American Natural Gas Affecting Russia’s Stronghold in the European Energy Market

The United States of America was always expected to rely on liquefied natural gas (LNG) imports, but in the last decade or so, the shale gas boom across the country has transformed it into a world-class exporter. The huge rise in the drilling activity across the country has led to the creation of a supply glut, larger than what the country can consume. Companies which had invested large amounts of money into building import platforms had to transform the facilities into export terminals. Thus, a large amount of gas in liquefied form has now started to find its way into foreign markets. Mexico acts as one of the best examples as it has replaced environmentally unsustainable sources such as coal and petroleum products with clean and cheap gas from the U.S.

Dealing With Russia's Dominance

The U.S. has committed to further its export capacity from the present 33 percent to an estimated 40 percent of the global trade by 2020. 60 percent of the overall new LNG export capacity is expected to be added in the U.S. The increased LNG export is not only expected to lengthen the supply but also put some downward pressure on the prices. The major impact of the shift in U.S. natural gas trade fortunes is expected to be felt by Russia, placing a question mark over its influence on the European market.

Russia gained share in the European market on the back of the decline in the North Sea and Dutch gas production. Russia fulfills approximately 30 percent of the continental gas demand just through its three pipelines. Russian natural gas makes up for approximately 75 percent of imports for 13 nations across the continent. Countries such as Latvia and Finland import 100 percent of its requirement from Russia. The dependence of European countries on the Russian energy sources places a huge power in hands of Kremlin not only in terms of dictating the prices but also suspending gas exports in case of conflicts. Russia’s brief suspension of exports to Ukraine in 2009 can be cited as one of the best examples of how the terms can be dictated at will. Thus, Russia has historically relied on using gas as a political tool as well.

Emergence of U.S. as an Alternative

The EU officials have slowly understood that they need to diversify their supply base to ensure they are not in a position of compromise and hence have started looking at the U.S. as an alternative. Supplier diversification is the expected way ahead for Europe and this is where the abundant shale gas from the U.S. comes into play. The affordable gas has given EU countries an option and has started to find its way into the European market. Poland which historically relied on Russia for 40 percent of its gas imports became the first country to import American gas after opening its first floating LNG terminal last year. This was followed by natural gas shipment from the U.S. to Lithuania. Russia’s grip on the European market has already started to loosen a bit as it has been forced to lower the gas prices in a move to tackle the American supply. Such loss in margins is not only affecting the revenues of companies but also making Arctic exploration and expansions less feasible. Focus on infrastructure seems to be the way ahead for European nations. New LNG import terminals for U.S. shale gas are expected to be built to reduce reliance on Russia.

The general sentiment is that soon Europe might witness a rise in demand, as the region looks to phase out other energy sources. The decision of U.K. to eliminate its coal usage by 2020 combined with Germany’s move to give up nuclear power acts as a window for more gas consumption. Such an increase paints a favorable picture for U.S. producers as European countries look out for non-Russian sources of energy. Will Europe go the Mexico way and become a huge market for the abundant U.S. shale gas? Well, one thing is certain that the emergence of the U.S. as an alternative has made the gas market more competitive. But it is difficult to predict the long-term geopolitical and economic implications of this gas battle.

Source:  

• https://www.ft.com/content/352f4cac-6c7a-11e7-b9c7-15af748b60d0