The US' limited reach
Deliveries from Sabine Pass to northwest and eastern Europe have begun, but don't hold your breath for an avalanche of North American supply
he arrival on 7 June of the first US liquefied natural gas cargo at Poland's Świnoujście terminal was hailed by the country's leaders as another milestone in efforts to reduce its dependence on Russian gas. But the quantity imported into Poland—and the rest of Europe—in future will be an outcome of market forces, not political strategy.
The Gate terminal in the Netherlands also received its first cargo from Cheniere Energy's Sabine Pass plant in Louisiana on 8 June—the first US delivery ever into northwest Europe. But the cargo was only taken to replace a delivery from Statoil's LNG production facility at Snøhvit, Norway, which was closed for maintenance between 12 May and 18 June. For the same reason, Lithuania—which takes regular deliveries from Norway via its floating storage and regasification unit (FSRU) in Klaipeda—took its first cargo of US LNG on 25 May.
Since Sabine Pass started operations in February 2016, only a handful of cargoes have been delivered to Europe, largely to the southern part of the continent, which remains isolated from the north due to limited gas interconnections. Four vessels landed in Spain, two in Portugal, and one in Italy.
Most US exports to date have been going to higher-priced markets outside Europe, in part because the tolling model adopted by US plants make their LNG relatively expensive compared to other LNG sources. While that remains the case, cargoes to Europe are likely to remain constrained.
Companies that have booked capacity at Sabine Pass have to pay a fixed fee of $2.25-3 per million British thermal units to liquefy molecules purchased at the US Henry Hub gas-pricing centre, on top of other variable costs.
'There is no way Gazprom would let a new supplier like the US come in and take market share'
"You need at least a differential of $1.15/m Btu between the Henry Hub price and the European price to be able to cover the costs of buying the gas at the Henry Hub, liquefy it, and ship it across to Europe," says Trevor Sikorski, lead analyst at Energy Aspects, a consultancy. Sabine Pass customers include Shell, Gas Natural Fenosa, and Cheniere itself.
Even then, with Europe's top suppliers Gazprom and Statoil increasing gas flows by pipeline in the past couple of years, European LNG imports have generally been kept to minimum contractual obligations—only around 25% of total import capacity is currently used. Any gas taken beyond contracted LNG deliveries is usually restricted to spare volumes on global markets looking for a home. Europe remains the market of last resort for global suppliers such as Qatar.
For this reason, Europe's LNG intakes will continue to hinge on demand from buyers in Asia, and, to a lesser extent, South America and the Middle East. Imports jumped 25% in 2015 as production from new LNG projects in Australia and Papua New Guinea pushed Qatari LNG out of the Asia-Pacific region. LNG intakes were more or less stable in 2016, given a small rebound in Asian demand—a mere 2.5% increase to 38.49m tonnes, according to the International Group of LNG Importers.
Flexing Gazprom's muscles
The liberalisation of EU energy markets, driven by the European Commission, in recent years partly resulted in Gazprom and Statoil including a hub pricing component in oil-indexed long-term contracts to protect their share of their core European market. Other pipeline suppliers, such as Sonatrach, then followed suit.
Gazprom, in particular, has made its commercial strategy more flexible to changing market requirements, and has also stepped in to fill critical supply gaps, such as those resulting from production cuts at the Netherlands' onshore Groningen field in April, due to fears operations there could cause earth tremors.
"Prices would have rocketed if there had not been Russian gas. There is no way Gazprom would let a new supplier like the US come in and take market share," says Thierry Bros, senior research fellow with the Oxford Institute for Energy Studies.
Gazprom is also expected to step in should the Gulf diplomatic crisis escalate further and have an impact on Qatari LNG exports. Bros adds that the Russian giant enjoys one of the world's lowest production costs, with a wellhead price of $0.70/m Btu, and with another 140bn cubic metres of untapped production capacity—and that's with its exports at a record 179.3bn cm in 2016, up 12.5% on the previous year.
Still, new LNG sources will have an impact, even if only as a bargaining chip. Former Soviet Union and eastern European countries are keen to spend money to cut reliance on Russian gas. Poland hinted that it may not extend a long-term supply contract with Gazprom beyond 2022, but supply diversification via LNG may just give it the clout it needs during negotiations, as was the case for Lithuania, which won a 20% discount on gas prices from Gazprom in 2014, just by threatening to build its now-functional Klaipeda FSRU.