Gazprom to Engage in Price War with US
US LNG will come to Europe even if the price of gas at hubs in the destination markets goes as low as $3.30/mn Btu, triggering a commercial conflict with Russian export monopoly Gazprom, Societe Generale senior gas and LNG analyst Thierry Bros told NGE May 4.
Some analysis has argued that the combined cost of gas procurement and liquefaction in the US and shipping and regasification in Europe will keep US LNG out of Europe as it would sell for less than the cost of delivery.
But Bros says that liquefaction and regasification are sunk costs for the seller and so they do not play a part in the calculation.
The cost of shipping and the Henry Hub price are what matters, he said, in the week that Cheniere was nearing the end of its commissioning phase with half a dozen or more cargoes sold to meet mostly Brazilian and Argentine demand. Only one of the cargoes has so far gone to Europe and that was to the illiquid market of Portugal. Cheniere had not commented on its commissioning process by time of press.
Henry Hub front month is around $2/mn Btu, but capacity holders at Sabine Pass pay Cheniere, which sources and transports the gas to the terminal on their behalf, an additional 15%; and shipping across the Atlantic may cost another $1/mn Btu.
To retain market share in a flattish demand growth environment, Bros said, Gazprom will need to 'spend' about $250mn each month as it lowers its price to compete with this new rival. The weak rouble means that there will still be a margin, he said.
If this price drop does happen, then Norway will be caught in the crossfire, as its production is more expensive than Gazprom's. Further, Gazprom has already developed the giant Bovanenkovo field in the Yamal Peninsula, where output has been curtailed as export markets and Gazprom's own domestic demand have have not required the additional gas. This means it is in a position to bring more cheap gas to market at little additional cost beyond transport. For Norway, however, adding more production capacity entails more capital expenditure, he said.
Cheniere’s second train could start up around August, bringing more LNG to an already well-supplied gas market.
Gazprom reported the average production cost of natural gas in 2015 at roubles 1,643/'000 m³, or $0.84/mn Btu. According to East European Gas Analysis, whose calculations were published by NGE earlier in May, the profitability of Gazprom's exports to Europe fell from 35% in 2013 to 13% in 2015 as the wholesale price fell. Gazprom's own costs – production, transport, transit and taxes – all fell but not as sharply as the market which fell from an average $11.9/mn Btu in 2013 to an average $7.50/mn Btu in 2015.
William Powell