Russia seen dominating European gas market for two more decades

Russia seen dominating European gas market for two more decades. A section of the Bratstvo gas pipeline crosses a river near Ivano-Frankvisk, Ukraine as seen in this photo dated February 6, 2014. Ukraine is a key route for Russia’s energy exports to Europe. Gazprom, Russia’s state-run export monopoly, shipped a record amount of gas to the European Union last year and accounts for about 34% of the trading bloc’s use of the fuel. Russia will remain the biggest source of supply through 2035, Shell said last week, echoing comments by BP in January.

Europe has wanted to wean itself from Russian natural gas ever since supplies from its eastern neighbour dropped during freezing weather in 2009. Almost a decade later, the region has never been more dependent. Gazprom, Russia’s state-run export monopoly, shipped a record amount of gas to the European Union last year and accounts for about 34% of the trading bloc’s use of the fuel. Russia will remain the biggest source of supply through 2035, Royal Dutch Shell said last week, echoing comments by BP in January. EU lawmakers have had their hearts set on diversifying supplies with liquefied natural gas delivered by tanker from the US, where production of the fuel skyrocketed last year. So far, those shipments have failed to materialize amid a lack of firm contracts and higher prices outside Europe. Overall, LNG shipments to the region, led by Qatar, were stagnant last year.
“Russia will for sure remain Europe’s largest gas supplier for at least two more decades,” even if most of the incremental gains in EU imports are met by LNG from somewhere else, said Vladimir Drebentsov, chief economist for Russia and CIS at BP in Moscow. Gazprom chairman Viktor Zubkov reiterated on Monday that 2017 European exports are expected to be close to last year’s level.
But the company may face greater competition from LNG this summer as its oil-linked prices become less attractive relative to market rates, according to London-based analysts from Energy Aspects Ltd to BMI Research.
More LNG will arrive in Europe from about mid-year as new plants start producing the fuel in the US and Australia, increasing supply options for customers. Russian gas will also become more expensive after last year’s 52% gain in Brent crude. The company has means to remain competitive. After adjusting price formulas in its export contracts, Gazprom has diluted the influence of oil prices in favour of linking revenue to Europe’s traded gas markets, a person close to the state- controlled producer said in October. That means its prices will adjust if a sudden inflow of gas from elsewhere depresses the market. “I think there’s a lot more that Russia can do,” Melissa Stark, managing director for Energy and Utilities at Accenture, said in an interview in London. “They can even be more commercial than they have been in the past. They’ve not had to be that commercially aggressive because they’ve a long-term contract type situation that they’ve been able to dominate.”
Europe’s domestic output is declining because of the natural aging of fields in the North Sea and production limits at the Dutch Groningen field, Europe’s biggest.
“There should be space for both increased LNG and Russian gas” in light of shrinking domestic production in the EU and improving demand, according to Christopher Haines, head of oil and gas at BMI Research. That’s provided “Russian gas prices continue to evolve to more closely reflect European hub prices,” he said. Any fluctuations in Russian supplies into Europe tend to whipsaw markets. In January 2009, when the dispute with Ukraine last disrupted supplies, UK prices soared as much as 27% in one day. Russia has enough reserves to remain Europe’s main gas provider for years to come, President Vladimir Putin said in December.
“Gazprom is supplying more gas to Europe than Russia or the Soviet Union ever did,” he said. “We have enough gas for ourselves, even considering the growing requirements of the Russian economy, and for our counteragents, the buyers of our gas.” LNG will by 2025 surpass Norwegian gas as a share of supply, with both the liquid fuel and imports from Russia needed to offset declining domestic production, according to Shell, which controls about a fifth of the world’s LNG trade. Russia’s share of EU gas consumption will rise to 40% by 2035 from more than 30% now, according to BP. Gazprom gas sales abroad account for more than 10% of Russia’s total exports and the company sees its market share holding or rising slightly to about 35% by 2025, management board member Oleg Aksyutin told investors in Singapore on Tuesday.
Europe will remain Gazprom’s “priority market” and no one else can provide gas at the same price, deputy chief executive officer Alexander Medvedev said at the same event. US LNG costs some 30% more than Gazprom’s gas in Europe supplied through its “most expensive” route, via Ukraine, Aksyutin said.
Russian volumes will stay above LNG in Europe if Asian demand is strong enough to absorb an oversupply of LNG, the Oxford Institute for Energy Studies said in a report published this week.
“There are so many moving parts now,” said James Henderson, an analyst at the OIES said. “So many more things are happening around the world that have an impact on the European gas market.”