Natural Gas Europe: Russian Pricing Strategy Makes US LNG, TAP Unprofitable

US LNG and expensive pipelines from the Caucasus region heavily depend on the Russian pricing strategy, which implicitly gives Moscow an edge to increase its clout in Europe in the years to come, said Thierry Bros, Senior European Gas and LNG Analyst for Société Générale, this Wednesday. 

“Gazprom’s profitability is not at risk,” Bros said, adding that alternative supplies are likely to be delayed. These temporary suspensions are strongly related to Russia’s ability to adjust prices in relation to changes in market conditions, as Gazprom can easily decrease prices to make new projects unprofitable. In this sense, Bros predicted Gazprom to increase its market share over the coming years.

Mentioning Statoil and Total’s retreat from Shah Deniz, the analyst argued that current prices are too low to allow expensive projects to go forward, at least for now. He even doubted the feasibility of the TAP pipeline.

“There are two alternatives: delays now or a price war later,” he said during the second day of the of the Unconventional Gas & Oil Summit in London, strongly restating that economic factors will be decisive for investments in European infrastructures.

His take was shared by other panelists.

According to other experts, US LNG and pipelines from Shah Deniz are expensive alternatives that would require a form of political support and would eventually lead to a price war with Russia. In this sense, question marks heavily hang over TAP’s timing.

These statements come as little surprise, considering the fact that major participants are withdrawing from the project. According to an article published by Reuters on Wednesday, E.ON could soon follow Statoil and Total, selling its stake in TAP.

LNG FROM UNITED STATES

The Kremlin’s decision is set to have similar effects on other projects that could decrease European reliance on Russian gas.

“Despite rhetoric, there are limits to Europe’s appetite for securing alternative resources like US LNG due to cost,” confirmed Will Pearson, Analyst at Eurasia Group.

Costs do play a central role in European leeway, which is also constrained by seemingly uncorrelated decisions. For instance, US macro-economic policies could further deteriorate European position, limiting the feasibility of projects to import gas from the United States. Being US LNG dependant via shale gas, eventual problems in North American unconventional production would have knock-on effects on European options. That is why American macro-economic decisions have to be factored in as well.

According to Paul Stevens, Distinguished Fellow at Chatham House, US unconventional small-medium companies are running a great risk.

“Shale gas revolution has been built on a mountain of debt,” said Stevens.

He argued that small-medium companies are very vulnerable to interest rates changes.

“When interest rates rise there will be lots of bankruptcies raising interesting issues of orphan wells, which could strengthen environmental opposition to shale,” Stevens added during the conference.

In this sense, European governments do not have many options. They are rather dependent on the long-distance arm-wrestling between the United States and Russia.

WAY FORWARD

As strange as it may seem, the only lifeline could come from Kiev. The standoff over Ukraine has indeed promoted a sense of urgency.

This could have three separate consequences. Firstly, it could push Europe to develop a collective purchasing mechanism in particular for Member States that are highly dependant on Russian gas. Grid harmonisation and internal market projects could ramp up as well. Secondly, the current uncertainties could pave the way to shale gas production. Thirdly, the current geopolitical crisis could turn the spotlight on research.

According to James Woudhuysen, Professor of Forecasting and Innovation at De Monfort University, funds for R&D in Europe decreased over the last thirty years, registering a 39% plunge from 1992 to 2012. While funds for energy efficiency and renewable energy sources went up in the last decade (2002-2012), research on fossil fuels and nuclear shrank also in the ten years to 2012.

In this sense, the current situation could clearly have positive effects on research. If US LNG and other expensive projects are nothing but uncertain, in-house research is a good option. The opportunity cost of research and development is indeed extremely low. With few options left, Europe could and should orchestrate a cooperation to promote efficiency through technological achievements and ameliorations. America is probably going to be of little help on a practical level, but it is still a model reminding that technology can sometimes lead to unexpected results. Unless significant Russian acquisitions of European technology firms, Gazprom’s gas pricing would have little voice in this process.

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Source: Natural Gas Europe, 2014

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