High oil prices are keeping gas price in Europe as high as $250, but Gazprom continues increasing its exports as LNG suppliers from the United States prefer Asia to Europe.
In Jan-Apr 2018, Gazprom enlarged its exports by 6.3% to 70.3bn c m and expects to export as much as 200bn c m this year. Meanwhile, in late 2017, gas prices in Europe were already high enough for U.S. LNG suppliers to be able to sell their gas at profit. Deputy Director of the National Energy Security Fund Alexey Grivach notes that in May, gas price at hubs were 8% higher than they were in Apr.
But U.S. LNG suppliers still prefer Asia to Europe.
According to the EIA, this winter, the United States exported 6.5bn c m of LNG, with 66.5% sold to Asia and only 17% to Europe (some 480mn c m supplied to Turkey, Portugal and Spain).
According to S&P Global Platts Analytics, as many as 52 LNG carriers were sent to Asia in Jan-Apr 2018 against just three carriers sent to Europe.
Analyst from the Skolkovo Energy Center Alexander Sobko says that there are several factors enabling Gazprom to be successful in Europe despite high oil prices. “Even though oil prices have indirect influence on gas price in Europe, things are not as simple as they were before. On the one hand, today Gazprom is selling Europe more gas that is not tied to oil prices, on the other hand, oil-tied gas contracts are usually protected by the take or part rule and are not subject to competition. Besides, LNG prices in Asia-Pacific are also growing. While June futures in Europe cost $7.5/mn BTU (over $266), LNG in Asia costs $8.2/mn BTU (over $291),” the expert says.
Grivach notes that American LNG is not tied to specific terminals and is sent wherever it can be more expensive.
“American LNG will be produced irrespective of prices (unless they fall below $4-5/mn BTU). So, what matters here is not competition with Russian pipeline gas but higher profitability of LNG in Europe,” Sobko says.
Russian gas contracts are more attractive in the longer run, according to Grivach.
Even the owner of the biggest U.S. LNG terminal, Sabine Pass, admits that for the time being, Russian gas is more competitive than American LNG. “Gazprom is able to go low in the short term. Of course, we can speculate whether American LNG can reduce prices in the same perspective. It seems that we can compete, but not in the short term, but rather in the long run,” Andrew Walker, vice president of Cheniere Marketing and Trading, said at GAZTERM 2018.
High demand for LNG and high prices in Asia come from growing gas consumption in China, where thermal power sector is moving from goal to gas.
Next year, Gazprom is planning to launch Power of Siberia, a gas pipeline with a capacity of 38bn c m, while the Americans are going to open four LNG terminals with a total capacity of 55bn c m. As soon as this happens, we will see if Asia will be able to consume more gas or if it will move to Europe. According to S&P Global Platts Analytics, by 2020, LNG demand in Asia-Pacific will grow by 24% or 70bn c m a year. The Japanese authorities expect 150% growth in LNG consumption by 2030.
“For LNG to become more popular in Europe, prices in other regions should drop while in Europe they should stay at their current level. This is possible if demand in Asia declines, while LNG supply keeps growing. But this will affect mostly LNG suppliers, especially those serving large projects,” Grivach says.