Before the end of the decade, low-priced American liquefied natural gas is expected to surge onto the global market and, potentially, cause a dramatic shift in worldwide gas market fundamentals.
But the possible ramifications of US LNG exports have been met with shoulder shrugs and slight eye rolls from officials with Russia’s Gazprom, the state-run gas giant.
US gas is no threat to Russia’s hold over the international gas trade, nor will it have much of an impact on Gazprom’s looming export plans, these officials have argued in recent interviews with Platts in Moscow.
US gas prices are poised for a severe price jump, US exporters have underestimated the high costs they will soon face and European and Asian markets will continue to see Russia as their best supply choice, Gazprom officials have said.
When it comes to the nearing wave of new US LNG suppliers, these Gazprom officials are quick to claim, at least publicly, that they have nothing to worry about.
US LNG exports, they contend, will be limited, and what US gas does get shipped likely won’t be cheap.
“In the US, the price of gas does not cover the average cost of its production,” Alexander Medvedev, Gazprom’s deputy CEO and director general of the monopoly Gazprom Export, told Platts. “If you bake bread at a certain price and sell it half the price, what can you say about such a business model? So, sooner or later the market mechanisms have to balance the price.”
Gazprom officials hammered this point repeatedly in recent interviews, arguing that the big US producers were losing money on shale gas development.
“As a model, it’s not sustainable,” one source said.
Medvedev got even more specific, arguing that he expected US natural gas prices to rise to $6/MMBtu within the next three years, a roughly 60% jump from where NYMEX front month futures prices were early this week.
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In the longer term, prices in the US could climb to a point that Gazprom could even revive its plans to ship LNG to the US from its Arctic Shtokman LNG plant, which were essentially abandoned after US prices plummeting due to shale gas boom, one Gazprom official said.
“The American market could be attractive at certain prices,” the official said.
This possible price spike, along with the costs of transport, liquefaction and other costs facing US exporters (which Medvedev believes will boost US LNG prices to as high as $13/MMBtu), will keep Russian gas “quite competitive” in the global market and even shut US exporters out of the European market where they will be unable to match Russian pipeline prices, Medvedev said.
US industry sources have, not surprisingly, taken issue with Gazprom’s anticipated scenario for US gas prices, pointing out that it ignores the growth of natural gas liquids production which have brought prices below operating costs even in dry gas plays.
“The continued production of NGLs will ensure the continued production of low cost natural gas in the US,” one US source said this week.
In addition, this source said that costs of liquefaction, shipping and regasification from the US’ east and Gulf coasts is expected to remain well below costs in Asia.
“The voyage to Europe is much shorter and does not require the fees necessary to move through the Panama Canal,” this source said. “US LNG will be able to capture market share if European prices remain where they are today.”
Still, Medvedev claims that Gazprom will likely remain Europe’s chief gas supplier as US, Australia and Middle East exporters compete for a share of Asia’s gas market instead due the premium the market offers over European prices.
The arguments from Medvedev follow similar arguments from Gazprom chairman Alexei Miller who has called North American shale gas production unprofitable and the ongoing boom a potential “bubble,” and Russian President Vladimir Putin who has said shale production costs are too high and pose a hefty environmental risk.
The argument is also an important one for a country with the largest natural gas reserves in the world, according to the US Energy Information Administration and its status as the largest producer and exporter of dry natural gas.
Gazprom officials also apparently see it necessary to downplay the impact of looming US LNG on the world market in an attempt to bolster their own export expansion plans.
Gazprom has made a final investment decision on its Vladivostok LNG plant in country’s Far East and is looking to expand capacity at it Sakhalin island LNG plant, currently Russia’s only LNG producing facility.
Alexander Novak, Russia’s energy minister, said recently that Russian LNG production is expected more than quadruple by 2030, to some 40 million-45 million mt/year from the current 10 million mt/year.