Page 8 - GLNG Week 32
P. 8
GLNG CommEntARy GLNG
Russia banks on LNG in Europe
LNG exports to Europe will preserve Russian market share
PERfoRmAnCE
WHAt:
Gazprom’s pipeline supplies to Europe are under pressure.
WHy:
The Eu is seeking supplier diversi cation.
WHAt nExt:
Novatek’s lNG exports will provide scope for Russia’s continued role as key supplier to Europe
AS Russia’s agship Nord Stream 2 project draws closer to completion, its state-owned operator Gazprom is ghting to defend its market share in Europe from a rising tide of LNG supplies. Rus- sia has managed to increase its gas sales steadily to the continent in recent years, capitalising on low costs and spare production capacity.
Piped Russian gas exports to Europe reached a new high of 201.8 bn cubic metres in 2018, with their share of supply expanding from 34.2 to 36.6%, defying EU e orts to diversify import sources. Supplies faltered this year, however, slumping 5.6% year on year in the rst half to 102.8 bcm. Meanwhile, European imports of LNG rose 50% y/y in the first five months of 2019, according to Edinburgh-based consultancy Wood Mackenzie, which expects full-year sup- plies to reach 71 bcm, up from 32 bcm in 2018.
“Flows will built into 2020 as US LNG start- ups continue, and we expect a record number of global LNG FIDs this year,” WoodMac gas analyst Kateryna Fillippenko said in a recent research note. “these will underpin another wave of LNG in the mid-2020s, competing with Russian piped gas for market share.”
As US output expands, suppliers are increas- ingly opting to sell their volumes in Europe because of a smaller price di erential with the Asian LNG market. “Given the transport costs, exports of LNG to Asia are therefore less appeal- ing than exports to Europe, particularly for mar- ket players in the Atlantic basin,” the authority of the Dutch port of Rotterdam, which recorded a 93.9% growth in LNG imports in the rst half, stated last month in a report.
While gas demand is predicted to be mostly at, European LNG imports are set to rise 4% each year up to 2024, the IEA forecasted in June, reaching 86 bcm. During the same period, Rus- sian piped gas to Europe will remain in line with last year’s level, according to the agency, with their share of demand dipping slightly to 33-36% by 2024.
Addressing the threat
In the longer term, Gazprom is looking to main- tain its market share at above 35% between now and 2035. It could in theory ramp up supply even further, by fast-tracking development of new gas elds on the Yamal Peninsula and utilising more of its spare export capacity via Ukraine. Russia pumped only 86.8 bcm of gas via Ukraine’s gas transmission system (GtS), which has a nominal capacity of 142 bcm per year. But as Russia has consistently stated it wants to reduce rather than expand shipments via Ukraine – this being a key
aim behind the 55 bcm per year Nord Stream 2 project – it is likely to choose other options for expanding its future market share in Europe.
With its other export routes at near full capac- ity, Russia would need to construct new pipelines beyond Nord Stream 2 and turkStream in order to expand shipments signi cantly. But the EU is likely to oppose these projects on the basis that increased piped Russian gas puts supply security at risk. However, Brussels is less likely to object to greater Russian LNG supplies, and here is where Gazprom’s independent rival Novatek comes in.
Novatek is at the forefront of Russian plans to expand annual LNG production vefold to 120- 140mn tonnes per year by 2035. e company commissioned its rst 16.5mn tpy LNG export terminal in the Arctic in late 2017, and is currently working on two more projects. Its CEO Leonid Mikhelson recently disclosed plans to have 70mn tpy of LNG capacity up and running by 2030.
Russia has positioned itself as a major LNG supplier to Europe, second to Qatar, with ship- ments totalling 8mn tonnes in the rst half of the year, according to Wood MacKenzie. “Russia is likely to review its traditional, pipeline-based export model and turn to LNG instead, at least for supplies to Europe,” Filippenko explained.
But by favouring increased LNG supplies, Russia risks undermining its tax base, as Gaz- prom has already warned. Whereas Russian sup- plies are currently subject to export duties and mineral extraction tax (MEt), the government provides lucrative tax breaks to Arctic LNG pro- jects to support their development. Yamal LNG, for instance, will not pay any export tax, MEt or pro t tax during its rst 12 years of operation and also enjoys a 13.5% reduced rate of pro t tax.
“Opting for additional LNG rather than new pipeline projects will mean less direct tax revenues for the government and a potential revision of Russia’s traditional export approach,” Filippenko explained. “And more work needs to be done encouraging co-operation between the country’s leading oil and gas companies to support this.”
While Russia is likely to bank on LNG sup- plies as means of defending its market share in the long term, its short-term strategy has been to bolster spot sales, favoured by buyers because of their exible pricing. Volumes sold at Gaz- prom’s electronic sales platform (ESP) accounted for only 4.8% of its total European exports since the platform’s launch last October and June 30 this year. But this share is set to grow, as Gaz- prom shi s from its traditional use of long-term, oil-indexed contracts.
P8
w w w . N E W S B A S E . c o m Week 32 15•August•2019
