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Saturday, February 17, 2018

Gas supplies to Europe will bring to the States some losses


American gas ready to oust Russia from the European market, I assure the American specialized analysts. It is claimed that after a few months Lithuania will start receiving liquefied natural gas (LNG) from the United States, and this will be only the first swallow. Does Gazprom a real reason for concern?

American suppliers of gas will compete with Russia on the European market in February next year, when Lithuania will receive from the U.S. the first shipment of liquefied natural gas (LNG), Reuters reported two sources in the industry.

“We really would like to have a party from the USA to our region for competition with Gazprom, but the negotiations, of course, depend on price conditions,”

Europe with its large consumption of gas and dozens of underutilized terminals for importing LNG is of great interest to U.S. companies spent a total of 60 billion dollars for creation of export infrastructure, reports the Agency. In Europe was really booming in the construction of LNG terminals, they were even constructed in Lithuania and Poland. The downside is the high cost of LNG compared with pipeline gas from Russia. As a result, 75-80% of the volume of LNG terminals in Europe is empty, calculated in the national energy security Fund.

What will be the volume of deliveries and the price of American LNG, not reported. However, in 2019, according to the Agency, the delivery of American gas to Europe as a whole is expected to exceed 60 million tons of LNG (it is 84 billion cubic meters of gas). Declare that it will help the EU to reduce its dependence on pipeline supplies from Russia. Gazprom last year supplied Europe for over 156 billion cubic meters.

If American LNG will indeed appear in the EU, Gazprom will have two options: either fight for market share through lower pricing, or to cut production and wait for price increases, as happened in 2008-2009, according to Western experts. Gas market analyst at Societe Generale Thierry Bros believes that Russia will “fight” if the United States will increase LNG supplies to the EU. Director gas market analysis at Wood Mackenzie Stephen O’rourke believes that Gazprom will attempt to close the path to Europe, American gas, reducing the price.

And yet, even Western experts are unsure about the prospects of us LNG on European market.

Contract no

In reality, Lithuania has signed the contract for the supply of LNG from the US. It was reported that the Lithuanian company Litgas and American Cheniere Energy, which is engaged in the construction of the first LNG export terminal in the U.S., allegedly indeed signed an agreement in February 2015. However, this is only a Memorandum, that is not a legally binding agreement. A month ago Lithuania said still in negotiations about deliveries of the first batch of LNG from U.S. LNG terminal in Klaipeda.

“We have a good relationship with Cheniere… We are negotiating the first deliveries (next year). We would very much like to get a party from the USA to our region for competition with Gazprom, but the negotiations, of course, depend on price conditions,” – said in mid-October, the Minister of energy of Lithuania Rokas Masiulis.

This directly shows that in mid-October, Lithuania still has not contracted shipments of American LNG. And if such an agreement really was signed, the Lithuanian authorities would hardly keep quiet about it. After all, it could be presented as another victory over Gazprom.

Price debatable question

In any case, the main criterion for assessing the prospects of us LNG as a competitor to Gazprom in Europe is the price. And she can’t even be comparable to the cost of Russian gas. Although the dumping at supplier American LNG cannot be ruled out, but this is possible only for political reasons. From a commercial point of view American the seller of LNG at a price lower than Gazprom will bring only losses.

Gas expert of the national energy security Fund Alexei Grivach estimated that if the price of LNG at $ 3 per million British thermal units at Henry Hub the delivery price of LNG in Lithuania will be about 9 dollars. “In terms of our pictures it will be about $ 320 per thousand cubic meters. But is the price low-margin provider, which earns almost nothing. It is difficult to imagine that the provider will refuse from the margin. The same Statoil does not supply Lithuania with LNG without margin under the assistance of Lithuanian independence, this gas is expensive for Lithuania,” – said Alexey Grivach the newspaper VIEW.

According to him, excluding the cost of infrastructure Statoil Lithuania LNG supplies at the price of 350 dollars per thousand cubic meters, if you take pictures on the third quarter. For comparison: the current price of Russian gas for the Baltic States – 280 dollars.

So, now Lithuania buys Norwegian LNG at a price 25% more expensive than Gazprom’s fuel. It turns out that to ensure price competition with Gazprom’s gas USA seller can not, even completely abandoning profit. The U.S. LNG price was at least comparable to the cost of Russian gas, American Cheniere need to accept the loss of 40 dollars from each thousand cubic meters.

Thus in winter at high demand the price of the gas spot market is traditionally grows. This will make LNG deliveries from the USA to Lithuania at the same price with Gazprom’s gas is absolutely unprofitable. “Last winter, for example, the price of gas at the Henry Hub reached $ 8. In terms of our price is about 300 dollars per thousand cubic meters”, – said Alexey Grivach. And this is only the initial price that does not include the cost of liquefaction, transportation and regasification, not to mention the profit of the seller.

Losses for the USA…

“Now Lithuania buys Norwegian LNG at a price 25% more expensive than Gazprom’s fuel”

Theoretically, the US could make Cheniere to go on such transfers for political reasons, to confirm the promise of Washington, this spring of 2014, to provide U.S. gas to Europe and even Ukraine (which there is not even an LNG terminal). Because gas exports to U.S. law is prohibited. Washington only made exceptions for some companies. Cheniere refusal from unprofitable deliveries to Lithuania may result in the company losing its rights generally to supply gas for export (if there is a political decision).

At the time, the U.S. built LNG-terminals, but for the reception of imported gas, the main supplier was to be Qatar is. But then the situation in the U.S. market has changed dramatically – thanks to shale technology, the United States has increased production of its own gas, imports no longer need, and these terminals have remained empty.

…or losses for Lithuania

However, it cannot be excluded that the Lithuanian authorities can themselves go on very disadvantageous contract. Lithuania already has experience of such a strange behavior that causes dissatisfaction even among Lithuanian consumers.

Lithuania is constantly talking about fighting for independence from Russian gas supplies, but all decisions in this direction look more like a political game. In October last year in Klaipeda was opened LNG terminal. Lithuania signed a contract with Statоil about the supply of 540 million cubic meters of Norwegian LNG a year. The Vilnius then was happy that he managed to conclude a contract with Statoil to tie the price of gas to oil prices, and to a British site spot NBP.

But in fact, no price revolution has not occurred, then the Norwegian LNG was 1.5 times more expensive than Russian. Now the price difference has decreased, but the Norwegian LNG still manages to Lithuanian customers is 25% more expensive than Russian pipeline. But most importantly, Lithuania is forcing consumers to buy this expensive gas, having passed the corresponding law. The capacity of the terminal in Klaipeda to 3 billion cubic meters a year will attract new suppliers. The terminal is now 80% empty. These are the results of the so-called liberalization of the gas market, whose purpose was not to simply create a second source of fuel, but due to competition to bring down energy prices. As a result, prices have increased.

Are there any in USA gas for Europe?

In this case, the question arises – is there not an American Cheniere contracted volumes of LNG that she could send to Lithuania? According to Grivach of the NESF, Cheniere has available LNG volumes in the amount of 2.5 million tons per year (or 3.5 billion cubic meters), it might sell Litgaz if you will be still signed the contract. According to him, Cheniere has even chartered several ships to deliver the gas to consumers.

However, supplies of these 2.5 million tons of LNG will begin only after reading the first five lines of an export LNG terminal. While entering only the first line, and all five should be up and running within the next year and 2017, said Grivach.

This means that the delivery of the first shipments of us LNG in February is extremely doubtful. Exactly the same as bringing the volumes of LNG from the US to Europe as early as 2019 to 60 million tons of LNG (or 84 billion cubic meters).

Even the commissioning of new capacity of LNG export terminals in the U.S. does not guarantee the availability of free fuel and a competitive price. To decide on unprofitable contracts in Europe will take the risk, not the buyer. LNG from the US zakontraktovat mainly for supplies to the premium Asian market, where gas prices are significantly higher than in Europe.

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