Europe’s reliance on Russian gas is a good illustration of the important trading relationship between Russia and Europe. Gazprom estimate they supplied up to 34.7% of the gas consumed in Europe in 2017; Germany is the largest individual market. This it implies Europe’s approach to sanctions is necessarily different to the US. Although it is a different industry, last week the US eased the recent sanctions on Rusal, given the knock-on effects on European businesses, by extending the deadline to October for compliance. US Treasury Secretary Steven Mnuchin commented: ‘Given the impact on our partners and allies, we are issuing a general license extending the maintenance and wind-down period while we consider RUSALs petition.’
Russian gas dependency has prompted Germany to consider options to diversify its suppliers: estimates have put over 60 percent of Germany’s natural gas imports as coming from Russia. But set against this, Germany is also trying to move away from coal and oil to more environmentally friendly fuels favouring natural gas and renewables. Thus, private initiatives to build LNG terminals (which Germany lacks) are being considered, notably the Brunsbuettel import terminal near Hamburg which could be up and running by 2022 at an estimated cost of USD500m. Another plant is also being considered near Duisburg.
Nevertheless, meaningful diversification looks to be challenging in the next 5 years as the Brunsbuettel plant is a 5 bcm/year LNG import facility compared to 53.44 bcm of imports from Gazprom in 2017. As we see it, Russian pipeline gas, aka Gazprom, is still likely to remain a key supplier but the presence of alternative sources of supply means that Gazprom’s pricing is likely to remain competitive.
LNG volumes from the US into Europe have so far remained small: the EC estimate Q4’17 EU LNG imports at 0.49bcm. In 2017 Gazprom supplied 194.4 bcm of gas to the European market, Qatar supplied 24 bcm and other LNG sources supplied 26.6 bcm. Importantly, the cost competitiveness of Russian pipeline gas to Europe means that it is likely to be more profitable for US LNG cargoes to be sold into Asia rather than Europe. In a recent paper, The Oxford Institute of Energy Studies note ‘the full long-run marginal cost of US LNG at a Henry Hub price of $2.60/MMBtu is over $7/MMBtu, and many commentators would argue that a more realistic assumption for new LNG projects overall would be a range of $7-10/MMBtu.’ By comparison they note ‘Gazprom’s fully costed gas from the Yamal peninsula, at the current rouble exchange rate, is approximately $6.50/MMBtu’.