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Give Energy Markets a Chance: The Story Behind ‘Russian’ LNG Exports to the US

It is good news for both producers and consumers that energy resources are no longer labelled – at least in the industry milieu – by their country of origin. Natural gas is therefore becoming an “ordinary” source of energy solely measured by its economic value, writes Danila Bochkarev, Senior Fellow of the Brussels-based EastWest Institute.

The Gaselys tanker owned by the French energy company Engie arrived in Boston on the last weekend of January with a cargo of liquefied natural gas (LNG) from the Isle of Grain LNG terminal in the UK. The news was somewhat of a surprise for the media, which have almost exclusively portrayed the US as an exporter – not importer – of LNG. Furthermore, some newspapers even labelled this cargo as the first Russian LNG delivery to the United States.

Why does the US – the world’s largest gas producer – needs to import LNG? Following the “shale revolution” and the surge in natural gas output, imports of LNG to the US terminals have decreased – according to US Energy Information Administration, by 3% year-on-year to barely 2.5 billion cubic meters (bcm) in 2016 with the absolute majority of imports coming from Trinidad in the Caribbean Basin. Most of imported LNG is consumed in New England, where the pipeline infrastructure is not always able to cater to the rising natural gas demand. Power plants shifting from environmentally unfriendly coal to gas and the cancellation, for environmental reasons, of the natural gas pipeline project meant to bring gas to the area lead to a gas deficit during the periods of peak electricity demand. For instance, cold weather this winter made New England the world’s most expensive gas market with prices occasionally going up to 6,300 USD per 1,000 cubic meters or 25 times higher than the average market price in Europe. Similarly, LNG-dominated regions in the EU, such as southern France, were subject to sharp price spikes during cold winter days, while this was not the case for regions with access to both LNG and pipeline gas. For example, in January 2017, the price on France’s TRS hub reached 600 USD per 1,000 cubic meters.

The highest bidder has attracted LNG: this time France’s Engie brought “Russian molecules” from the UK to its own re-gasification terminal in Boston. But was that really Russian gas? The answer, despite the physical origins of the molecules, is “no.” The gas was re-sold to ENGIE by Malaysia’s Petronas, which originally brought it to the UK from the Arctic, and from the legal point of view it has nothing to do with its producer, the Russian gas company Novatek. Russian energy minister Alexander Novak correctly said that “although the molecules are from Russia, the gas is no longer Russian.”

It is good news for both producers and consumers that energy resources are no longer labelled – at least in the industry milieu – by their country of origin. Natural gas is therefore becoming an “ordinary” source of energy solely measured by its economic value. It can be sourced almost everywhere, and its source of origin is no longer a concern for the buyers. The increased confidence in global energy markets which can provide stable and secure supplies at a competitive price is also explained by market-based behaviour of the energy exporters. Energy producers have realized they are running the risk of rapidly losing their market share if they cannot effectively adapt to the new market realities.

Yamal LNG – a joint Chinese-French- Russian undertaking – is driven by profit not politics. The International Energy Agency (IEA) forecasts that inter-regional and LNG trade will grow by 70% through 2040. It is therefore natural that Novatek is eager to commercialize its reserves (over 2 trillion cubic meters in the natural gas alone) and compete for a market share with other energy companies. The whole logic of this mega-project – constructing an additional fourth liquefaction train, planning new LNG project (Arctic LNG 2), building an LNG transhipment and marketing complex in the Kamchatka region – fits into a normal business logic of any LNG producer regardless of its country of origin.

Similarly, Russia’s Gazprom – often portrayed as an “arm of the Kremlin” – has changed its market behaviour to comply with the European energy markets rules. Gazprom accused by the European Commission of breaking EU antitrust rules, accepted to amend its market strategy and submitted relevant commitments to the Commission. DG COMP positively assessed these commitments. “We believe that Gazprom's commitments will enable the free flow of gas in Central and Eastern Europe at competitive prices. They address our competition concerns and provide a forward-looking solution in line with EU rules. In fact, they help to better integrate gas markets in the region,” said Margrethe Vestager, EU Commissioner for Competition, one of Gazprom’s most consistent critics in Europe.

As we see, the markets are both able to deliver safe, secure and affordable energy supplies to the customers and to shape the energy companies’ behaviour. Those who do not want to comply are simply losing their market share and clients. On the contrary, politicization and unnecessary over-regulation of the energy sector risks to destroy this efficient but still fragile framework. Policymakers need therefore to keep away from unduly influencing markets and private companies and restrain from holding them hostages to political games.
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.