Will There Be a Price War Between Russian Pipeline Gas & US LNG in Europe?

About the Project

KAPSARC is analyzing the shifting dynamics of the global gas markets, which have turned upside down during the past five years. North America has emerged as a large potential future LNG exporter while gas demand growth has been slowing down as natural gas gets squeezed between coal and renewables. While the coming years will witness the fastest LNG export capacity expansion ever seen, many questions are raised on the next generation of LNG supply, the impact of low oil and gas prices on supply and demand patterns and how pricing and contractual structure may be affected by both the arrival of U.S. LNG on global gas markets and the desire of Asian buyers for cheaper gas

Key Points

Around 150 mtpa of LNG export capacity will come to global gas markets over 2015-20. While Asia seems unlikely now to be able to absorb it all, Europe emerges as a residual market for flexible volumes. The question is, therefore, which outcome(s) in the global LNG market could set the stage for a battle for market share in the European gas market between LNG suppliers and the incumbent pipeline suppliers, most importantly Russia, and how that country could respond to the potential challenge of large quantities of LNG supplies flooding European gas markets? 

• Russia’s gas export strategy in Europe so far has been based on value maximization rather than on protecting its market share. But if increasing LNG supply to Europe becomes an extended threat to Russia’s market share, it may change its position from reactive to proactive and attempt to defend it. 
• Whether a confrontation between Russian gas and LNG takes place and how Russia could respond depends crucially on the build-up of total LNG trade and the appetite of China for LNG. 
• Russia has the advantage of being a low cost producer with ample spare productive capacity and underutilized pipeline capacity to Europe. A low price environment (up to $40/bbl) would actually benefit Russia more than a higher price environment, from a market share perspective, as it can reduce its prices below the variable costs of U.S. LNG and can push U.S. volumes out of the European market. In a higher price environment, U.S. LNG would continue to flow. 
• The competition between Russian gas and U.S. LNG in Europe is also about pricing models, driven on one hand by oil market fundamentals, with some influence from Europe spot markets, and on the other hand driven by the fundamentals of the U.S. gas market and the LNG trade. 
• The geopolitical aspect is also important. While relations between Russia and Europe have become frosty, cheap and abundant Russian gas could potentially help mend commercial ties. However, the tensions between the U.S. and Russia have been increased by the Ukraine situation, the war in Syria and sanctions. The competition between U.S. LNG and Russian pipeline gas in Europe is about more than the pure commercial aspects and will be influenced by the geopolitical standoff of the two powers.