Competition to Russian gas comes from the other side of Europe

(Ship of the US company Cheniere with liquid natural gas tanks arriving at the port of Sines, Portugal, April 26th.)

The bimonthly magazine New Eastern Europe, especializing in political, economic and social issues of Central and Eastern Europe, published a short article about the end of the near-monopoly of Russian company Gazprom over gas sold to Europe. According to the text, the increase of natural gas production by the United States is encouraging the product export on liquid form to Western Europe. The country is already the largest natural gas producer in the world, surpassing Russia.

The event that marked this American venture was the arrival of the first shipment of liquid natural gás to port of Sines, in Portugal, on April 26th. The ship belongs to Cheniere company, which first sell the product to Europe after meet Brazil, Agentina and India.

According to the New Eastern article the Gazprom chairmanship received with relative indefference the entrance of liquid natural gas in Europe by the Americans and announced that it will lower the price for the sale of natural gas to continent in a clear attempt to fight the new competition. But if Russia, which sells one third of natural gas comsumed in Europe (see p. 35-38) having a monopoly on sale in some countries for the eastern part, why it should fear the US entry if it´s selling gas in liquid form, more expensive than the Russian one? And why the article discussed here is rushing to talk about the end of the Gazprom near-monopoly in Europe?

(Price of liquefied natural gas: sold to Asia in red; sold to Europe in blue. From early 2014 untill now, the profit difference in sales for both continents is small.)

The issue isn´t the current situation, but the prospect of the natural gas global market in the near future. According to New Eastern, nineteen countries already are world exporter of liquefied natural gas, and the number of exporters increased, the market continues to expand and the technology for the conversion and transport of gas in liquid form is cheapening. Furthermore, with the slowdown of Asian economies, especially China, and the increasing of the American production the product price is falling all over the planet.

This brings two direct consequences for the gas market: reduces the Gazprom income and the product demand in Asia, making Europe more atractive for the US exports. The forecast is that 55% of all natural gas produced by the US is destinated to Europe. On the European side, the forecast is that the continent will further increase demand for gas: in 2013, 65% of natural gas consumed by the European Union was imported. This number should rise to 77% in 2025. Even if the increase of demand means the market expansion for both the US as to Russia, the strong American investiment in production and product transport will cause an increase competition between two countries.

(Pipeline gas for Europe: Gazprom´s project in black dotted; Western project in light blue dotted. Now competition extends to the other side of the European continent.)

This can change the energy geopolitics of Europe in the short time, perhaps troughouth Eurasia, as Russia also supplies the Asian market and will have to reconsider it´s sales strategy for other countries in a context of fall of the product price and the search for new markets.

Most importantly, however, will be the decline of Russia´s ability to use gas as a political weapon against Europe. The new geopolitics will have impact in projects already commented in this blog, pipelines that connect Russia and Europe and the pipelines led by Western countries in order to compet with Russian gas extracting the product from Caspian Sea through Caucasus. The competition, therefore, will result in a further price fall of the product, the increase in economic difficulties in Russia and smaller investiments in this competition coming from the east. It´s an exaggeration to speak at the end of Gazprom´s monopoly on the sale of gas to Europe as a whole, as Russia provides only one third of gas consumed by all continent, with the rest coming mainly from Middle East, Algeria and Norway. The threatened monopoly is in the eastern parte of the continent. What should happen, rather, is the expansion of energy geopolitics and the oscillation of it´s pendulum to the Atlantic Ocean and the consequent decrease of the Russian ability to influence European politics by manipulating prices and gas supply, as occurred in 2006 and 2009 in disputes involving Ukraine. The new Russia´s concern is in the other side of Europe.

* published in Portuguese on April 29th 2016.