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Gas war 2020: Will they throw Gazprom out of Europe?

US LNG plants ramp up, dropping gas prices

The gas market in Europe is on the verge of a large-scale crisis. This is due to the transit agreement with Ukraine that Gazprom signed. As soon as the risk of stopping supplies through the Ukrainian pipe disappeared, gas prices in Europe flew down. According to forecasts, by the summer of 2020, prices may fall below $ 100 per 1,000 cubic meters. Then Gazprom’s export will become unprofitable, and American LNG plants may stop production. On January 24, Kommersant reported this.

 

Gas became cheaper throughout 2019, as the struggle between Gazprom and LNG suppliers sharply intensified. In September, the average spot price at the key TTF hub in the Netherlands fell to $ 117 per 1,000 cubic meters – this is the lowest level in the history of the modern European gas industry. But in 2020, experts say, gas prices in Western Europe will definitely update historical lows.

 

Analysts note that the situation on the gas market in Europe resembles the crisis in the oil market in 2015, when prices fell rapidly amid rising shale oil production in the United States.

 

On the gas market, American LNG plants are now the main source of new supply. In April and July 2020, commercial operation of the second and third phases of the Cameron LNG plant of the American Sempra Energy with a capacity of 8 million tons will begin. At the end of 2019, Freeport LNG launched the second line of the plant with a capacity of 5 million tons, another line of 5 million tons will be launched in May. By the middle of 2020, the remaining seven lines of the Elba Island LNG plant will be launched, then its capacity will reach 2.5 ml. n tons per year. Finally, in 2021, it is planned to launch the third stage of the Corpus Christi project with a capacity of 4.5 million tons per year.

 

Asian LNG producers are not sitting idly by. Additional capacities of 2 million tons will be commissioned at PFLNG Dua in Malaysia and Sengkang in Indonesia.

This means that in 2020 competition between Russian pipeline gas in Europe and suppliers of liquefied natural gas will further intensify.

In this situation, only one thing is “pleasing”: American LNG producers will also have a hard time.

 

In the United States, owners of LNG plants themselves do not supply gas. They sell liquefaction facilities to gas companies on a long-term basis. They then take LNG and take it to the most attractive markets. According to analysts, at current gas prices in the United States (about $ 70 per 1,000 cubic meters for Henry Hub), the cost of American LNG in Europe, including transport, is $ 230–250 per 1,000 cubic meters.

 

To cover only transaction costs for LNG supplies from the United States, the European gas price should be at $ 130 per 1,000 cubic meters. That is, at current levels. If prices sag more, it will be unprofitable to supply LNG from America to Europe.

 

True, there is a nuance: American LNG plants will not immediately end their activities. There is a version that the LNG industry in the United States is given guarantees at the state level, and therefore, even at extremely low prices, American manufacturers will be able to stay for a very long time.

 

For Gazprom, this means a full-fledged war for the European market. In which the Russian concern may lose. According to skeptics, Gazprom no longer has to rely on the growth of sales markets. None of the foreign partners, under the conditions of anti-Russian sanctions, will seriously contact the expansion of Russian supplies. At best, they will be maintained at the current level. But exactly until the moment when it becomes possible to reduce Russian supplies and switch to a new infrastructure for LNG reception.

 

And then it is not known how things will turn out. It may well turn out that the LNG market will develop so well that the EU and Turkey will completely switch to liquefied gas. In this case, Russian export gas pipelines will become only backup sources for current consumers – with all the ensuing consequences for the budget of the Russian Federation.

 

  • Gas prices in Europe are really low right now, but it’s important to understand that Gazprom supplies most of the blue fuel under contracts with reference to oil quotes, and they are significantly higher than current spot prices, – said Sergei Pravosudov, director of the Institute of National Energy.

 

  • Therefore, the current situation for Gazprom is not as apocalyptic as it might seem at first glance. It hits hard at those who sell gas at exchange prices.

 

– Gas prices may fall below $ 100 per 1 thousand cubic meters?

 

  • An additional drop is possible. If frosts do not hit Europe and consumption does not increase sharply, then spot prices on the exchange will decrease – an increase in supply on the European market will affect the record reserves in underground storage facilities (UGS) that were accumulated in anticipation of the Ukrainian transit crisis.

 

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But again, the Russian concern sells most of the gas with reference to oil, and for it a sharp drop will not occur even in this case.

 

In such a situation, Gazprom itself will decide what to do. Whether to sell additional volumes in the low spot market, or to refrain from such a step to maintain gas prices.

 

But I want to emphasize: all players are well aware right now that prices below $ 100 per 1,000 cubic meters are simply impossible for suppliers. No company in the world can make money on gas supplies to Europe at such prices – not only from America, but also from Asia. Nobody, frankly, will be torn into the European market.

 

Accordingly, the supply of gas will decrease, and prices will go up.

 

– There is a version that American LNG producers will be able to work for a long time even at extremely low prices, thanks to guarantees from the US government. Does this sound like the truth?

 

– In my opinion, this is pure conspiracy theology. The American state cannot give any guarantees to LNG suppliers – after all, these are companies from all over the world. It is these companies – Asian, European – that buy American gas, liquefy it and then resell it. What guarantees can be in such a situation ?!

 

We note that gas production in the USA, even at current prices, is unprofitable. But most of the US gas is associated gas produced as a by-product of oil production. Americans more or less manage to sell oil – with minimal profitability, or even zero.

 

American mining companies simply cannot abandon production – they have taken a lot of loans fo development, and now they need to pay loans back.

 

Associated gas in such a situation is simply there – as a free application. And he must be put somewhere. That is why gas production in 2020 is unlikely to decline.

 

By the way, with suppliers – who buy gas, extract gas from gas producers and distribute it around the world – everything is not easy either. They have written in the contracts that they are obliged to pay for the liquefaction of gas – otherwise a fine. So, suppliers at low prices will compare: whether to liquefy gas, or still spit and pay fines, and do not take this disadvantageous gas anywhere.

 

These calculations will be the moment of truth: it will immediately become clear how the situation on the European gas market will develop.

 

– Will gas prices be untied from oil in the medium term and tied to spot prices? Will this lead to a deterioration of Gazprom’s position in the European market?

 

– Recently, European partners regularly pressured Gazprom in order to tie an increasing share in deliveries to spot payments. And Gazprom was walking towards them – this is a pronounced trend.

 

At the same time, Europeans understand that there is such a moment as the reliability of the supply chain. Yes, spot prices can fall dramatically – as we are seeing now. But if the supply drops sharply, and if severe frosts strike, the picture will very quickly become the opposite – spot prices will rush to heaven. Therefore, it makes no sense to completely abandon the binding in oil – it is more stable.

 

– Looks like, no matter how things turn out, “Gazprom” cannot be in a tangible loss – lose the European market?

 

– We have a strong position in this market. We have long-term contracts, the largest gas reserves in the world, and the lowest cost for deliveries to Western Europe. Therefore, if someone loses from the changes, Gazprom will certainly not be the first in the “black list”.

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