decades, but private companies sell to the highest bidder – and not just to the countries Washington might want for geopolitical reasons. They don’t pursue the goal of taking the European market away from Russia to deprive it of profits. For instance, in February Cheniere Energy Inc. sent its ship with the first cargo of liquefied natural gas to Brazil. The Foreign Policy reports that «For the companies pumping, freezing, and exporting gas, the key consideration is economics, not politics. American firms will sell gas to the buyers willing to pay the most money – not where they will necessarily do the most to advance the US strategic agenda».

Second, the US companies need supply-chains to sell LNG. They use go-betweens in trade deals. The Foreign Policy writes that «About 90 percent of Sabine Pass’s export capacity has already been gobbled up by private companies in Britain, Spain, India, and South Korea. Companies like Britain’s BG Group will likely resell the gas to customers in other countries, but most purchasers will probably use the American gas to run power plants and heat homes within their own borders».

Cheniere has signed long-term contracts with a number of European gas companies, including BG Group, which was acquired earlier this year by Royal Dutch Shell PLC, and Spain’s Gas Natural. All these companies take part in Russia’s projects to deliver gas via pipelines. As agreed in the shareholders’ agreement signed on 4th September 2015, Royal Dutch Shell PLC is planned to be a part of Nord Stream 2 international consortium. It’s hard to imagine they will let the US deprive them of profits.

Third, the US shale industry is very susceptible to geopolitical risks and the fluctuations of world oil prices. Chesapeake Energy Corp. has recently put in pledge «substantially all» of its gas fields, office buildings and derivatives contracts to maintain access to a $4 billion credit line as the shale driller grapples with falling energy prices. Under the agreement, the company has transferred to creditors – banks MUFG Union Bank N.A. and Wells Fargo Bank Securities as collateral 90% owned proved reserves of oil and gas, as well as most of their assets in real estate, derivative instruments, deposits and securities. In early February, Chesapeake hired a lawyer to file for possible bankruptcy. The company had barely enough cash to make a repayment on loans of $500 million.

Fourth, Russia is not standing idly to watch the situation. Novatek is involved in in the Yamal LNG project to explore the South Tambey gas field. Starting from 2017, the company plans to produce 16.5 million tons of liquefied natural gas annually. There will be no problem with consumer demand as the contracts have already been signed. Novatek is planning a second LNG plant to be constructed in the Gydan peninsula, a geographical feature of the Siberian coast in the Kara Sea. The Persian Gulf monarchies, especially Kuwait, are among potential buyers. Kuwait has plans to purchase up to 1.5 million metric tons of liquefied natural gas (LNG) from Russia annually, Deputy Managing Director of Kuwait Petroleum Corporation (KPC) Nasser Abdullah Saleh said on April 22.

In late 2015, Russian energy giant Gazprom and the Kuwait Petroleum Corporation agreed to cooperate in liquefied natural gas (LNG), liquefied hydrocarbon gases (LHG) and other petrochemical projects, as well as in scientific, technical and investment areas.

Fifth, Russia can offer a better deal. At current prices, US LNG delivered to Europe would cost around $4.3 per million British thermal units (MBTU), according to price reporting agency Argus Media. Russia sells its gas to Europe for $ 5.80 per MBTU, on average. However, analysts say that Russia could drastically lower prices in a price war, to below $3 per MBTU.

Unlike their American competitors, Russia’s gas producers are not strongly tied to the world oil prices. It enables them to reduce gas costs without much damage. The prices below $3 will drive American competitors bankrupt.