Big changes are expected on the European gas market in the near future. Chief among those will be an increase in gas prices that will impact not only large energy companies, but ordinary consumers as well. And this in turn will lead to a reconfiguration of Europe’s whole energy security system and force those states to be more careful about evaluating existing and future gas projects.
Alexander Medvedev, the deputy chairman of Gazprom’s management committee, has commented that export prices for gas, which are indexed to oil quotes, have bottomed out and should soon rise. An increase in prices for Russian gas exports has already been noted. For example, the price premium that Gazprom tacks onto its overseas shipments – over and above the rate it charges the domestic market – has hit 20%, a jump from 16% at the beginning of the year. It should be kept in mind that a significant percentage of Gazprom’s export contracts (including those with Europe) are indexed to oil prices with an embedded 6-9 month lag.
This state of affairs promises a new round of price wars on the European gas market. And the biggest fault line in this confrontation could crack open between the key European suppliers – Russia and Norway – vs. America’s shale oil companies. «Norway and Russia have flooded the market», German media has noted, pointing out that in 2015 Russian gas exports to Western and Central Europe, as well as to Turkey, rose by more than 8% to 158.6 billion cubic meters – equal to 31% of all European gas imports. In the first quarter of this year Gazprom boosted its exports to Europe by another 28%. Norway – at second place on the list of the European market’s biggest gas suppliers – can also expand its exports (last year those amounted to 108 billion cubic meters and increased by 17% in the first quarter of 2016, reaching a two-year high, according to the Norwegian operator Gassco).
The Europe-bound shipments of US liquefied natural gas (LNG) that began in late April prompted the European Commission to declare a further drop in prices for Russian gas and to announce a review of the relevant long-term contracts between Gazprom and European consumers. And it’s true that over the last year the price of Russian gas has fallen by more than 50% – down to $147 per thousand cubic meters, a ten-year low. And an approximate level for the new price drop was cited – $100 per thousand cubic meters by this summer.
However, the oil market’s U-turn toward a price hike, plus a reduction in gas exports to Europe from other suppliers (with the exception of Russia and Norway) has turned out to be a more significant factor than the incoming LNG from the US. Russian gas prices are currently stabilizing at around $160 per thousand cubic meters – which parallels the «breakeven point» for US LNG. However, that point is calculated using the current global price for oil, which is slightly below $50 a barrel. If the rally in oil prices continues, the new benchmark price for Russian gas headed to Europe could reach $205-210 per thousand cubic meters, according to current data.
These calculations are based on new predictions for the future momentum of world oil prices. Analysts at Citigroup have dramatically raised their projected estimates for 2016-2017. According to their figures, Brent crude quotes will top $50 per barrel by the third quarter of this year, not the fourth, as previously thought. According to Citigroup, it looks like commodity markets have already passed through the worst of their ordeal and are now following the oil market’s lead to recover their previous losses.
OPEC members are making similar predictions. For example, Mohammed Saleh Al Sada, the minister of energy and industry in Qatar, has claimed that oil quotes of at least $65/barrel are «fair» for his country. «The oil market is recovering slowly but steadily. Luckily, the fundamentals show it is heading in the right direction. I don’t think we are yet at a fair price. We need to have a fairer price so that we can have the ability to invest more in order to secure the energy supply to the world and avoid any price shock», stressed the Qatari minister.
What’s particularly significant is that Qatar’s spokesman made this statement on the eve of the next OPEC summit, scheduled for June 2 in Vienna. It was Mohammed Saleh Al Sada who took over as acting president of OPEC in 2016. And it is Qatar that is the largest exporter of LNG and therefore a competitor with both Russia and Norway – although those two countries are also competitors on the European gas market, not only with Qatar and the US, but also with each other.
And even their local media admit that Norwegian suppliers, the most prominent of which is Statoil, are losing out to Gazprom. «There is not enough Norwegian gas to satisfy Europe» and it is «expensive and will get even more expensive», writes the Norwegian edition of VG, citing calculations made by the Oxford Institute for Energy Studies: «‘The level of expenditures in Norway’ is traditionally one of the highest in Europe. Statoil’s quarterly report claims that the company spends $1.04 to produce each million BTUs (British thermal units), which can be contrasted with Gazprom’s 2015 figure of only 40 cents. The difference in price would have been even greater if the krone had not declined by approximately 30% over the past two years. And, frankly, it’s easy to see who stands a better chance of selling cheap gas to Europe in the future».
«During what we can call the ‘last oil boom’ – in 2008-2012 – huge investments were made to ensure future gas supplies from Norway. The results have not been encouraging. Few deposits were discovered and those were small and expensive. The Barents Sea was no guarantee of the revival of the Norwegian oil and gas fairytale», concludes VG.
And the calculations purporting to show how LNG from the US will help «knock down» the price of Russian gas are speculative. Even if US exporters were operating at full throttle and refusing to sell to other parts of the world (and that would never happen, considering that even the «pilot» tanker that was sent out in February did not head for Europe, but Brazil), the Americans are not capable of providing more than 24 billion cubic meters for Europe’s markets. Meanwhile, according to figures from the European Commission, total annual demand for gas in the EU is reaching 426 billion cubic meters. In other words, LNG supplies from the US could meet no more than approximately 5-6% of the European Union’s needs. And that is without taking into account the fact that in coming years the EU’s dependence on energy from abroad will continue to grow, and by 2030 the EU may need to import over 80% of its gas.
Given this context, long-term contracts and pipeline projects intended to provide energy for many years are really proving their worth, and here Russia has taken the lead.