How the Newest U.S. Export May Leave Russia With Excess Gas

With the U.S. as a potential source of gas, Russia has less leverage with a once-dependent Europe.

Russia, meanwhile, faces erosion of its stealth gas monopoly in Europe, having inadvertently set the stage for its own comeuppance the way monopolists often do. Its state-owned gas behemoth Gazprom has long asked for top dollar in the form of gas contracts linked to oil prices, opening the door for potentially cheaper LNG.

And Europe — spooked by the war in Ukraine and its reliance on Russian gas — has been getting ready to handle more LNG imports.

“Russia will not want [a price war], but it’s inevitable,” says Massimo Di Odoardo, principal gas analyst with Edinburgh-based Wood Mackenzie, a leading energy consultancy.

 First, some math. Global LNG production capacity stood at 14 trillion cubic feet in 2014, already higher than demand of nearly 12 trillion cubic feet.

Capacity only stands to rise from there; the International Energy Agency projects that supplies will jump another 40 percent by 2020, far faster than demand.

 “There is a real risk of an LNG boom-bust price cycle,” says Costanza Jacazio, an analyst at the International Energy Agency. All that extra gas will start squeezing prices, and that’s where it gets interesting for geopolitics. Australia will produce a lot of that gas, although almost all of it is already committed to Asian markets.

But the U.S. is building five huge LNG export terminals on the Atlantic coast, the first of which should begin operating early next year.

That export capacity, which the U.S. Energy Information Administration conservatively estimates at 2.5 trillion cubic feet by 2022, will position the U.S. as a “swing supplier” capable of gassing up either Asia or Europe as needed. In fact, roughly half of future U.S. LNG cargoes are already slated for Asia.

But the rest should head toward Europe, says Jonathan Stern, chairman of the gas research program at the Oxford Institute for Energy Studies.

Several European companies have contracted for some deliveries, and in any case, the IEA expects overall European LNG imports to double (to 3.2 trillion cubic feet) by the end of the decade. All that extra gas will start squeezing prices, and that’s where it gets interesting for geopolitics.

 In recent years, Gazprom has been selling gas to European companies at around $10 per million BTU. But big exports of U.S. LNG could hit Europe as low as $6 per million BTU, Di Odoardo says. The U.S. can afford to export its gas at close to cost, says Stern; having spent heavily to build those export terminals, suppliers need to keep them humming.

And keeping prices low might help them establish a foothold in Europe. Of course, U.S. suppliers don’t have to sell to Europe at rock-bottom prices — and even if they do, Europe may not see much economic upside, since its demand for gas is falling, says Nick Butler, a former BP executive.

Russia also wouldn’t be hurt right away by cheap LNG imports, since its long-term contracts with Europe would buffer the immediate impact. Ultimately, though, Gazprom and its ilk would have to accept either lower market share in Europe or lower prices — and profits — from their gas exports.

 For now, the latter scenario seems more likely; the IEA expects Russian gas exports to Europe to remain stable through 2020. “The need for drastic measures might not be there, but much depends on what strategy Russia wants to engage in,” says the IEA’s Jacazio.

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