RUSSIA WILL RETAIN OVER 30%
Much has been made of Russia's ability to ward off US LNG imports from its gas markets in Europe through cutting its price.
But other factors will be likelier to keep US LNG out, Wood Mackenzie said March 9.
The consultancy used its Global Gas Model to determine the impact of the oil price, the coal price and Russia's export strategy on US LNG.
Global Gas & LNG research head Noel Tomnay said: "Our analysis shows that while Russia's export strategy is important, ultimately US LNG export utilisation will be influenced more by the price of other commodities: of US gas, oil and, particularly, of coal, which will determine European spot prices through coal-gas switching in the power sector."
Low oil prices make Russian oil-indexed contract gas cheap and buyers will maximise their off-take of Russian gas. At low oil prices, customer choice rather than strategic Russian decision-making would allow Russia to retain over 30% of the roughly 490bn m³/yr European market and threaten US LNG export volumes. If coal prices also remain low, monthly European gas prices could fall to $3.85/mn Btu, and the use of US LNG export capacity could average 85% between 2017-20.
UK benchmark NBP month-ahead price, according to the 'Tankard' brokers' index of deals done, was just above $4/mn Btu on March 9.
Russia's share of the European market stands to decline to only 25% if the price of oil and Russian long-term contract prices rise. Russia could elect to make more pipeline gas available at spot prices and increase market share to as much as 35%, but in so doing European spot prices could fall towards $3/mn Btu for longer periods.
Wood Mackenzie says this could cut US LNG capacity to some 40% and would deter developers of future US LNG export projects. But while it could maximise profitability for Russia under some oil and coal price combinations, it seems an unrealistic outcome. Securing additional pipeline access for export volumes would require the support of Ukraine and the EU, which appears politically challenging, it says.
Tomnay said: "Russia's export strategy will be a key determinant of US LNG export capacity utilisation, but the Russian pursuit of European market share to drive out US LNG from Europe seems either uneconomic and/or impractical under different external conditions. Instead other factors such as the price of US gas, oil and European coal prices will likely be greater determinants of US LNG export capacity utilisation. Subject to these factors alone, average utilisation of US LNG export capacity between 2017 and 2020 could vary from 54%-100%. For US LNG exporters, the best thing to happen would be for global coal prices to rise, or for US gas prices to stay low."
While governmental relations between Russia and the US are bad, it is perhaps worth noting that Russia would not be directly harming US financial interests if it adopted an aggressive marketing strategy.
It would however be damaging the interests of capacity holders in US liquefaction facilities at Sabine Pass, for example, which include European and Asian companies, with many of which it has commercial relations including the sale of LNG.
A recent Oxford Institute for Energy Studies report concludes that political and regulatory constraints mean that Russia is unlikely to be able to build any new gas export pipelines such as Nord Stream-2, Turk Stream or South Stream by 2020, and that Gazprom would therefore need either to negotiate some transit rights post-2019 across Ukraine or persuade its customers to lift some of their offtake at the Russo-Ukrainian border.
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