U.S. shale drillers appear to be worried about losing market share in Europe to Russia, Bloomberg reported last week, citing data from a Kansas Fed survey. But this worry may be more of a hypothetical than actual problem.
“Associated gas will increase as the U.S. shale drilling ramps up in future years,” an executive from the oil and gas industry told the Kansas Fed. “European demand will be further satisfied from Russian supply, reducing the U.S. market share.”
Yet most U.S. gas exports haven’t been going to Europe at all this year. Instead, most American gas has been going to Asia, where buyers have been more generous with prices.
In September, the Financial Times reported that Asian gas buyers have been outbidding European buyers precisely for U.S. gas.
“They have more purchasing power now,” one LNG broker told the FT, referring to Asian gas buyers. “Europe has pipeline supplies and China and Japan don’t have alternatives.”
In other words, the European market may not be as key for U.S. gas exports as some media coverage would have you believe. Some of that coverage includes a report that U.S. energy companies are once again in a rush to build more liquefaction capacity in a bid to take advantage of Europe’s gas shortage.
Additional gas export capacity would certainly be in order in a scenario featuring growing global demand for gas. However, the current shortage of gas in Europe will be over long before any of that new capacity comes online. After all, LNG projects take years and billions of dollars to complete, so any capacity boost should be based on the long-term outlook for the commodity.
The Real Reason OPEC+ Refused To Boost Production Further This outlook seems quite bullish right now. The energy crunch in Europe and Asia has shown that Europe may have rushed a bit with its energy transition, making itself vulnerable to high commodity prices when renewables fail to deliver as expected. So, it does make sense for U.S. LNG companies to build more export terminals.
As for capitalizing on the current crisis, the opportunities are limited, and it’s not because of Gazprom. Analysts point to the output loss resulting from this year’s hurricane season in the Gulf of Mexico as one constraint on U.S. gas exports, and to the continued production discipline among shale drillers.
“At any other time, we would have seen a huge surge in investment,” Kristen, Holmquist, LNG forecasting manager at broker Poten & Partners, told Natural Gas Intelligence. “What we’re seeing instead is that companies are being very disciplined,” she added, as a direct consequence of last year’s industry crisis.
U.S. LNG has never been particularly competitive in most of Europe because of the availability of pipeline gas. Still, in earlier years, the major boost in global LNG capacity brought prices to comfortable lows on spot markets, making U.S. gas a welcome addition to European sources of energy. That did not—and could not—last because of how demand developed. Now, spot cargos are mostly prohibitively expensive for European buyers.
Going forward, a rebalancing of the gas market could once again make U.S. gas popular with European buyers, for diversification reasons if nothing else. Yet, with Asia’s insatiable appetite for energy and its willingness to pay a premium for U.S. LNG because of the lack of major pipeline supplies, it is likely to remain as the ultimate market for U.S. LNG.
This means shale drillers needn’t worry about Russian competition in Europe — Europe is, after all, on a quest to wean itself off gas, so whatever dominance Russia has on European energy markets should be over by 2050 if all goes well.
By Irina Slav for Oilprice.com
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