U.S. LNG Won’t Replace Russian Gas as Europe Seeks Supply

Source: Cheniere Energy via Bloomberg

Construction at Cheniere Energy Inc.'s liquified natural gas terminal in Sabine Pass, Louisiana. Close

Construction at Cheniere Energy Inc.'s liquified natural gas terminal in Sabine Pass, Louisiana.

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Source: Cheniere Energy via Bloomberg

Construction at Cheniere Energy Inc.'s liquified natural gas terminal in Sabine Pass, Louisiana.

U.S. exports of liquefied natural gas won’t be able to replace Russian exports to Europe as the Ukrainian crisis threatens to disrupt flows to the region.

U.S. LNG supplies expected to start in the first quarter of 2016 won’t be enough to compensate for Russia supplies that meet about 30 percent of Europe’s gas needs, said Jean Abiteboul, president of Cheniere Supply & Marketing Inc. U.S. LNG exports won’t have any bearing in the current conflict and deliveries will likely target higher-price markets in Asia, said Will Pearson, director for global energy and natural resources at consultant Eurasia Group.

“You cannot replace Russian gas with any kind of LNG, especially by U.S. LNG only,” Abiteboul said yesterday in an interview at the Flame conference in Amsterdam. “It will probably force people to think more accurately on the diversification of supply, security of supply and not only price and could give an additional chance for LNG imports into Europe, including U.S.”

The European Commission, the 28-nation bloc’s executive, will by June prepare a road map on how to cut reliance on Russian imports and increase security of supply as tensions between Russia and Ukraine escalate. About half of Russia’s gas exports to Europe are carried through pipelines crossing Ukraine. Disputes between the two nations disrupted supplies of the fuel to Europe in 2006 and 2009.

Sabine Pass

Houston-based Cheniere Energy Inc.’s Sabine Pass terminal is the only facility in the lower 48 states to obtain a full U.S. export permit.

U.S. LNG and alternative supplies such as the Shah Deniz project in Azerbaijan are unlikely to come to Europe after U.K. gas prices on the National Balancing Point fell 36 percent this year and freezing weather boosted U.S. futures on the Henry Hub by 6.8 percent, said Thierry Bros, an analyst at Societe Generale SA. U.K. prices need to be at Henry Hub plus $6 per million British thermal units for the arbitrage to work, he said in Amsterdam.

U.K. next-month gas rose fell 0.9 percent to 43.99 pence a therm ($7.39 per million Btu) on London’s ICE Futures Europe exchange, the lowest level since September 2010. The comparable U.S. contract was little changed at $4.47 per million Btu.

No Panacea

“Europe can do things, but I don’t think U.S. exports or global LNG is a panacea for Europe,” Andrew Walker, head of LNG strategy at BG Group Plc, said in Amsterdam yesterday. “If Europe needs LNG, it has the infrastructure, it has an option to pull global gas. The trouble is that global gas is more expensive than Russian gas.”

The global impact of future LNG exports has already started, Abiteboul said at the conference, citing U.S. coal exports to Germany, price reviews in Europe and pressure on prices in Asia linked to the Japan Crude Cocktail marker. U.S. LNG exports to Europe are profitable versus current oil-linked gas prices, he said. Gazprom sells most of its gas to the region under long-term contracts at prices linked to oil, in a system that has been challenged by buyers including RWE AG, Germany’s second-largest utility.

Gazprom billed Ukraine for 114 million cubic meters of gas a day in June, or about $1.66 billion, assuming a price of $485 a thousand cubic meters charged since April. Supplies will stop on June 3 unless Gazprom receives some payment by June 2, according to Sergei Kupriyanov, a spokesman for Gazprom.

Killing Competition

Russia is boosting gas supplies to Europe to “kill competition” from potential new projects before they even start, Bros said. They also want to have European storages filled in case of a supply disruption to Ukraine, he added.

OAO Gazprom’s gas exports to western Europe were at 448 million cubic meters on May 15, up from 425 million at the beginning of the month, according to data from the Russian Energy Ministry’s CDU-TEK unit.

“It’s a matter of political willingness, it’s also a matter of costs and my guess is that in the end is that Russia will continue to play a very important role in Europe especially if the crisis in Ukraine finds a peaceful solution,” Abiteboul said.

To contact the reporters on this story: Isis Almeida in London at ialmeida3@bloomberg.net; Anna Shiryaevskaya in London at ashiryaevska@bloomberg.net

To contact the editors responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net Rob Verdonck, Andrew Reierson

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