The head of the American company EQT, Toby Rice, announced his readiness to supply gas to the Old World at a price of about $ 380 per thousand cubic meters. True, on one condition: European consumers will have to conclude long-term contracts like those that were previously concluded with the Russian Federation. European officials are likely to agree, and then the EU market for Russian gas will be lost, writes Vladislav Grinkevich in the magazine “Profile”.
Instead of Gazprom
For the United States, long-term contracts with the European Union are the implementation of a long-standing strategy that they announced back in the midst of the shale revolution in the 2010s. American gas companies dreamed of a large sales market at high prices, because shale projects are expensive in themselves. The European Union can become such a market. But all the places here were occupied, and the largest supplier was the Russian Gazprom, which was almost impossible to push aside by purely economic methods, because pipeline gas from the Russian Federation turned out to be cheaper than any liquefied natural gas (LNG).
Where the economy is powerless, geopolitics has worked. After the start of the military operation in Ukraine, the introduction of anti-Russian sanctions and sabotage on the Nord Stream, pipeline supplies from Russia to the EU fell to a modest 20-30 million cubic meters per day (transit through Ukraine). But the Old World still needs gas, and the United States with its LNG turned out to be just in time. In 2022, Americans have already increased exports to Europe by 2.4 times, occupying more than 40% of the market. And now they are ready to provide the European continent with gas at a very reasonable price, but on the terms of long-term contracts.
Why so cheap? After all, now spot (exchange) prices for blue fuel fluctuate between $ 600-700 per cubic meter, and recently jumped up to $ 2 thousand. The fact is that after 2026-2027, LNG can become much cheaper, because by that time the leading producers – The United States and Qatar are planning to approximately double their production volumes. And the Americans really want to have a guaranteed market. As a senior expert at the Institute of Energy and Finance (IEF) noted in his interview: Mikhail Zhuravlevwhile maintaining the current input, average spot gas prices after 2027 may drop to about $ 300 per cubic meter in summer and $ 600 in winter, which is plus or minus the same as in 2015-2016.
By the way, as recently as February 2, Freeport LNG, the largest US liquefied natural gas plant (20% of US LNG exports), received approval from the Federal Energy Regulatory Commission (FERC) to resume and expand production. The stated goal is to increase supplies to the European market.
It is no coincidence that the Americans want to conclude contracts for 10-15 years. As conceived by European officials, the EU economy will need about that much time to switch to “green” energy, explained IEF Chief Energy Director Alexey Gromov. Indeed, with all the cataclysms of recent years, no one has canceled the “green” agenda, and by 2050 Brussels still hopes to decarbonize its energy sector. Thus, long-term contracts for LNG supplies from the United States virtually exclude the possibility of Gazprom returning to the European market.
True, Russia also increased LNG supplies to Europe by almost 20% over the past year – 15.8 million tons against 13.2 million in 2021. But due to the activity of the United States and the geopolitical situation, the further fate of the supplies is in question.
What does the LNG market look like?
The market for liquefied natural gas (LNG) is similar to the oil market – using tankers, you can deliver fuel to any country where there are seaports. But you can’t pour gas through a pipe like oil. In order to sell LNG to an exporting country, it is necessary to build a plant near the port where natural gas is compressed and cooled. This process is energy intensive and absorbs up to a quarter of the energy contained in liquefied gas.
Liquefied gas is transported in special tanks that allow maintaining a low temperature. The host country needs special LNG terminals, where the cooled liquefied gas returns to its usual gaseous state and enters the gas transmission network.
The three leading LNG producers in the world today are the United States, Australia and Qatar. Until 2022, the main LNG consumption region was Asia: China, Japan, South Korea, and to a lesser extent India, Vietnam, Pakistan. The main suppliers for these countries were Australia and Qatar.
In 2022, for political reasons, Europe began to abandon Russian pipeline gas and became one of the main consumers of LNG. At the end of 2022, the United States supplied 51.5 million tons of fuel to Europe (42.7% of the market); in second place is Qatar (18.4 million tons, or 15.3%), in third place is Russia (15.8 million tons, or 13%). Fourth and fifth places are occupied by Algeria and Nigeria.
In order to stimulate LNG production in Russia, the Ministry of Finance has developed amendments to the Tax Code, according to which Gazprom and its subsidiaries are exempted from the increased income tax of 34%, introduced from January 1, 2023 for all LNG exporters.
Where to deploy pipes?
The Russian monopolist Gazprom finds itself in a rather unpleasant situation, because the sales infrastructure of the domestic gas sector has been honed specifically for Europe since Soviet times. The technical possibility of supplying pipeline gas there is preserved even now – there are lines running through the territory of Ukraine, and one undamaged line of Nord Stream 2. But the geopolitical situation precludes its launch, making direct deliveries to Europe almost impossible.
“I think that the European gas market is essentially lost for us,” – says Alexey Gromov.
Probably, Russia will try to send fuel to Turkey as much as possible, from where supplies will go further to Europe (Ankara will buy gas for itself and resell it to European partners as its own). Recall that in the fall of 2021, President Vladimir Putin said that the gas flowing through Nord Stream could be sent to the Black Sea region, and Turkey could become Europe’s largest gas hub. Moreover, a significant part of the pipeline infrastructure between our countries already exists: in the early 2010s, Moscow was implementing the South Stream project, which was supposed to pump 63 billion cubic meters of gas per year to Varna, Bulgaria.
In 2014, after the return of Crimea to Russia, Bulgaria, under pressure from the European Commission, withdrew from the project, and South Stream was reformatted into Turkish Stream – the pipe went along the bottom of the Black Sea from the Krasnodar Territory to the European part of Turkey. The capacity of the new gas pipeline was only 31.5 billion cubic meters. But on the territory of the Russian Federation to the Black Sea coast, pipes have already been laid, originally designed for 63 billion cubic meters. And in order to double supplies to Turkey, it is enough to stretch two lines of 15.75 billion cubic meters each.
Perhaps that is why in early February the head of the Ministry of Energy of the Republic of Turkey Fatih Domnez said that the new hub could start operating as early as 2023. Ankara, he said, held talks with several countries, and they confirmed their readiness to support the Turkish project. Works on creation of the gas distribution center are at the final stage. True, the statement was made on the eve of a devastating earthquake, and it is not yet known how the consequences of the cataclysm will affect the announced plans.
Far from India, and the Chinese are cunning
Two more potential destinations for Russian gas sales are China and India, where Russia redirected a significant part of its oil after losing the European market. The Celestial Empire has already become one of the main areas of Moscow’s “gas efforts”: if the Chinese economy throws off the shackles of covid quarantine, then its demand for energy will increase markedly.
Russia plans to fill the Power of Siberia to the maximum by 2025. The design capacity of the gas pipeline is 38 billion cubic meters per year, by the end of 2022, 15 billion cubic meters should be pumped, that is, it is potentially possible to add another 23 billion cubic meters. Plus, 10 billion cubic meters, according to Alexei Gromov, can be supplied to China via Sakhalin. That is, the potential increase is 33 billion cubic meters, and the Old World received 140 billion cubic meters. It remains to attach more than a hundred cubic meters somewhere else.
To date, there is an agreement on the construction of the “Force of Siberia – 2”, and, perhaps, work on the implementation of the project will begin this year. But, as Mikhail Zhuravlev noted, the Chinese are very cunning negotiators and try to push their partners for maximum discounts. And Russia does not currently have the strongest negotiating positions, therefore, according to the expert, the gas that can be supplied via Power of Siberia 2 will cost less than what is supplied to China from Turkmenistan. That is, financial losses from turning to the East are inevitable in any case.
In India, things are not easy at all. Pipeline deliveries there from the point of view of logistics are practically unrealizable, just look at the map. In addition, Turkmenistan and Iran can claim the Indian market – both countries, according to OPEC, are among the top five world leaders in proven natural gas reserves. Moreover, Turkmenistan has already begun to pull the pipeline to India – this is the TAPI (Turkmenistan-Afghanistan-Pakistan-India) project with a potential capacity of 33 billion cubic meters per year. Its launch was scheduled for 2017, but the cards were confused by the rise to power of the Taliban in Afghanistan. Now the fate of this gas pipeline is in question.
It turns out that we do not have a lot of reliable “alternate airfields”.
“We will sell something to the countries of Central Asia as part of the fulfillment of their export obligations to China, we will fill the domestic market,” says Alexey Gromov. “But the process of reorienting gas markets will take not a year, but about ten years.”
And in any case, the profitability of the Russian energy sector (this applies to both gas and oil products) will henceforth be much lower than before 2022, because Europe was the most expensive, premium market for the sale of energy carriers. Trade with Asia, as we see in the example of oil, requires serious discounts. We will have to come to terms with this and start betting on other sectors of the economy.
Oil and gas losses of the Russian budget
According to the preliminary estimate of the Ministry of Finance, the federal budget in January 2023 was executed with a deficit of 1.76 trillion rubles. Revenues amounted to almost 1.4 trillion rubles, which is 35% lower than in January last year. Oil and gas revenues in annual terms decreased by 46%, to 426 billion rubles. Non-oil and gas revenues are 28% lower than in January 2022 (931 billion rubles).