Cheaper Natural Gas Is Coming To Europe

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By Irina Slav

The European Union recently updated its gas pipeline rules in a bid to assuage concerns about its deepening dependence on Russian gas. The move was generally praised by Nord Stream 2 opponents, but guardedly, since the update did not halt the project but will merely slow it. However controversial, the project will be among the factors that will benefit gas consumers in Europe amid stiffer competition from other exporters of natural gas.

Germany, the largest gas market in Europe and biggest buyer of Russian gas as well as the strongest supporter of Nord Stream, said it will build two LNG terminals as part of efforts to diversify its sources of the fuel as it phases out coal and nuclear power plants under pressure from the green lobby. U.S. LNG is a natural candidate for these terminals but not the only one: Russia’s Novatek also exports LNG to Europe, and since its Yamal plant is quite a bit closer to the continent than Cheniere Energy’s Sabine Pass plant, its prices are more attractive.

This means Russia is playing on the European gas market with two players rather than just one and that would make it more challenging for U.S. LNG to grab a bigger market share. Yet the challenge can be overcome: as U.S. Deputy Energy Secretary Dan Brouillette said earlier this year during a visit to Germany, as more LNG production capacity comes on stream in the United States, prices will fall further, making the commodity competitive with Russian piped gas and Russian LNG.

Some doubt how soon this will happen and one of these is commodity strategist Christopher Louney from RBC Capital. Last month Louney told CNBC “Europe taking U.S. LNG and U.S. LNG challenging Russian pipeline supplies for dominance are two very different things. Europe has already taken U.S.-sourced LNG over the past two years with just a couple of export terminals in operation. With more U.S. export facilities coming online, the number of takers and volume taken can both increase, but there is a long way to go to compete (with Russia) for pre-eminence.” It won’t happen overnight, in other words, but U.S. LNG does have a promising future in Europe.

But there is another competitor that will be joining the race soon: the Trans-Adriatic Pipeline, which will carry natural gas from the Caspian Sea to Europe. TAP is a key part of the Southern Gas Corridor—a key infrastructure project for Europe aimed at diversifying gas supplies away from Russia and bringing natural gas from the Caspian Sea region to European markets. The Southern Gas Corridor consists of several separate energy projects with a total investment of around US$40 billion. The US$28-billion Shah Deniz 2 gas development in Azerbaijan, which BP and its partners started up in July last year, is the starting point of the Southern Gas Corridor.

So, more gas is coming into Europe over the next few years and demand will likely continue growing as it has been for the last four years, according to figures from the Oxford Energy Institute. As is usually the case, more supply will pressure prices and stimulate even stronger demand. This may add a challenge to producers’ efforts to keep their prices low but profitable, but the challenge is just part of the game.

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