That the Nord Stream 2 pipeline will increase Europe’s dependence on Russian natural gas is a geographic and arithmetical fact. But buried in the heated rhetoric — now rising to US sanction threats — over how much that matters, is just how inexpensive it would be for Europe to purchase supply diversity with liquefied natural gas from the US.
Of course gas-by-ship costs more than gas-by-pipe. But at today’s prices and the spread between gas from Russia’s Gazprom and US LNG, the EU’s total annual energy import bill would rise by less than 5 per cent — or around $20 per head of population annually — by purchasing a volume of US gas equal to both the existing Nord Stream 1 and the planned second pipeline.
Critically, Europe would also need to spend nothing to build LNG import terminals because the two-dozen that exist already are running, collectively, at barely one-fourth capacity. Operating all those terminals at full tilt could bring in triple the supply the Nord Stream 2 pipe will if it is ever completed.
Essentially, the growth in US gas output has converted LNG from being a high-cost infrastructure-centric energy source into a bargain commodity at less than half the average price that’s been common for decades.
The clear signal of a new era for LNG occurred this past March when, for the first time, an LNG cargo ship was resold en route and redirected to a new destination — the hallmark of a mature commodity market.
That cargo, the first to depart America’s second LNG export terminal at Cove Point, Maryland, was originally destined for Asia but instead diverted to the UK after the ‘Beast from the East’ cold snap boosted both demand and prices of gas in Europe.
We’re still in early days of LNG commoditisation. Over the coming decade, global LNG trade will grow more than it has over the past half-century. By one estimate, within a couple of years the number of LNG cargoes trading on the spot market could reach some 5,000 a year.
The commoditisation of LNG emerged from the US shale gas revolution. With the US now the world’s biggest and fastest growing natural gas producer, there’s no possibility its domestic markets can absorb existing, never mind future, output.
In fact, at the wellhead in some US shale basins, natural gas is often negatively priced creating a huge advantage for keeping future LNG costs down. Notably, that supply glut did not come from a handful of oligarchs seeking to capture markets, but from myriad shale entrepreneurs engaging in capitalism.
Up until now, Russia and the Middle East were Europe’s primary options for gas imports; neither has the incentive nor capability to create a price-driven commodity market.
Of course there are other new players in global LNG markets. Rising Canadian production is on track, in due course, to join the export melee. And Western Australia’s gargantuan $50bn offshore Gorgon project has vaulted that free-market nation into the LNG supply mix. But US export capacity, with only two LNG terminals operating so far, is already nearly 50 per cent greater than the Gorgon.
The big question now is whether the US merely expands its current export capacity by three-fold as currently planned, or by as much as six-fold, as is possible. If the latter happens, the US becomes the world’s biggest LNG exporter and really upsets the apple cart.
This new reality accrues to the benefit of Europe with its urgent need for massive new quantities of natural gas.
North Sea production is declining and is creating a supply vacuum greater than what the Nord Stream pipelines can fill. At the same time, EU policies to electrify transportation, and to promote wind and solar, are both increasing the need for gas-fired power plants to meet 24/7 demand.
So when Jean-Claude Juncker, EU commission president, recently said that Europe is receptive to buying US LNG at “competitive” prices, he was articulating a reality inherent to all buyer-seller relationships.
But commodities are rarely traded purely on the basis of price. As articulated by noted Harvard economist Michael Porter, commodity sellers can provide “something unique that is valuable to buyers beyond simply offering a low price.” US LNG offers indisputable benefits in diversity, supply security and resilience. The key is at what premium. We know the answer.
The Commodities Note is a regular online commentary on the industry from the Financial Times
The writer is a senior fellow at the Manhattan Institute and author of the Institute’s policy paper, “Natural Gas: The Real Fuel of the Future.”
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