Last month, France’s president Emmanuel Macron accused the United States of a “double standard” because of the difference between the price at which liquefied natural gas produced in the U.S. sells in Europe and the price at which natural gas sells within the U.S.
“The North American economy is making choices for the sake of attractiveness, which I respect, but they create a double standard,” Macron said, also adding that “they allow state aid going to up to 80% on some sectors while it’s banned here -- you get a double standard.”
He wasn’t alone among European national leaders in being unhappy about gas prices. In fact, as many as 15 leaders were unhappy, and they insisted that the EU imposes a price cap on all natural gas imports, regardless of origin. The idea followed delicate attempts to convince Norway to sell its gas at a discount and equally delicate attempts to convince U.S. producers of the same. Now, the U.S. is striking back at the accusations.
“What’s happening is the companies that hold those long-term contracts with US LNG producers, they’re marking that up and earning that margin in the European market,” Brian Crabtree, an assistant secretary at the Department of Energy, told the Financial Times. “It’s not the US LNG company, it’s basically European-headquartered international oil companies and traders.”
Indeed, producers of liquefied natural gas do not invariably sell their product directly to the consumer, in the face of a country in Europe, for instance, They work with commodity majors such as Vitol and Trafigura, or the supermajors, including BP and Shell.
Take Cheniere Energy, the biggest producer of LNG in the United States. Earlier this year, Cheniere inked a long-term sale and purchase deal for its LNG with Chevron. Under the deal, Chevron will buy 2 million LNG from Chevron annually, and then it will sell it on for whatever price it deems fair.
Also this year, Cheniere closed another sales and purchase deal, too, with Norway’s Equinor, this time for an annual volume of 1.75 million tons of LNG. Those 1.75 million tons will also be sold at a price that Equinor sets, not Cheniere.
This is not to say that LNG producers are not benefiting from the much stronger demand for LNG from Europe. And this is exactly the reason they have been benefiting, in the form of higher profits: demand has surged, and when demand surges, prices follow, especially if supply is not growing as fast as demand.
Earlier this month, Cheniere Energy reported twofold revenue and profit growth for the third quarter, thanks to this stronger demand for its product. Separately, the company said it was ready to sign more long-term supply contracts, both with businesses and governments in Europe, which would motivate its planned capacity expansion.
At the same time, BP reported exceptionally strong performance at its gas-trading unit. This was not the case for Shell, however, whose gas-trading division booked a loss of $1 billion for the third quarter of the year because of the spike in European gas prices after the suspension of exports via Nord Stream 1.
Macron’s—and others’—accusations, then, are not exactly founded on facts, with producers being just the first stop in a supply chain that features middlemen that are among the biggest commodity trading businesses in the world. Besides, even in the best of times, U.S. LNG has been more expensive than pipeline gas coming from Russia in real terms.
The reason for this is purely physical. The production of liquefied natural gas is much more complex process than purifying natural gas and sending it down a pipeline. Because LNG production is more complex, it automatically means it is more expensive because it is quite energy—intensive.
Once produced, this gas needs to be transported on tankers that are in short supply as well this year, which has pushed freight rates through the roof, adding to traders’ expenses in shipping the product to customers.
In other words, Europe seems to want businesses to not act as businesses and take every opportunity to make a profit, which is what businesses are all about. But instead of addressing these businesses, many of which are based in Europe, as the DoE’s Crabtree told the FT, it is addressing the federal U.S. government, which has little control over the private sector.
Be that as it may, Crabtree told the FT that the U.S. was committed to helping Europe get enough gas “at a price that is affordable to the continent.” It’s hardly a surprise he did not go into detail on how this affordable price would be achieved. It is also no surprise that his statements to the FT contained a warning.
“So it’s especially concerning to us that the discussion in Europe is being presented as though we have some control over the margins that are being earned on our LNG, because we don’t,” the official said.
By Irina Slav for Oilprice.com
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