Europe’s shrinking production of natural gas has made it an enticing target for exporters. It has also left the region facing difficult choices at a time of growing political uncertainty.
Imports to the continent are poised to rise almost 20 percent by 2040 from 2016 levels, the International Energy Agency has forecast.
While Russia has long been the region’s top supplier, it is now facing significant challenges from the US, as well as Qatar, rivals with vast natural gas reserves.
For Europe, there is both opportunity and risk. While competition can drop prices, geopolitics is becoming increasingly tricky in an age dominated by strong headwinds coming from both US President Donald Trump and Russian President Vladimir Putin.
“Things that jeopardize security of supply are going to be at the forefront” of Europe’s decisions on who to buy from, said Breanne Dougherty, a New York-based analyst with Societe Generale SA.
European countries have fought with Russia over pricing and been hit with key stoppages. A burgeoning trade war with the US spurred by Trump’s tariff decisions is complicating the relationship with that country and Qatar is in the midst of an antitrust probe brought by the EU.
Still, US companies are getting ready to jump into the competition in a big way.
After Cheniere Energy Inc two years ago began shipping gas from its Sabine Pass terminal in Louisiana — the first to send shale output abroad — the US became a net exporter of the fuel for the first time since the 1950s.
This year, Dominion Energy Inc opened the first export facility on the east coast, providing a quicker route to European buyers.
Meanwhile, four more US terminals might start up by the end of 2020, making the US the world’s third-largest liquefied natural gas (LNG) supplier, behind Qatar and Australia.
However, concerns about a potential trade war are not making matters easy. After the Trump administration hiked tariffs on EU steel and aluminum exports, the union retaliated with duties on a range of US products.
Although natural gas is not directly affected, political friction could make it more difficult to ship US supply overseas, Societe Generale said.
“The US influence on European policymakers isn’t particularly strong at the moment,” said Trevor Sikorski, head of natural gas and carbon research at Energy Aspects Ltd in London.
Meanwhile, the EU is investigating whether contract restrictions have prevented importers from reselling gas bought from Qatar Petroleum.
Europe has become an enticing target for gas exporters as the Netherlands winds down production from the Groningen field — the continent’s largest — to limit damage from drilling-induced earthquakes.
Many of the continent’s buyers, particularly in Eastern Europe, are eager for alternatives to Russian supply.
Gas flow to Europe was twice disrupted over a pricing dispute between Russia and Ukraine, in 2006 and 2009. Meanwhile, Lithuania and Poland have built terminals to import cargoes of LNG from overseas, reducing their reliance on Russia.
“Everything’s quite bullish at the moment” in Europe, Sikorski said. “Next winter, the global gas market will be quit tight” before probably easing as new US export terminals come online next year and in 2020, he said.
Europe is “one of the biggest surprises” in terms of rising demand for gas, Venture Global LNG chief commercial officer Tom Earl said at a conference in Amsterdam in May.
Venture Global, a US LNG developer, is building an export terminal in Louisiana and has already signed supply deals with BP PLC and Portugal’s Galp Energia SGPS SA.
Gazprom, which already supplies about 35 percent of Europe’s gas, is taking steps to preserve its slice of the European market.
Russia’s share could jump to 45 percent or higher as the country pushes ahead with Nord Stream 2, a controversial pipeline that is to carry Russian gas to northern Germany, Energy Aspects said.
Russia relies on gas exports for its budget revenue and Europe is its biggest customer, meaning that it will “protect its turf at all costs” by laying new pipelines and selling as much gas as it can, Manas Satapathy, a managing director for energy at Accenture Strategy, said in a telephone interview.
For most of Europe, it “comes down to economics and the economics of it is that Russian pipeline gas can always price cheaper than full-cost LNG from the United States,” which right now is about US$7 per million British thermal units, Sikorski said.
That compares with about US$6.30 for Gazprom supplies.
“The Russians don’t need to battle for market share, they’ll just increase it naturally,” Andree Stracke, chief commercial officer of German utility RWE AG’s supply and trading unit, said in an interview on May 16.
Still, declining European supply has created an opening for rivals to Russian output.
Although LNG accounted for just 10 percent of Europe’s gas supply last year, Societe Generale said it could climb to 25 percent by 2020.
The US “will continue to be one of the lower-cost suppliers of LNG,” Satapathy said. “It will continue to have a bigger and bigger share in the market, including in western Europe.”
However, the continent could have a tough time attracting cargoes if prices are higher in other regions.
“The issue about LNG is that it’s flexible, it can go anywhere,” which is both a benefit and a risk for Europeans looking for secure gas supplies, Sikorski said.
While the continent’s terminals can receive gas from around the world, “there’s no guarantee that it will go there in the middle of a cold winter,” he said.
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