Gazprom’s Surprise Acknowledgement of Tough Competition from US LNG

A high-ranking Gazprom official has admitted for the first time that liquefied natural gas (LNG) exports from the United States have negatively impacted the Russian state-owned energy giant’s sales. Gazprom exported a record volume of gas to Europe in 2018, increasing its market share on the continent to 37 percent from 35 percent in 2017. But its sales to Europe dropped by 8 percent in the first quarter of 2019. Notably, until Sergei Komlev’s acknowledgement in late March, Russian energy-sector executives had routinely shrugged off all competition from US LNG and elsewhere (Vedomosti, March 22). Komlev heads Gazprom’s contracts-structuring operation.

The US is presently the third-largest supplier of LNG to Europe, trailing Qatar and Algeria. But the US’s market share on the continent has jumped over the past six months—currently amounting to 7.9 billion cubic meters (bcm)—for geopolitical as well as economic reasons (Naturalgasintel.com, March 11). When it comes to geopolitical considerations, among the most important driving forces behind this increase have been Europe’s search for alternatives to Russian gas as well as a regional desire to assuage and gratify the temperamental Donald Trump administration. In terms of economics, although domestic US gas prices have been relatively stable, buyers in the Far East—the primary destination for US LNG—have been reluctant to pay more. This has made Europe more attractive for US energy exporters (Interfax, March 21; Bloomberg, March 26).

Russian Gazprom, meanwhile, supplies most of its gas by pipeline. In 2018, it exported only 5 million metric tons (6.8 bcm) of LNG—mainly to Japan and other Asian countries. The company is bringing more gas online, however, which should help it counter foreign LNG competition. In December 2018, Gazprom started pumping from the third block of its Bovanenkovo field, increasing output capacity from 82 to 115 bcm per year (Natural Gas World, December 6, 2018). And in mid-March 2019, Russian President Vladimir Putin launched the opening of the Kharasaveyskoye gas field in Russia’s northern Yamal-Nenets Autonomous District. Kharasaveyskoye is expected to add 35 bcm of gas a year to Russia’s supply by 2023 (Kremlin.ru, March 20). It will come at a particularly fortuitous time because several current Gazprom fields are reaching maturity.

Gazprom also plans to step up its LNG production by building more export terminals. At the moment, all of its liquefied gas shipments go through the Sakhalin 2 terminal, in Russia’s Far East, which it developed in partnership with Dutch Shell and the Japanese companies Mitsui and Mitsubishi. Most of the terminal’s more than 5 bcm of gas exports a year go to Asia (Gazprom.com, accessed April 1).

Gazprom is also taking steps to increase its LNG supplies to Europe. In January, it commissioned its first floating unit for converting liquefied shipments back into gas. Named the Marshal Vasilevskiy, this Floating, Storage and Regasification Unit (FSRU) is moored off Kaliningrad, Russia’s exclave in East-Central Europe. The unit will allow Gazprom to deliver gas to the nearby region without sending it through a pipeline across Lithuania, with which it has had tense relations in recent years (Kremlin.ru, January 8).

Finally, on March 29, Gazprom and its partner RosGazDobycha announced a mega-project near Ust-Luga, on the Gulf of Finland, that will reportedly produce 45 bcm of LNG a year. Earlier, Gazprom, Shell and Japan’s Itochu had already agreed to build a 10-million-metric-ton (13.6 bcm) LNG terminal in the same area (Gazprom.com, March 29; Oil and Gas Journal, April 2). It remains unclear whether the smaller project will proceed or if the bigger one will supersede it (Natural Gas World, April 2).

The global LNG market in 2018 grew by 8 percent to 314 million metric tons (427 bcm) from 2017. As in 2018, most of 2019’s export growth is expected to come from the US (Oil and Gas 360, April 2). This means Europe is likely to see more US LNG supplies, boosted in part by a renegotiated trade deal between the US and the European Union that the Trump administration demanded. One provision of the deal “encouraged” the EU to import more US LNG. And it is doing just that. The European Commission reports that the EU imported 1.3 bcm of US LNG in January, a tenfold increase year on year. The US was the big winner, with its LNG exports to the continent soaring 181 percent between July 2018 and January 2019 (Naturalgasintel.com, March 11).

Although Gazprom’s conventional gas supplies to Europe are triple those of all LNG imports combined, it will have to adapt to maintain its market share there. This means offering the continent more supply options and more price discounts—a good deal for European consumers, but likely a bitter pill for the Kremlin, which has long used gas sales as a coercive geopolitical tool.