Europe got lost in three gas ‘pines’

Written by The Frontier Post

Alexander Sobko

Super high gas prices in Europe are a popular topic of discussion. It has already become customary to note that the European Union has punished itself by persuading almost all participants in the European market to supply gas with a price pegged to the quotations of European stock exchanges. As a result, when, due to a combination of circumstances, there was a shortage in the market, these exchange prices flew into the sky. However, this whole story has another dimension – the theoretically relevant issue for the EU of reducing the share of Russian supplies. It would not be an exaggeration to say that it was the EU’s obsession with pegging to the exchange price that did not allow reducing dependence on Russian gas earlier.
It is known that the Russian contribution to gas consumption in Europe is significant and amounts, depending on how you count, 30-40 percent. Now, due to well-known circumstances, the problem of such dependence has become relevant again, but, by and large, the issue has been raised from time to time in recent years, but rather, for the last decade. Great hopes were placed on American liquefied natural gas (LNG).
Over the past ten years (construction of the first LNG plant in the United States began in the summer of 2012), the United States has rebuilt the entire export infrastructure for LNG sales from scratch and has become the largest supplier of this product, overtaking Qatar and Australia . Now the United States is already exporting about 120 billion cubic meters of gas in the form of LNG – these are current volumes in terms of annual values. If all this volume were guaranteed to always go to Europe, then it would have sharply reduced its dependence on Russian supplies long ago, which even at the maximum amounted to about 200 billion, and in some years were noticeably lower.
Yes, right now more than half of American LNG actually ends up in the EU, moreover, in January more of it was delivered to Europe than Russian gas through pipelines. But this is a temporary story associated with high prices. After all, American LNG belongs to trading companies that take it to where it is more profitable. The main thing is that they have no obligations to Europe. It would seem that what prevented not to give this LNG to traders? And directly to European gas importers to take and bind all or most of it with their contracts for guaranteed supply to Europe, which were concluded, but in symbolic volumes.
The answer is known. US producers are generally willing to sell their LNG at a price pegged to US domestic gas prices plus the cost of liquefaction and margins. Pay and LNG is guaranteed to be yours. But in this case, European importers would face risks: suddenly the exchange price of gas in the EU, at which it is necessary to further sell fuel to consumers, would turn out to be lower (as often happened). Who will pay the difference? There were almost no applicants for such schemes. As a result, the EU voluntarily-compulsorily transferred long-term contracts of pipeline suppliers ( Norway , Russia ) to the exchange peg, which have nowhere to go. And in the LNG sector, there remains a large share of flexible sales without obligations, responsive to the exchange price.
It must be said that in previous years, Gazprom also tried to influence the volume of gas supplies on prices in Europe in such a way that they turned out to be lower than the full cost of American LNG. This is also why the Russian company previously adhered to the tactics of maximizing sales. This brought down prices and additionally demotivated European companies to look towards guaranteed supplies from the United States.
Here the attentive reader may object. Let’s say Europe still “took” all the American LNG under guaranteed contracts, while Russian supplies simply dropped sharply. But then this LNG from the US would not have gone to Asia , where demand growth is high. How would the entire world economy emerge from this situation?
By the way, this is exactly what is happening at the moment when the flow of LNG to the EU, caused by the low volume of supplies from Russia, leads to an additional deficit in Asia. And it is not clear how this will end if the situation continues for, say, a few more months.
But history, including the history of energy, does not know the subjunctive mood. Perhaps part of the gas supplies from Western Siberia could be redirected to the Asia-Pacific region, although the task is difficult for such volumes. Perhaps the consumption of coal would increase. Maybe prices would have risen even earlier and there would have been an energy crisis. Maybe the US and other countries would build even more LNG plants.
Let us immediately answer the second possible objection of attentive readers. It is believed that the United States is interested in suspending Nord Stream 2 in order to stimulate the export of its LNG. Isn’t there a contradiction here, since the EU still doesn’t really conclude direct contracts for supplies from America? But there is no contradiction here. After all, any decrease in supply on the global market creates additional market niches and increases prices, and therefore stimulates gas exports from the United States.
One way or another, there are still a lot of LNG projects ready for construction in the United States at the moment, and the entire described but not implemented scheme for replacing Russian gas can be started even now, although this will take another ten years. But in the EU there are still no people willing to implement this approach. In addition, do not forget that American LNG producers want to sign twenty-year supply contracts, and in such a time interval, Europe is already hoping for a drop in demand for gas against the backdrop of the development of green energy. This is another contradiction for the European Union , which would like guaranteed non-Russian gas here and now, but does not want long-term commitments.
The situation is somewhat similar with Qatar, from which the EU and the US wantsee additional support for the volume of LNG supplies to Europe. This country does have some “overhang” of liquefied gas free from long-term contracts, which they sell in various markets. Although these volumes cannot solve all the problems of Europe. But the main thing: on what basis should they be redirected to Europe? Again, LNG will always go there at a high price and without further instructions. But let’s imagine that LNG is redirected “administratively”. This means that prices in Asia will rise, but in Europe they will fall if it is additional gas, or remain in place if this gas replaces the Russian supply. In any case, a non-market situation will arise. On what basis, then, should Qatar sell its LNG cheaper to Europe, even on formal grounds? How to arrange it?
It is logical that new long-term contracts could be signed with Qatar for these volumes. Qatar is still willing to do this with an oil price peg (in particular, a recent contract with buyers from China ). Then, at the moment, Qatar would have lost a lot in price, but it guaranteed the sale of its goods for many years. And such options were discussed . But no concrete decisions seem to have been made again, as this approach is at odds with European pricing mechanisms.
And so far, there are no signs that the European Union is ready to move away from its established system. Even now, when the exchange price of gas is several times higher than both oil-pegged prices and the full cost of LNG from the United States. Of course, the current high stock prices will eventually fall, but in the long run it is not clear which type of pricing will be more profitable. Therefore, buyers in Asia are trying to create a basket of contracts with different types.
Let’s summarize. If Europe were willing to pay a little more and also accept the US LNG pricing model, then in theory it could replace 60 percent of Russian imports with US LNG over the past ten years. But this has not happened and there is no sign that the EU is ready to start this process now. Perhaps, after Russia’s military operation in Ukraine , which began yesterday , something will change, but in any case, this will take at least another five, and preferably ten years.

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