- The Writer holds an MSc in Eurasian Political Economy & Energy from King’s College London and also an MA in European Studies from Sabancı University.
The introduction of horizontal drilling and hydraulic fracturing with the onset of U.S. technological advancements has ensured that once unavailable shale and other tight geological formations are now economically viable. The surge in U.S. natural gas production came at a time when the risk perception on the global natural gas market was heightened, particularly in Europe between 2006 and 2009.
The spectacular growth achieved during this time period was concurrent with major political developments in the EU. Due to the increased risk of Russia using natural gas as political leverage over EU states, particularly after the Ukrainian gas crises in 2006, energy security concerns were prioritized on the EU agenda. Therefore, the U.S.’ gas glut increased hope in many EU countries of diversifying natural gas supply sources away from a single source, mainly Russia.
The exponential growth in oil and gas production in the U.S. in recent years has greatly reduced its energy dependence from over 60 percent to approximately 20 percent. The U.S. Energy Information Administration states that 750 billion cubic meters () of natural gas was produced in 2017, of which 475 was produced from shale resources. This volume is equivalent to approximately 60 percent of natural gas produced in the U.S.
Energy authorities in the U.S. suggest the shale revolution over the last decade would further unlock more natural gas production by 2025 following the Trump administration’s deregulatory initiatives by cutting red tape in the industry. The very first U.S. LNG cargo exports took off back in 2016. And the U.S. is expected to potentially become one of the major LNG suppliers in the world just after 2020. However, growth attained in the U.S. gas market would not necessarily provide energy supply security to EU states unless some major shortcomings are carefully addressed.
From insufficient LNG capacity to restricted terms in long-term gas contracts, to low capacity utilization as well as Russia’s readily available idle gas capacity and lastly, the current gas pricing mechanism all remain major impediments against diversifying towards LNG for countries reliant on Russian gas.
Heightened vulnerability between 2006 and 2009 when Russia decided to shut down natural gas supplies to Ukraine resulted in the EU reconsidering its energy supply security both in the short and long term. Specifically following Russia’s aggression in Ukraine, with the aim of lowering over-dependence on Russian gas and, if possible, to counter Russia’s energy leverage over EU states, many policymakers started to consider the U.S.’s ability to supply gas to the EU gas market in the form of LNG.
When the first U.S. LNG cargo sailed from Sabine Pass LNG terminal back in 2016, the price environment favored the Asian gas market over the EU market where the majority of new LNG contracts was oil-indexed. At that time, the majority of gas market experts estimated that U.S. LNG exporters would choose the Asian market over Europe. But the trading window of opportunity has been closing between these two markets since then, paving the way for more optimism for the expansion of the EU’s LNG market. Currently, U.S. LNG is more expensive than Russian natural gas and therefore Russia could potentially undercut U.S. LNG with its idle capacity to protect its share of the European gas market.
A substantial proportion of Russia’s natural gas supply contracts are based on long-term contracts running beyond 2025. In essence, these intergovernmental contracts are renegotiable but are almost impossible to terminate. Russia does not use destination clauses for the majority of the EU states it supplies, which, in reality, allows consumer states to re-export or resell their unconsumed natural gas on the spot market. This option might sound flexible for EU countries, but given that the contract volumes are fixed on an annual basis, and in fact contract volumes may exceed the actual needs of gas importers, Russia’s main intention in giving consent for selling on gas is very much linked to its desire to maintain its market share in the EU.
Taking into account Russia’s vast gas reserves, particularly in the Siberian region, idle capacity could be used anytime to increase overall capacity levels if Russia feels that U.S. LNG is threatening its market share. Therefore it would not be an exaggeration to assume that Russia could price out U.S. LNG with its vastly idle capacity, where all costs have been primarily sunk. In this regard, U.S. LNG, in the short term, has little room for maneuver over Russia’s supremacy in the EU’s natural gas market.
To avert gas supply disruption and to ensure greater market integration between EU states, the European Energy Program for Recovery was introduced in 2009 with funding of over €1.3 billion. Under this program, priority was given to reserve flow capacities, regasification capacity, as well as market-based rules on more transparency and accountability. The program has strengthened the hands of EU states at the negotiation table against Russia. Furthermore, many energy market experts suggest that EU policymakers have to use the LNG card as an insurance policy against Russia in the long term.
The strategy used by the Lithuanian government in recent years might serve well as an example for other EU states that aim to enhance LNG capacity. Lithuania, with its newly built LNG terminal, has been striving to diversify its gas imports away from Russia. After the terminal’s inauguration, Lithuania imported LNG cargoes both from Norway and the U.S. in the belief that the LNG card would help the country negotiate a better deal with Russia’s Gazprom.
Currently, the majority of the 27 LNG terminals are located in Western Europe; namely in Spain, France, the U.K. Portugal. The main problem with European LNG has to do with the fact that mainly Eastern European states, which are heavily reliant on Russian gas, have no or insufficient LNG storage capacity that would ease their dependence on a single source.
Additionally, low capacity utilization also remains a problem. As of 2014, LNG capacity utilization in the EU remained at 22 percent. Capacity underutilization for projects as expensive as LNG terminals are usually internalized, which eventually increases overall energy costs to the end consumers. In this regard, options for LNG consumption are a double-edged sword in which both options have their own peculiar adversities.
After the oil price collapse in 2014, the U.S. Henry Hub price and the European and Asian spot gas price narrowed down to the extent that the appetite for new LNG investments in the U.S. was curtailed. The progressive shrinkage in the trading gap has been the most effective impediment to new LNG projects.
Given Russia’s supremacy in the EU gas market with contracts extending beyond 2025 along with Russia’s strong desire to protect its European market share, coupled with Russia’s vast idle capacity, the U.S.’ LNG growth in the EU market will have to wait until conditions on the ground improve.
- Opinions expressed in this piece are the author’s own and do not necessarily reflect Anadolu Agency's editorial policy.