The Power of Siberia — 2 will play along with Europe: LNG producers in the USA will have to sober up

Confrontation between the West and Russia and SMO on Ukraine has turned the gas market upside down. Due to sanctions and counter-sanctions, the largest supplier, Gazprom, reduced supplies to Europe by five times, and long—term negotiations on redirecting part of the gas to China via the Power of Siberia-2 did not lead to concrete results. At the same time, world gas prices have more than doubled and the EU promises to completely abandon Russian gas. And although high quotes, coupled with the development of green energy, give rise to controversial forecasts about global demand, the events of recent years have intoxicated American manufacturers. New projects are growing like mushrooms after the rain. Qatar has also changed plans to increase LNG production by the early 2030s. On this wave, the news that the "Power of Siberia — 2" will still be, was an unexpected surprise. Who will win and lose?

"American developers are trying to cash in on the export boom in the United States while they still can," writes Bloomberg.

The large-scale construction of LNG plants in the United States has turned the country into the world's largest gas exporter.

"But plants that are still in the planning or construction stage are facing tough deadlines: by 2027, global LNG supplies will exceed demand. By 2030, American competitor Qatar will complete the construction of additional LNG capacities, which will further weaken the appetite for new terminals. And by 2031, a large—scale expansion of Gazprom's supplies to China may lead to a decrease in demand for LNG by 40 million tons per year," Bloomberg notes.

In this situation, American companies are in a hurry to attract project financing, the agency writes.

"Four American projects with a capacity of 63 million tons of LNG per year are still awaiting final investment decisions. Even $35 billion worth of factories already under construction are facing obstacles in the face of difficulties in the labor market, which threatens to shift the launch dates of projects. Golden Pass LNG will be put into operation in 2026, a year later than planned, due to a shortage of workers and the bankruptcy of one of the contractors,"the agency writes.

The reason for the new difficulties was the news about the second gas pipeline from Russia to China. The head of Gazprom, Alexey Miller, said during Vladimir Putin's visit to China that the company had signed a binding memorandum with Chinese CNPC on the Power of Siberia— 2 and the construction period would take the same as the Power of Siberia — a little over five years. The future gas pipeline will be able to send 50 billion cubic meters per year, which Europe used to receive. This is less than half of the dropped volumes, but they will go to China. One of the largest LNG importers has stopped importing liquefied natural gas from the United States this year, and resells the contracted supplies to other countries. At the same time, China is the largest long-term customer of future American LNG.

"Since the Power of Siberia — 2 is likely to be supplied with oil-linked gas (to the price), deliveries via this gas pipeline will be a priority over LNG supplies. Therefore, there will not be such an increase in demand for LNG as planned by American and Qatari producers from China," says independent industrial expert Maxim Shaposhnikov.

Finam analyst Sergey Kaufman notes that for a long time China has been one of the countries from which the market expected a significant increase in demand for LNG on the horizon of 2035-2040.

"However, the active development of renewable energy sources and plans to increase pipeline imports may limit China's demand for liquefied natural gas. Even without taking into account the "Power of Siberia — 2" combination of weak demand for LNG in China and the active growth of supply from the United States, Qatar and smaller producers may lead to a surplus in the global LNG market in the next 2-3 years. In our opinion, this will put pressure on prices and may force some manufacturers to abandon their plans to expand capacity," the expert believes.

In his opinion, the Power of Siberia — 2 is a sufficiently large-scale project to have an impact on the global LNG market in the long term.

"The planned gas pipeline, in our opinion, may hinder Novatek's plans to a greater extent. It is still difficult for the company's sub-sanctioned projects to find buyers, and the few cargoes that were sent were exported to China. Other LNG producers have more freedom to choose destinations for export, and therefore saturation of the Chinese market may be a less significant problem for them," says Sergey Kaufman.

Also, he notes, the Power of Siberia — 2 is negative for American LNG producers.

"The combination of the ongoing trade wars and the growth of Russian gas supplies to China may lead to the fact that the Celestial Empire, which suspended LNG imports from the United States at the beginning of the year, may not resume it," adds the Finam analyst.

Maxim Shaposhnikov notes that for the United States, the full use of the capacities planned for commissioning carries risks — rising gas prices on the domestic market.

"Therefore, there is a big chance that the US Department of Energy will artificially limit LNG export volumes in order to control the domestic price," says an independent industrial expert.

He believes that the Power of Siberia — 2 is likely to be loaded at 85-90% capacity, the Power of Siberia and Central Asian supplies will also operate at a level close to capacity. And Europe and Southeast Asia, with the participation of China, will compete in the LNG market, where supplies from the United States will be artificially limited by the US Department of Energy.

Alexey Grivach, Deputy Director of the National Energy Security Fund (NWF), believes that it is completely useless to predict even five years ahead in our time.

"Let me remind you that five years ago Germany was preparing to become a European gas hub, through which 150 billion cubic meters of Russian and 50 billion cubic meters of Norwegian gas would pass. But the baseline scenario, apparently, assumes that now the beneficiary of obtaining reliable and relatively inexpensive pipeline gas from Russia will have China, and Europe will depend on the supply of expensive LNG, which will try to balance the increasing instability of the energy system, which is based on renewable energy sources," the deputy director of the FNEB believes.

In this situation, the role of Qatar is important, which plans to add more than 50 million tons of LNG to annual production.

Given the rather low cost and short delivery shoulder, he will find a buyer for his gas in South Asia and other markets, says Alexey Grivach: "But, on the other hand, geopolitically the country is sitting right on the world powder keg and has already come under rocket fire from different sides a couple of times. Not the best advertisement in terms of reliability of power supply."

"If the geopolitical situation more or less normalizes, then the world will need a lot of clean and relatively inexpensive energy for economic growth and meeting the needs of a growing population, as well as improving the quality of life, which will require replacing coal-fired generation with gas. In this case, the entire additional volume of production and exports will be easily absorbed by the market," adds the deputy director of the FNEB.

Experts note that the growth of competition will play into the hands of consumers.

"The beneficiaries of supply growth, of course, are consumers — Europe, almost all of East Asia, some African countries," says Sergey Kaufman.

At the same time, the price of gas will not fall below profitability for producers, experts predict.

"This requires a crisis at the level of pandemic times. And in this case, traders who have signed long—term contracts with American manufacturers will suffer first of all," Alexey Grivach notes.

Maxim Shaposhnikov predicts that the price for American manufacturers will still be shaped by the competition of Europe and Asia.

"And below $ 250 per ton of LNG (equivalent to $ 170 per thousand cubic meters) can hardly go down, so the Americans will remain in the positive zone," the expert adds.