The Economist explains

Why America struggles to sell LNG in Europe

It looks unlikely to challenge the pre-eminence of pipelined Russian gas

By L.G.

LAST WEEK Rick Perry, America’s energy secretary, went to eastern Europe to try to sell his country’s liquid natural gas (LNG). In Warsaw he announced a 24-year contract with Poland’s state gas company, PGNiG, under which it will receive 40.95bn cubic metres of gas from an American supplier, Cheniere Energy. Mr Perry said the deal was “a signal across Europe that this is how your energy future can be developed”. In Berlin on the same day Peter Altmaier, Germany’s economy minister, met Alexey Miller, the CEO of Gazprom, Russia’s gas giant. As the two discussed increasing imports of Russian gas to Europe via Nord Stream 2, a controversial pipeline from Russia to Germany that travels through the Baltic sea, they described a very different future from that envisaged by Mr Perry.

European countries are dealing with heightened energy-security worries. Demand for gas in Europe has risen since 2015, thanks in part to the global economic recovery and the favouring of more environmentally friendly gas-fired power plants. According to the International Energy Agency (IEA), an inter-government agency, total demand in Europe (which in the IEA’s definition excludes Russia) reached 613bn cubic meters (bcm) last year. The IEA expects it now to stabilise, and indeed to fall very slightly by 2040. But with gas production dwindling in non-Russian Europe, the region is increasingly reliant on imports, particularly from Russia, which already provides 35% of its supply. The precariousness of the situation was made plain in 2006 and 2009, when Russia temporarily interrupted the transport of gas through Ukraine, causing shortages in several countries. European leaders began looking for alternative gas supplies, including American LNG.

America is the world’s largest producer of natural gas and is on track to become the dominant exporter of LNG, thanks in part to soaring demand from South America and Asia. But the big problem with its LNG, as far as European buyers are concerned, is that it is more expensive than pipelined gas from Russia. American LNG exporters need to sell in Europe for at least $6-7 per million British thermal units (mBTU) to cover the costs of freezing, shipping and re-gasification. By contrast Russia’s long-run marginal cost of supply to Europe is only about $5 per mBTU. American LNG is also more expensive than LNG from Qatar and some African countries because feed gas in America is more costly to extract, and the distances it has to travel to the customer are longer.

Last year, as a result, Europe imported eight times more gas by pipeline than in the form of LNG, according to the US Energy Information Administration. This trend appears to be continuing into 2018. Imports of Russian gas by countries in the European Union hit a record high in the first half of the year, up 8% year-on-year. The threat of competition from America has forced Gazprom to become more efficient and to lower prices. So American LNG is actually more likely to end up in Asia, where Australia and Qatar sell a lot of LNG but are unable to meet growing demand. China, the main driver of that growth, has become a particularly important destination. Ensuring that President Donald Trump’s trade war with China doesn’t close off this market is more important to American LNG suppliers than any deal signed in Europe.

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