By avoiding pushing too much volume, Gazprom/Russia and
Statoil/Norway not only avoided a price war in 2011-2013 but
managed to reset spot prices at a level that is acceptable to
Gazprom realised price in Europe vs NBP Month
Source: SG Cross Asset
Research/Commodities, Gazprom, Datastream
Higher prices were leading to permanent demand destruction.
Russia is not willing to boost European gas demand for power
generation at a price that it considers too low. As even with no
growth in demand, Gazprom's volumes are rising to mitigate the
decline in European gas production.
So why has Gazprom provided additional volumes to Europe at the
expense of prices, that went down by 40% since end-2013? Higher
prices were also leading to the development of alternative supply.
With the Final Investment Decision (FID) in December 2013 for Shah
Deniz 2 in Azerbaijan and a long list of potential LNG projects in
North America, Russia could see the threat of new
suppliers/competitors entering the European market after 2020e.
The two main producers (Russia and Norway), by flexing their own
supply, have made Shah Deniz gas attractive both for European
buyers (diversification of supply) and sellers (reduced risk of
tough price competition). But with prices now down by 40%, Shah
Deniz looks less attractive...
And what we saw with Woodside in May, electing
to terminate the memorandum of understanding on the Leviathan
project, offshore Israel, where profitability on selling LNG into
Europe was challenged by higher costs/taxes and lower European
prices could now happen in other parts of the world.
Lower European prices could make US LNG only
profitable for the Asia market. We believe that the cost of US LNG
to berth in Europe is going to be 6 $/Mbtu, on top of the US Henry
Hub (HH) price. Hence the broad metric should be to compare NBP and
HH+6 (both in $/Mbtu).
Recent downward trend on the NBP
suggests that US LNG will only have one market: Asia
Source: SG Cross Asset
This means that the optionality embedded in US
LNG to serve both Europe and Asia could prove to be wrong. This
price decline in Europe could make reaching an FID in US LNG more
difficult than consensus thinks.
In this no-demand-growth world,
Gazprom's strategy to reduce its prices to delay alternative supply
after 2020e makes perfect sense.
Dr Thierry Bros
Author of the book "After the US
shale gas revolution", Editions Technip