America: Cheap Natural Gas Disrupts European Plans

Econintersect:  Europe’s strategy to develop natural gas supplies from non-Russia Asia is in shambles.  Yes, the Nord Stream natural gas pipeline on the Baltic Sea floor has been in operation for six months bringing Siberian natural gas into Germany.  But the planned pipeline from the Caspian Sea basin into Austria, bypassing Russia, has not even been started – the Nabucco pipeline may never be built, according to Spiegel, because the costs keep escalating and the supplying countries, Azerbaijan and Turkmenistan, have not made commitments to supply the gas.  A Spiegel article says that a second line from Russia across the Baltic is now likely given the failure to develop the southern route.  Germany already depends on Russia for 35% of its natural gas and further concentration of supply with Russia and Russian energy giant Gazprom is considered risky.

Below is a map of the 1,200 kilometers (745 miles) Nord Stream pipeline:

One of the problems facing the Asian producers is the huge volumes of LNG (liquefied natural gas) coming from North America.   The liquid fracking revolution is flooding the world market with cheap gas, now down to $2 to $3 per million BTU (British Thermal Units) at the well head, and this gas can be liquefied and shipped around the world.  The prices for natural gas in Asia are about $16 and in Europe from $6 to $8, according the Spiegel.  The paper says that the price differential is simply not sustainable and will be compressed as the LNG market is now global.

From Spiegel:

Many ports are building new terminals for LNG tankers. On the Louisiana coast, for example, Houston-based Cheniere Energy has built a transshipment station that was originally intended for importation. Now the company plans to use it as a launch pad to export cheap American natural gas worldwide.

This new competition threatens the Russians’ traditional business model. They are accustomed to pegging the price of gas to oil prices. Delivery contracts sometimes run into the decades, and if customers need less, they have to pay the full contract price anyway. The principle, called “take or pay,” has been extremely profitable for the Russians.

As old contracts begin to expire, customers are becoming more self-confident in new negotiations, because they can now buy natural gas on the spot markets. On the European Energy Exchange (EEX) in the eastern German city of Leipzig, for example, trading volume increased by more than 50 percent last year.

Notes on natural gas prices: The BOE (barrel of oil equivalent) is 5.8 million BTUs.  So, by one calculation the current price of North American natural gas is equivalent to $12 – $18 per barrel of oil.  The European prices of $6 to $8 per million BTU is still much cheaper than oil (BOE price of $35 to $46), but the Asian (Russian) price is similar to the price for oil BOE in the $93 area.  Another source says the cost of natural gas in the U.S. is 40% of the price of oil (Caroline Baum, Bloomberg).  Econintersect thinks this might be based on average pricing for natural gas as delivered to the end user and not the Henry Hub or well head price.

According to Spiegel, shale and rock entrapped gas is much less widespread and in densely populated areas compared to North America, so production is likely to remain much lower, even though reserves are comparable to the eastern U.S. Marcellus shale formation.  This is especially true since there is widespread environmental opposition to fracking in Europe which hinders development of the resources they do have.  And the largest reserves are in Poland where extraction may not be profitable.   (Bloomberg)

Bloomberg estimates that U.S. exports ,  approximately $8 billion in 2011 at the current very low prices (U.S. energy Information Administration) will rise significantly in volumes in coming years:

Imports to the European Union are projected to grow 74 percent by 2035 as Italy, Poland and Lithuania build terminals to receive tankers carrying gas in liquefied form.

John Lounsbury

Sources:

• Gazprom Hopes to Build Second Baltic Sea Pipeline, Part 2 (Frank Dohman and Alexander Jung, Spiegel, 18 May 2012)

• Gazprom Hopes to Build Second Baltic Sea Pipeline, Part 1 (Frank Dohmen and Alexander Jung, Spiegel, 18 May 2012)

• European Fracking Bans Open Market for U.S. Gas Exports (Katarzyyna Klimasinska, Bloomberg Businessweek, 23 May 2012)

• Analysis:  Shale energy boom dangles prospect of leap in economic growth (Jason Lange, Reuters, 24 May 2012)

• Oil and Gas Boom Interrupts Greening of America (Caroline Baum, Bloomberg, 14 March 2012)

• Coal usage and U.S. Carbon Emissions Decline (GEI News, 24 May 2012)

• Econintersect Europe newspaper page