In the Age of Trump and Putin, Europe Faces Hard Choices on Gas

(Bloomberg) -- Europe’s shrinking production of natural gas has made it an enticing target for exporters. It’s also left the region facing hard choices ahead at a time of growing political uncertainty.

Imports to the continent are poised to rise almost 20 percent by 2040 from 2016 levels, according to International Energy Agency. While Russia has long been the region’s top supplier, it’s now facing significant challenges from both the U.S. and Qatar, rivals with vast natural gas reserves.

For Europe, there’s both opportunity and risk. While competition can drop prices, geopolitics are becoming increasingly tricky in an age dominated by the strong headwinds coming from both U.S. President Donald Trump and Russian leader Vladimir Putin.

The result: “Things that jeopardize security of supply are going to be at the forefront” of Europe’s decisions on who to buy from moving forward, according to Breanne Dougherty, an New York-based analyst with Societe Generale SA.

European countries have fought with Russia over pricing, and been hit with key stoppages. A burgeoning trade war with the U.S. spurred by Trump’s tariff decisions is complicating that relationship. And Qatar is in the midst of an antitrust probe brought by the European Union.

In the Age of Trump and Putin, Europe Faces Hard Choices on Gas

Still, U.S. companies are getting ready to jump into the competition in a big way.

After Cheniere Energy Inc. began shipping gas two years ago from its Sabine Pass terminal in Louisiana -- the first to send shale output abroad -- the U.S. became a net exporter of the fuel for the first time since the 1950s. This year, Dominion Energy Inc. opened the first export facility on the East Coast, providing a quicker route to European buyers.

Meanwhile, four more U.S. terminals may start up by the end of 2020, to make America the world’s third largest LNG supplier, behind Qatar and Australia.

But concerns about a potential trade war are not making things easy. After the Trump administration hiked tariffs on the continent’s steel and aluminum, the E.U. retaliated with duties on a range of U.S. products. Though natural gas isn’t directly affected, political friction could make it more difficult to ship U.S. supply overseas, according to Societe Generale.

“The U.S. influence on European policy makers isn’t particularly strong at the moment,’’ said Trevor Sikorski, head of natural gas and carbon research at Energy Aspects Ltd. in London.

Meanwhile, the European Union is investigating whether contract restrictions have prevented importers from reselling gas bought from Qatar Petroleum.

Europe has become an enticing target for gas exporters as the Netherlands winds down production from the Groningen field -- the continent’s largest -- to limit damage from drilling-induced earthquakes.

Many of the continent’s buyers, particularly in Eastern Europe, are eager for alternatives to Russian supply. Gas flow to Europe was disrupted twice, in 2006 and 2009, over a pricing dispute between Russia and Ukraine. Meanwhile, Lithuania and Poland have built terminals to import cargoes of liquefied natural gas from overseas, reducing their reliance on Russia.

“Everything’s quite bullish at the moment” in Europe, Sikorski said. “Next winter, the global gas market will be quit tight’’ before probably easing as new U.S. export terminals come online in 2019 and in 2020, he said.

Europe is “one of the biggest surprises” in terms of rising demand for gas, Tom Earl, chief commercial officer at U.S. LNG developer Venture Global LNG, said at conference in Amsterdam in May. Venture Global, which is building an export terminal in Louisiana, has already signed supply deals with BP Plc and Portugal’s Galp Energia SGPS SA.

In the Age of Trump and Putin, Europe Faces Hard Choices on Gas

Gazprom, which already supplies about 35 percent of Europe’s gas, is taking steps to preserve its slice of the European market. Russia’s share could jump to 45 percent or higher, according to Energy Aspects, as the nation pushes ahead with Nord Stream 2, a controversial pipeline that would carry Russian supplies of the fuel to northern Germany.

Russia relies on gas exports for its budget revenue and Europe is its biggest customer, meaning the nation will “protect its turf at all costs” by laying new pipelines and selling as much gas as it can, Manas Satapathy, a managing director for energy at Accenture Strategy, said in a telephone interview.

For most of Europe, it “comes down to economics and the economics of it is that Russian pipeline gas can always price cheaper than full-cost LNG from the United States,’’ which right now is about $7 per million British thermal units, Sikorski said. That compares with about $6.30 for Gazprom supplies.

“The Russians don’t need to battle for market share, they’ll just increase it naturally,’’ Andree Stracke, chief commercial officer of German utility RWE AG’s supply and trading unit, said in an interview May 16.

In the Age of Trump and Putin, Europe Faces Hard Choices on Gas

Still, declining European supply has created an opening for rivals to Russian output. Though LNG accounted for just 10 percent of Europe’s gas supply last year, Societe Generale sees it climbing to 25 percent by 2020.

The U.S. “will continue to be one of the lower cost suppliers of LNG,” Accenture’s Satapathy said. “It will continue to have a bigger and bigger share in the market, including in western Europe.”

But the continent may have a tough time attracting cargoes if prices are higher in other regions.

“The issue about LNG is that it’s flexible, it can go anywhere,” and that’s both a benefit and a risk for Europeans looking for secure gas supplies, Sikorski said. While the continent’s terminals can receive gas from around the world, “there’s no guarantee that it will go there in the middle of a cold winter.”

©2018 Bloomberg L.P.