Will Russia put half of US LNG at risk of shut-in over next 5 years?

Russia could build more natural gas pipeline in Europe and reduce US LNG export utilization 40%

Goldboro LNG plant

As American LNG capacity ramps up to serve export markets, industry is speculating about Russia’s response. Will Russia build more infrastructure to protect European markets, driving down natural gas prices, and potentially rendering a lot of American LNG production uneconomic?

A new study from Wood Mackenzie suggests that other factors may be more influential. These include US gas prices, which are forecast to rise from recent levels, the price of oil and the price of coal, which will determine European spot prices through coal-gas switching in the power sector.

“With European LNG imports, including from the US, set to grow over the next five years, there is much speculation about Russia’s likely response. Will Russia’s gas strategy mimic that of Saudi Arabia’s oil strategy, will it seek to retain market share in Europe, pushing European gas prices to levels that force the shut-in of US LNG exports?” said Stephen O’Rourke, research director of Global Gas Supply for Wood Mackenzie.

Wood Mackenzie asserts that US LNG export utilisation will be determined by multiple factors and a large proportion of export volumes will be under threat at times over the next five years.

“Our analysis shows that while Russia’s export strategy is important, ultimately US LNG export utilisation will be influenced more by the price of other commodities: of US gas, oil and, particularly, of coal, which will determine European spot prices through coal-gas switching in the power sector.” said Noel Tomnay, head of Global Gas & LNG research for Wood Mackenzie.

Noel Tomnay, Head of Global Gas & LNG research for Wood Mackenzie

“Using our Global Gas Model, we explored the impact of three determinants on US LNG exports: Russia’s gas export strategy; oil price; and coal price. This addressed questions such as what if coal prices remain low? What if oil prices don’t rebound? What if Gazprom increases or decreases exports?” said O’Rourke.

“Should oil prices remain low, Russian oil-indexed contract gas will remain cheap and buyers will maximise their offtake of Russian gas. At low oil prices, customer choice rather than strategic Russian decision making would allow Russia to retain over 30 per cent of the circa 490 billion cubic meters (bcm) European market and threaten US LNG export volumes. If coal prices also remain low, monthly European gas prices could fall to US$3.85/mmbtu, and utilization of US LNG export capacity could average 85 per cent between 2017-20.”

What if oil prices rise?

“Russia’s share of the European market stands to decline to only 25 per cent if the price of oil and Russian contract gas rise.  Russia could elect to make more pipe gas available at spot prices and increase market share to as much as 35 per cent, but in so doing European spot prices could fall towards US$3/mmbtu for longer periods,” said O’Rourke.

Wood Mackenzie says that such a market share strategy could reduce US LNG export utilization to some 40 per cent and would send a strong signal to deter developers of future US LNG export projects.

Russian Gazprom LNG plant

But while it could maximize profitability for Russia under some oil and coal price combinations, it seems an unrealistic outcome.

“In addition to undermining existing contractual supply agreements, securing additional pipeline access for export volumes would require the tacit support of Ukraine and the EU, a dependence that appears politically challenging,” said O’Rourke.

“Russia’s export strategy will be a key determinant of US LNG export capacity utilization, but the Russian pursuit of European market share to drive out US LNG from Europe seems either uneconomic and/or impractical under different external conditions,” said Tomnay.

“Instead other factors such as the price of US gas, oil and European coal prices will likely be greater determinants of US LNG export capacity utilization. Subject to these factors alone, average utilization of US LNG export capacity between 2017-20 could vary from 54-100 per cent. For US LNG exporters, the best thing to happen would be for global coal prices to rise, or for US gas prices to stay low.”