All the Tsar’s Men
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On April 21, the first Europe-bound shipment of U.S. liquefied natural gas (LNG) left the Gulf of Mexico and crossed the Atlantic, a move that has been widely regarded as the first step in an impending gas war between the United States and Russia. As the theory goes, Russia has a grip on the European gas market, which it uses to bully its close neighbors and shush any major European states that push back on its geopolitical ambitions. U.S. LNG, it follows, will break Russia’s stranglehold. It is a cheaper and more reliable alternative. In turn, Russia will either lose market share or compete by lowering its prices. But either way, Europe wins, economically and geopolitically.
The economic argument is simplistic but not incorrect, although the geopolitical argument is dead wrong. It overstates the importance of U.S. LNG to Eurasian politics, and it reinforces the false impression that Europe’s energy security lies abroad. New supplies, from the United States or elsewhere, are good for consumers since they will further depress prices. But Europe’s energy security is in European hands alone; obsessing too much about what U.S. LNG can do risks distracting from the challenges, including strengthening Europe’s internal energy market, which remains woefully fragmented, especially in Eastern Europe.
By 2020, the United States could be sending roughly 80 billion cubic meters of LNG to Europe a year—about two-thirds of the volume that Russia exported to Europe in 2015 and just under a third of Europe’s entire gas consumption, which is 400 billion cubic meters per year (450 billion cubic meters, if one includes Turkey). It is no wonder that conflict seems imminent: if such a large share of U.S. LNG were to land in Europe, Russia would get pushed out of the market and lose a large chunk of the $42 billion it earned by exporting pipeline gas in 2015.
Yet that argument rests on faulty assumptions about the gas market. Trying to understand the European gas market by looking solely at U.S. LNG and Russian gas is like trying to enjoy a symphony by listening only to the part of a single violinist.
For one, Europe’s production is declining by about ten billion cubic meters a year, so Europe needs roughly 50 billion cubic meters by 2020 just to offset the drop in its own supply. If half of U.S. LNG exports, 40 billion cubic meters a year, were to land in Europe, Russia would see no material decline in its own exports. And even if all 80 billion cubic meters of U.S. LNG made it to Europe, which is unlikely given the pull from other regions, Russia would still most likely maintain its position as the continent’s largest supplier (together with Norway).
This prospect, of course, assumes that supply, demand, and prices remain constant. That is unlikely. Over the last decade, European gas consumption has contracted by about one-fifth—or 100 billion cubic meters. This decline, which led to a similar drop in production, has left Europe’s needs for imported gas at the same level as in 2005 at around 300 billion cubic meters.
But recently, European gas demand has begun rising again. It went up by 4.5 percent in 2015, partly due to colder weather and partly due to low prices. In the United Kingdom, for instance, gas surpassed coal-fired energy generation in May 2015 and has since exceeded it substantially: in the first four months of 2016, gas provided for 40 percent of the United Kingdom’s electricity generation, while coal was at just 15 percent. In Spain, once Europe’s most promising gas market, gas is making a comeback: in 2015, gas generated a little over half as much electricity as coal. In early 2016, gas was nearly on par with coal. Other markets, such as Austria, Greece, and Italy, are seeing gas regain market share as well.
On the supply side, Norway is the second-largest provider of gas after Russia. Algeria is third, although its market share is shrinking. This makes these two countries important players, at least for European countries on the coast, which have direct access to seaborne LNG. These coastal European countries are also where U.S. LNG is likely to land since the ability to move gas further inland is often limited by infrastructure and other obstacles. And yet no one is talking about a looming price war between the United States and Norway or Algeria. That’s not as geopolitically exciting, even though it is far likelier to happen: U.S. LNG will compete in markets where Norway and Algeria are often larger players than Russia. Norway’s exports to Europe have risen in recent years, but Algeria’s have declined substantially. How these two countries react to the changing market environment in Europe will matter a great deal.
Beyond Europe, Australia is going to add as much LNG to the global supply as the United States over the next five years. Of course, Australia’s distance from Europe means that little of its LNG is likely to make it there. But since the global gas market, once tightly segregated between regions, is now more interconnected, when Australian LNG reaches Asia, it lessens the need for Asia to pull in gas from the Middle East or from the Atlantic basin. That gas is then free to move around the world, including to Europe.
That LNG, of course, may not come to Europe since other markets, globally, tend to have access to fewer alternatives and have historically paid more for gas than Europe. After all, those who invested in U.S. LNG in recent years did so with other, more lucrative buyers in mind. Demand for LNG remains robust in Latin America and it is growing in the Middle East and North Africa. Other countries want to import LNG as well, especially if prices remain low. How much LNG goes to Europe will depend on how, exactly, this complex supply and demand interplay unfolds over the next five years.
Over that period, we have no way of knowing how much U.S. LNG will reach Europe—nor should we really care. U.S. LNG can have a profound impact on Europe without ever reaching it because, eventually, supplies are fungible. And it can have a marginal impact on the market even if it ships cargo after cargo because of competing markets. It all depends on how all those other forces, which are never static, evolve in Europe and abroad.
None of this complexity seems to matter to policymakers: the European glee about the impending arrival of U.S. LNG is as visible across the Atlantic as the Russian frowns. Any fluctuations in Russia’s market share are bound to be seen as geopolitically significant. They are not.
Russia’s market share has moved up and down a lot over the last 20 years, and if it moves again it is no big deal. Nor does market share matter much to Europe’s energy security, at least when confined to a narrow band of a few percentage points. The most serious gas crisis that Europe has faced because of Russia, in 2009, when exports through Ukraine were disrupted for two weeks, came at a time when Russia’s European market share was at its lowest ever as Qatar, in particular, boosted its exports into Europe. There is more to geopolitical life than market share, and it is time that Europe retired this measure of the continent’s energy security.
Instead, Europe should focus on the competition it faces and new markets it can explore. For all the rhetoric about Russia’s Gazprom serving the geopolitical aims of the Kremlin, the company has been a surprisingly rational commercial actor—prickly, at times, but certainly rational. Even the European Commission, which is investigating Gazprom’s marketing practices and pricing strategy across Central and Eastern Europe, recognized that by the time Russian gas reached the Czech Republic, where competition intensifies, prices were market-driven. Gazprom knows competition when it sees it.
In short, Europe can easily turn its back on U.S. LNG and focus, instead, on completing its internal market. After all, in 2009–10, Europe got another wave of inbound LNG, largely from Qatar, which mostly hit northwestern and southern Europe; central and eastern Europe felt only a soft breeze. As this shows, it hardly matters how much U.S. LNG reaches Europe. What matters is how that and any other gas can move around within Europe. If it can reach central and eastern Europe, which will require strong action against incumbents, such as Bulgaria and the Baltics, who resist competition in their home turf, then Europe’s energy security will continue to improve. If not, no amount of U.S. exports will make a difference.
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