US LNG exports: a new foreign policy tool

The US will use its gas bonanza as a foreign policy tool to reshape world gas market dynamics and lessen influence of key petro-states.
• The US which has edged out Russia as the world’s largest producer of natural gas is likely to get a LNG export capacity of 45 million tons by 2020-2025.

• The reduced vulnerability of North America and improved national energy security had led to a decreased interest in Middle East (ME) oil and a renewed strategic interest in Asia

• NA gas boom is a challenge to OPEC and Gas Exporting Country Forum (GECF), decrease the geopolitical power wielded by key petro-states (Russia, Iran…)

• North American natural gas exports will impact global gas pricing, eroding the appetite for oil-linked prices

• North America’s new role as a LNG exporter will play a central role in helping strategic allies which are important consumers, lessening their dependence on dominant suppliers (such as Russia in Europe)

• Fostering global shale resource potential in other parts of the world through the Global Shale Gas Initiative (India)

Gazprom is not Microsoft

Gazprom and Microsoft are two different animals. The European Commission cannot go after Gazprom the same way it went after Microsft because of the intense politicization of the antitrust investigation launched in September by the European Commission to determine whether Gazprom might be hindering competition.

The political overtone of the investigation makes it unlikely that the EU will impose fines. Fines would risk hurting ties with Russia, since Moscow would likely balk at accepting the penalties. In reaction to the EU investigation, Russia published a decree in September requiring government permission for various actions by companies operating in "strategic sectors," which was aimed at giving Gazprom legal cover in response to the EU investigation while also formalizing Kremlin oversight of the company .

The completion of the investigation is expected to take anywhere from six months to 18 months. The outcome will likely include mixed results, but on balance the Commission will be cautious in its judgment. The consequences are likely to be differentiated depending on the extent to which the proved anti-competitive practices hurt each country. Then, if Gazprom does not like the outcome, there is the option to appeal to the European Court of Justice- adding maybe another 12-18 months before a decision.

Sooner or later there will be some compromise and partial recognition of EU goals due to the highly interdependent relationship between the EU and Gazprom. Russia remains Europe's main supplier and Europe remains Russia's core market.

With US LNG Exports, the EU May Not Need Nabucco

In a scenario of a gas supply boom by 2020—with US LNG exports as a core pillar of incremental LNG growth along with other new suppliers and planned projects coming online by decade-end—Europe may not need Caspian gas any longer. US LNG exports appear as a more attractive supply option for European gas buyers than Caspian gas for three main reasons:

First, in terms of timing, Nabucco West is expected to come online by 2018 at the earliest, while US LNG exports could start in 2016 but with a slow ramp-up to 2020. The first approved and fully contracted US shale-to-LNG project, the Cheniere’s Sabine Pass plant, located in the Gulf Coast will operate its first two trains by 2016-2017, followed by two additional trains in 2018-2019 to reach 16 million tons of export capacity. In the event that the US Department of Energy approves 2 or 3 additional export projects in 2013-2014, the US could add about 45 million tons of LNG (62 bcm) in the global gas market by 2020.

Second, regarding volume, the Southern gas corridor (TANAP and Nabucco West and/or TAP) will bring a modest amount of 10 bcm of Azeri gas into Europe (and 6 bcm into Turkey), while it is reasonable to expect that ¼ of US LNG exports (equivalent to some 15 bcm) will end up in Europe —providing a minimum of 3 to 4 additional projects will receive their license for exports to non-free-trade agreement nations.

Finally, both supplies will address the concern of security of supply. US LNG exports and Azeri gas will bring a net improvement into EU security of supply by adding a new source of gas and a new pricing into the EU (both US LNG exports and Azeri gas will be hub-linked), while reducing further EU's dependence on Russian gas.

In this context, why is the EU still politically pushing for Nabucco West and the opening of the Southern Gas Corridor (SGC)?

The key rationale beyond the SGC is ‘destination security’—which cannot be provided by LNG. Even in a scenario in which the US exports 45 million tons of LNG by 2020, there is no 100% guarantee that 25% of this volume will come into Europe, which is about what Azerbaijan will send to Europe by 2018-2020.

There is an intrinsic risk to LNG imports: European demand for gas could be overshadowed by Asian demand or any other growing niche markets. LNG shippers often pursue the highest paying market, currently Asia, meaning that European regasification terminals face risks of underutilization in a tight supply environment, a factor that implies significant security of supply risk given the flexibility of destination provided by LNG. As a result, the EU is still pursuing extremely large, fixed, cross-border gas pipeline projects because they provide ‘destination security’ without risk of diversion or profit-seeking strategies. In other words, the EU is willing to take the risk of committing to a pipeline that links buyer and seller for up to 40 years with the concomitant risks of pricing revision and transit country disputes because it ensures better security of supply. Although amidst the Eurozone crisis financing is a concern, the SGC’s aggregrated cost of roughly $20 billion is manageable if the EU, various utilities, and upstream players share costs.

That said, the EU is pursuing a multi-dimensional security of gas supply strategy where both diversified LNG and pipeline imports are core elements along with relying on better connectivity, liberalization, and deeper integration of the EU’s gas market through the Third Energy Package.

In terms of geopolitical implications, the combination of US LNG exports and Azeri gas into Europe is a nightmare scenario for Gazprom, which has yet to come with a coherent and competitive business strategy to defend its market power in Europe.

Iran: Aborted Gas Dreams

While the European Union ramps up pressure to adopt a ban on Iranian gas imports this week, the impact will be mostly psychological. The sanctions have already prevented Iran to develop its LNG plants and no European member buy directly Iranian pipeline gas. But Turkey which is an importer of Iranian gas could in theory export some of it to Greece through the interconnector and then ship it to the rest of Europe...

More importantly, Iran stands out as a big gas giant with aborted dreams. With the worlds's second largest gas reserves, its potential remains untapped. Its neighbor Qatar and co-owner of the giant South/North Pars field has become the world's top LNG exporter reaching 77 million tons of capacity. The shale gas revolution in the US has eroded the influence of the gas troika (Russia, Iran, Qatar) and the GECF (gas exporting country forum). 

The fastest North America develops its gas bonanza into LNG exports, the more new suppliers enter the market (East Africa, East Mediterranean), and as Caspian gas continues its expansion, the less the world needs Iranian gas.

With US LNG exports, the EU may not need Nabucco

With US LNG exports, the EU may not need Nabucco

- Timing: Nabucco West could come online by 2018, while US LNG exports could start in 2016 but they will slowly ramp-up to 2020
- Volume: Nabucco West will bring 10 bcm of Azeri gas into Europe (and 6 bcm into Turkey), while US LNG exports could add about 45 millions tons of LNG in global gas market among which 1/3 could reasonably go to Europe.
- Security of supply: both options will bring a net improvement into EU security of supply by adding a new source of gas and a new pricing into the EU, while reducing further EU's dependence on Russian gas.