Russian Gas Goes to New Markets

11.08.2017

Russian pipeline gas plays a key role in the energy balance of the European Union, and liquefied natural gas from the United States or any other source can only supplement it, but can hardly be a replacement, says Valdai Club expert Danila Bochkarev. At the same time, Russia is increasing its presence in the LNG market, where Asia is the key direction.

One of the goals of the new US sanctions against Russia is to weaken the Russian gas exporters in Europe and create conditions for a greater penetration of the US liquefied natural gas (LNG) to European markets. However, the position of the European Union is that LNG can complement, but not replace the Russian pipeline gas, which is a key element of the EU energy balance, says Danila Bochkarev, senior researcher at the Brussels-based East-West Institute.

"The American LNG will gradually penetrate into Europe, but in limited quantities," he told valdaiclub.com. "Within the current price trends, pipeline gas (primarily Russian) is more commercially attractive than LNG, and this trend can be broken either by a sharp increase in gas prices in Europe, or by introducing non-commercial, administrative and regulatory barriers with delays of new gas pipelines construction".

This scenario, however, is unlikely and is against the interests of key market players in Europe, the expert said. According to him, the competition between LNG and pipeline gas is almost an ideal scenario for the European consumer. "Disappearance of one of the components (especially, pipeline gas) will inevitably lead to a sharp gas prices rise in the European market," Bochkarev said. "Deliveries of the Russian gas have a deterrent effect on the potential price increase and force LNG suppliers to adjust to these price trends."

European consumers clearly saw this last winter, when price peaks in regions dependent on LNG supplies showed that in liquefied gas prices rise sharply, when demand is high. "So, on January 20, prices in the TPS hub in Southern France reached 500 euros per 1,000 cubic meters, more than twice the price in hubs with access to pipeline gas," the expert said.

Although Europe will remain Russia's main gas market in the foreseeable future, and pipeline gas will be the main component of Russian supplies to Europe, LNG production is growing in the country with Asia being the primary market for it. In late July, supertanker Christophe de Margerie, owned by the Russian SCF company, began to ship LNG from Norway to South Korea along the Northern Sea Route. The tanker will pass this route in just 15 days, which is almost twice as fast as through the Suez Canal.

According to Bochkarev, sending a gas tanker along the Northern Sea Route to Asia is economically profitable. "LNG is supplied to Europe and Asia, but on average, gas prices are higher in Asia, which explains the fact that most LNG supplies go to the Asia-Pacific region," he said. "For example, South Korea is not connected by pipelines yet and receives all gas as LNG."

The Asian LNG supply line will remain priority not only for Russia, but also for the US, Qatar and Australia (these four countries will dominate in the LNG market in the 2020s). "This is due not only to prices, but also to the dynamics of the natural gas consumption," Bochkarev said. "According to the International Energy Agency, the bulk of gas consumption increase in 2014-2040 will be in Asia (739 billion cubic meters) and the Middle East (363 billion cubic meters)."

According to the expert, Russia is increasing its presence in the liquefied natural gas market, where Qatar is the undisputed leader (it accounts for almost 30% of the world LNG trade). The key role here is played by the Yamal LNG project, whose shareholders are the Russian Novatek company (50.1%), French Total (20%), China's CNPC (20%) and the Silk Road Fund (9.9%). "After full-scale launch of all three phases of the Yamal LNG project with a production capacity of 16.5 million tons or 22 billion cubic meters per year, Russia's share in the world LNG trade will increase from 3-4 to 9-10% and it can become the world's third largest LNG producer. It should be noted that the Yamal LNG project will start shipping LNG along the Northern Sea Route this year, and its uninterrupted operation is important for this project, which will be the largest LNG plant by 2019," Bochkarev concluded. 

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.

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