The global natural gas industry has no version of OPEC – the Organization of the Petroleum Exporting Countries. But it does have a Saudi Arabia, in the form of Russia. Russia sits on the world's greatest proven gas reserves, and state-controlled Gazprom is the world's biggest gas producer, one of Russia's top exporters and the favourite geopolitical plaything of President Vladimir Putin.
The Saudis and the Russians also have another thing in common: an overwhelming desire to maintain their dominant energy market share.
Saudi Arabia is the effective leader of OPEC and has enough capacity to pretty much set global crude oil prices. In late 2014, the Saudis launched a global price war by refusing to slash their exports to prop up prices. Oil, which had traded at more than $100 (all currency in U.S. dollars) a barrel a few months earlier, went into a tailspin and dipped under $30 this past January.
Taking its cue from the Saudis, Russia (or Gazprom, since it and Putin's Kremlin are joined at the hip) seems set to administer the same pain to the gas markets. Where the Saudis went after the oil sources that had the audacity to challenge their market dominance – U.S. shale oil and, to a lesser degree, the Canadian oil sands – the Russians will go after liquefied natural gas (LNG) exporters, who are threatening to eat into Gazprom's core European market. If they do, watch out, because the burgeoning LNG business in the United States and Canada could take a beating. The trouble for Russia is that so could Gazprom.
LNG is the gas equivalent of shale oil. It is relatively new in the marketplace, has enormous export potential and the ability to disrupt global markets. Tens of billions of dollars of LNG infrastructure is under construction in North America, in large part to soak up the shale gas surplus. LNG is created by cooling gas to -162 C. As a liquid, it takes up just 1/600th the volume it does in its gas state. LNG travels the world in ships with enormous spherical storage tanks (the no-smoking signs are best obeyed). The LNG is then converted back into gas at import terminals and fed into local pipeline networks.
In Canada, as of late 2014, there were 17 proposed LNG export terminals, all but one of them in British Columbia. Canada has one LNG import and regasification terminal in operation, in New Brunswick. The United States has 110 LNG plants. Six massive new export terminals are under construction—five on the Gulf Coast and one in Maryland. The first LNG exports from the Gulf Coast shipped in late February. In early March, global natural gas prices plunged to 17-year lows, due in large part to surging LNG exports from Australia.
The European Commission, the executive arm of the 28-country European Union, is rolling out the red carpet for LNG imports from all comers. A new EC strategy, set out in February, said, "LNG can give a real boost to the EU's diversity of gas supply and hence greatly improve energy security."
Translation: We're relying too heavily on one source – Russia – that has a nasty habit of turning off the gas taps to countries it doesn't like. Ukraine comes to mind.
Russia considers Europe its home turf. The EU can supply just under half of its own gas. About 40% of the other half comes from Russia by pipeline. A few EU countries, including Poland and Lithuania, are almost entirely dependent on Russian gas. Both countries have opened LNG terminals to try to break the Russian habit. At last count, LNG imports, mostly from Algeria, Qatar and Nigeria, supplied about 10% of the EU's gas. The EC desperately wants that proportion to go up.
The big question: Will Russia, already reeling from low prices for oil and gas, its main export earners, risk a gas price war that could sink Gazprom's revenues?
It will. Gazprom is a wounded bear, but losing the key European market to rival imports might send it into irreversible decline. When the going gets tough, the tough lower their prices.
Gazprom is already the low-cost supplier in Europe, thanks to the gas glut and pipeline access. According to the Oxford Institute for Energy Studies, it costs Gazprom $3.50 per million British thermal units to deliver gas to Germany. That compares to about $4.30 for American LNG supplies. The Europeans might be willing to pay a premium for diversity of supply, but not much. Still, Gazprom needs to keep its prices low to maintain its dominant market share.
This could evolve into a long and nasty war, because no one does bargain-basement sales like the Americans. All their new LNG infrastructure has to be put to use, even if it means exporting at a loss. Mutually assured profit destruction is possible. During the oil and gas bubble years of the past decade, Gazprom boasted it would be the first trillion-dollar company (take that, Apple!). Its stock market value today is just above $40-billion. Lower it will go.
Follow Eric Reguly on Twitter: @ereguly
Eric Reguly