The first cargo of U.S. liquefied natural gas last week reached its destination in Poland. The country’s Prime Minister called this “a historical moment,” that brought the Central European country a step closer to breaking its energy dependence on Russian gas. At the same time, the Netherlands also received its first LNG delivery from Cheniere Energy, the only U.S. exporter so far.
The U.S. gas industry has been quick to take advantage of growing LNG demand and abundant shale gas output to join the global LNG trade. Europe is a natural focus, not just because of stable demand, but because of the European Union’s energetic drive to diversify its sources of energy away from Russia. Gazprom holds a third of the EU gas market, which the EU sees as a dominant position.
This is especially true for Poland, which has historical reasons to want to be as independent as possible from Russian supplies… of anything. The country has been the most vocal opponent of the Nord Stream-2 project, also a Gazprom initiative, and it has been particularly eager to find alternative energy suppliers. No wonder then that PM Beata Szydlo said at the arrival of the Clean Ocean LNG tanker that “Today Poland can say that it is a safe and sovereign country.”
That’s how things look from the Polish side, but how are they looking from the Russian perspective? One expert from the Russian Institute of Energy and Finance said that the delivery was a political move rather than anything else. In an interview with radio Sputnik, Sergey Agibalov noted that U.S. LNG is still costlier than Russian gas, but acknowledged Poland’s efforts in energy supply diversification. Related: How “Zombie” Funds Are Disrupting Oil Prices
Indeed, calculations of the price for U.S. LNG bound for Europe suggest that it is about US$1-2 above northwestern European benchmark gas prices, which does make it uncompetitive. Yet this is the way things stand now. They can change a lot in the near term, especially if both the sending and the receiving side are willing to make mutually beneficial compromises, which they seem to be.
Poland is very likely to be willing to pay the price of energy independence, whatever it is: last year, imports from Gazprom accounted for 89 percent of all gas imports made by the country’s state oil and gas company PGNiG. That’s uncomfortably high, particularly in light of Russia’s track record for manipulating gas deliveries to make political points.
In the end, however, things will likely boil down to which gas is cheaper. Commendable as the idea of energy independence may be, gas costs money. Gazprom is not unaware of this as it is not unaware of the European Union’s ambition to diversify away from it. This has already prompted the Russian giant to substitute long-term gas supply contracts with shorter ones, and make its pricing more flexible. Chances are that the more the EU works to reduce its dependence on Russian gas, the more Gazprom will work towards making this gas competitive. After all, Europe is a core market for the company.
This could be a challenge for U.S. producers, despite the EU’s eagerness to buy US LNG. In the end, it will all come down to how low Gazprom could make its prices without incurring serious losses, and how much and for how long European countries are willing to pay for more expensive U.S. LNG.
Gazprom, however, is not the United States’ only competition when it comes to gas. There is also the Trans-Adriatic Pipeline, which will carry Caspian gas from the Azeri Shah Deniz field to Europe, which should come online next year. There is also Qatar, the world’s largest LNG exporter. In 2014, almost a quarter of the gulf nation’s exports (23 percent) went to Europe. Beating this competition will require a further substantial lowering of production and shipment costs.
By Irina Slav for Oilprice.com
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