Russia’s success in LNG production may soon create problems even for our pipeline companies.
Russia took the second place in the supply of liquefied gas to the EU countries. Russian suppliers are ahead of not only the United States, but also Algeria, and are second only to Qatar. The first deputy head of the government apparatus of the Russian Federation Sergey Prikhodko spoke about this at a press conference.
At the same time, our country also holds record high volumes of pipeline gas supplies. According to Prikhodko, this year they will remain at the level of 2018, when the EU countries purchased more than 200 billion cubic meters of gas from Russia.
– Russia is the largest and most reliable supplier of blue fuel to Europe. Last year, deliveries of Russian pipeline gas to the European market amounted to a record 201.9 billion cubic meters. Given the real situation and the market situation, it is forecasted that in 2019 they will be close to this indicator. In addition, Russia also ranks among the leaders in LNG supplies to the EU countries, taking second place after Qatar, – the official said.
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According to the International LNG Importers Group (GIIGNL), in 2018, Qatar (16.42 million tons), Algeria (9.29 million tons) and Nigeria (9.07 million tons) became the largest suppliers of liquefied gas to the EU countries. Russia supplied 4.43 million tons, and the United States – 2.7 million tons. But already this year the picture has seriously changed. At the end of July, the European Commission published a report on the implementation of trade agreements with the United States, reached a year earlier. As a result, the Americans were in third place with 12.4% of total gas imports. In 2018, this indicator among them reached only 5%. However, Russia managed to get ahead of the United States in this direction.
According to experts, this is due to several factors. First of all, with logistics. Tankers with Russian LNG sail from Yamal. Which makes the transport shoulder shorter than that of American suppliers who have to cross the Atlantic Ocean. This allows you to offer a competitive price. And, in addition, makes deliveries more flexible.
For example, even Lithuania, which is moving towards energy independence from Russia, began to buy Russian LNG, since it is much more expedient to economically supply LNG from the port of Vysotsk of the Leningrad Region to Klaipeda than a tanker flight from the US Due to trading operations, this gas may not even be considered Russian and may not spoil statistics for the Lithuanian authorities.
Moreover, the Americans themselves began to actively purchase Russian liquefied natural gas. The fact is that during peak periods the states of the Atlantic coast lack their own raw materials, especially given the fact that significant volumes are exported. Last year, according to experts, the United States purchased Russian LNG seven times. In particular, when abnormal frosts hit in January and when in July, due to the heat, the air conditioners were operating at full capacity.
The states were not embarrassed that the gas supplier Novatek and its co-owner Gennady Timchenko were actually under American sanctions. Simply, transactions are conducted through intermediaries – French firms Engie or Total, Malaysian Petronas and others.
Although in Europe, Americans continue to aggressively promote their gas, and many analysts call their sanctions campaign against the Russian Nord Stream-2 an attempt to push Russia away with pipeline gas and take its position. The idea is to cause gas shortages in Europe, which will lead to higher prices and make the supply of American LNG to this market profitable. Without such political leverage, the Americans are simply not able to compete not only with Russian pipeline gas, but also with its liquefied gas.
So far, the US plans to disrupt the construction of alternative gas pipelines have not been crowned with success. But Russia is also increasing supplies of liquefied gas, so there is no talk of any shortage. Earlier, Russian Minister of Energy Alexander Novak said that Russia plans to occupy up to 20% of the global LNG market.
The Yamal LNG plant on the resource base of the South Tambeyskoye field, owned by Novatek, shipped the first batch of liquefied gas at the end of 2017. In 2018, deliveries on long-term contracts began. The company supplies LNG not only to Europe, but also to countries such as Malaysia, Japan, China, the USA, India and others.
The shareholders of Yamal LNG are Novatek (50.1%), Total (20%), CNPC (20%) and the Silk Road Fund (9.9%). Currently, three production lines have been launched, each with a capacity of 5.5 million tons, and an additional fourth line is under construction. Work is planned to be completed in early 2020.
According to the results of the first half of this year, Yamal LNG achieved a net profit of 135.6 billion rubles against a loss of 73.1 billion incurred in the same period last year. Profit quadrupled. In addition, Novatek is developing an Arctic LNG-2 project for natural gas production and liquefied natural gas (LNG) production on the Gydan Peninsula (on the other side of the Gulf of Ob from Yamal). The start of the first line is planned for approximately 2023. Planned annual production of 18.3 million tons.
Paradoxically, if supplies grow at the same pace, then the main competitor to Russian LNG may not be the United States or even Qatar, but Russian pipeline gas. As Nord Stream 2 and Turkish Stream are launched, Europe’s demand for more expensive LNG will decrease.
However, for Russian LNG this should not be a big problem. Unlike pipeline gas, this market is more flexible. Simply put, tankers can go anywhere in the world where prices are more attractive.
Deputy Director General of the Institute of National Energy Alexander Frolov told that the import of Russian LNG into Europe will grow purely for economic reasons. And companies from the United States without political measures by the leadership of this country will not be able to compete with them. But Russian companies may eventually compete with each other.
– Today, all the plants in the United States can produce about 30−35 million tons, or in terms of 40 billion cubic meters of gas per year. Last year, Gazprom alone supplied 201 billion cubic meters of gas to Europe. By the end of this year, American capacity should reach 60 million tons, or 70 billion cubic meters.
But you need to understand that production and the market in the United States are very different not only from ours, but even from Europe. There is no one central state company that would be engaged in the production and sale of LNG. The scheme of work of American manufacturers is as follows.
There are companies that produce gas. These are separate enterprises that are not associated with those who later liquefies it. There are companies that have invested in the construction of liquefaction plants, such as Cheniere Energy. And finally, there is the third link of this chain – customer companies that book capacities at these plants according to the “liquefy or pay” scheme. This means that if they do not liquefy gas, they will still have to pay for idle capacity.
Among the booking companies, there are both the largest world companies like BP and Shell, and smaller companies. But they are not connected with the leadership of the United States and poorly managed in terms of American foreign policy. No matter how much the American president wants and no matter what he writes on Twitter, he cannot command these companies to take and carry gas to Europe.
Moreover, it may not even be American companies. The same Poles booked facilities under construction by the Americans. Maybe they will take LNG to Europe. Or they may not be lucky, because they must repay the money invested for the “liquefy or pay” scheme so as not to go bankrupt.
If they do not liquefy gas, they will lose $ 100 per ton. If they sell below cost, then they will lose about $ 50. Therefore, of course, they bring LNG to those where they pay more or where the delivery shoulder is less. That is why the largest buyers of US LNG are in Latin America and Asia, which is the highest-margin market. Japan, China and South Korea take almost half of all LNG. And all manufacturers are trying to enter this market.
– Why, in 2019, LNG supplies to Europe are growing?
– The fact is that due to an overabundance of LNG supply and a number of other factors, such as the US-China trade war, world prices fell. The difference between Asia and Europe has become insignificant, about $ 40 per ton, therefore, in a number of conditions, these markets have become almost the same, especially if brought closer to Europe.
And here the geographical factor plays a role. If you are near the consumer and have your own fleet, it is more profitable for you to sell to him, and not to take them somewhere else.
Because you save on shipping and can effectively manage your logistics costs, gaining a competitive advantage compared to those who are forced to carry goods from overseas.
After all the Yamal-LNG lines were fully commissioned last year, Novatek was able to transport about 16 million million tons of liquefied natural gas to Europe, because it is closest to Europe. Delivery there is cheaper and easier. Although deliveries to other countries are also carried out. Simply put, Novatek’s offer is more competitive than what US companies can offer.
I repeat that before the beginning of this year, Europe was far from the most profitable market. But a combination of a number of factors gave the result that we are now observing – Novatek is crowding out other LNG producers, including American ones, which cannot compete with it. If the latter sell LNG at a loss, they will simply go bankrupt. They have rather narrow borders of price reduction for the struggle for the consumer.
– That is, Russian companies have the opportunity to even more advantageously increase their market share in European LNG?
– Given the existing technical capabilities, Europe could purchase LNG per year in the amount of more than 220 billion cubic meters. Over the past years, she bought an average of 50–55 billion cubic meters. This year, this volume is likely to be greater.
But the reasons why demand has grown are not long-term. In addition, Europe is more nimble than Asia. She is not ready to pay too much just to attract new suppliers. Therefore, only those with low prime costs can compete in its market.
Novatek is in an extremely privileged position because it has colossal benefits within Russia, close proximity to the buyer, and its own fleet. And, besides, as a vertical company, it turns out to be more effective than the “small successful American companies”, which some of our experts like to talk about.
– And what if our LNG competes with our pipeline gas?
– LNG, in the first place, competes with LNG itself. And when we talk about the competition between American liquefied gas in Europe and Russian pipeline gas, this is not entirely true. We must first talk about competition with LNG from Algeria, Qatar, and so on.
LNG and pipeline gas are two different products. Pipeline gas is more maneuverable; it is able to satisfy needs as they arise. It is easy to increase or decrease the daily gas flow through pipes under long-term contracts. LNG, which goes, at best, for several weeks, simply does not possess such a property.
Of course, there is a danger that Russian liquefied gas will compete with the Russian pipeline. For a long time, one of our largest oil companies has lobbied for its interests in terms of access to an export gas pipe, since the domestic market is not very interesting to it.
However, this initiative was not supported. We still have a monopoly precisely because of fears that internal competition between companies with each other would weaken Russia’s position in the global oil and gas arena. Of course, there is an opinion that competition, on the contrary, would help us strengthen our position in Europe. But the specifics of the gas market and the results of Gazprom, which has already occupied 37% in Europe, show that this is not so.
However, there is a chance that LNG supplies will partially compete with pipeline gas supplies. For this, a number of factors must be matched on the European market that are not yet traced.
In addition, European gas imports are growing and will continue to grow in the coming years, as domestic production in the EU is declining. For example, the Dutch Groningen will be reset to zero by 2030. Europe will have to buy even more gas, which compensates for all the negative consequences of the possible competition between our suppliers.
Rather, competition is associated with the construction of Baltic LNG, a Gazprom enterprise that will directly compete with Yamal LNG in the European market. But the expected increase in gas imports in Europe may offset this.
In addition, we must not forget that China is actively increasing its consumption of LNG and this year it may come out on top, pushing Japan aside. Therefore, our companies have great opportunities to expand the export of liquefied natural gas.