EU-Russia gas relations and the advent of American LNG

The Russia-Ukaine transit deal, NS2 and US gas exports

The global natural gas market is becoming increasingly dynamic and competitive, encouraging market entrants both in terms of suppliers and customers, particularly thanks to the shale revolution that took place in the United States in the past two decades. The transformation of the country to a net exporter of natural gas will likely affect the geopolitics of this commodity, impacting first and foremost EU-Russia gas relations. The entrance of US LNG in European markets is indeed taking place against a background of evolving EU-Russia energy relations. After the signature of the Russia-Ukraine transit deal in 2019, another big step for the gas supplier is represented by the completion of the Nord Stream 2 pipeline. Russia has invested substantial political and financial capital in the project and it thus has a strong interest in its completion. Once gas consumption resumes after the COVID-19 downturn, the project will also be needed by Russia to keep selling large amounts of gas to the EU and compete with American LNG.

The Russia-Ukraine gas transit deal


In December 2019, Gazprom and Naftogaz Ukrainy signed an agreement for the transit of Russian gas through Ukraine covering the period of 2021-2024. It entails 65 bcm of gas to be transited in 2020 and 40bcm/year to be transited in the period from 2021 to 2024. The reduction, if compared to the levels of physical shipments in 2019 of around 90bcm, is significant.

However the gas deal has contributed to solving a security of gas supply issue the EU has been struggling with in the past few years, as the agreement has been signed just one day before the expiry of the previous 10-year contract between the two national companies. In this way, the deal guarantees the flow of Russian gas to Europe for another five-years, closing the potential schism between Russia and Europe and, at the same time, benefiting Ukraine financially. The volume of gas trade contained in the December deal will indeed still bring significant (and much-needed) transit revenues to the Ukrainian government (7 billion $ for 5 years).

The Nord Stream 2 pipeline and US sanctions


Russia is the first exporter of natural gas to Europe. In 2019, Russia accounted for 38.3% of the total EU imports of natural gas, mainly transported via long distance pipelines, and the deal struck in December 2019 officially ensured the continuation of Russian gas transit to Europe through Ukraine. Nevertheless, the actual quantity of gas Moscow will send to the EU also depends on a few other elements, such as the realisation of the TurkStream pipeline connecting Russia to Turkey. Above all, it is the future of Nord Stream 2 that will matter the most – and thus the impact of US and EU Commission action in relation to the infrastructure.

The opposition of Capitol Hill has had indeed an impact on the realization of Nord Stream 2. Covering 1200 kilometers, this pipeline would double the capacity of the already existing Nord Stream, which connects Russia with Germany across the Baltic sea. Started in 2019, the $11bn project was supposed to be completed by mid-2020. After the imposition of the US sanctions, the completion date was delayed to early 2021. Threats and steps by the US continue, but the infrastructure will almost certainly be completed, albeit with a delay. Considering the scope of the route and its economic and geopolitical implications, the US opposition did not come as a surprise. The pipeline would decrease EU demand for American liquefied gas, making less economically interesting the construction of LNG infrastructures needed to further import US gas.

EU regulations may as well represent an obstacle to the use of the pipeline. In May, Germany’s energy regulator denied granting a waiver of European Union gas directive 2019/692 (as amended in April 2019) to the operators of the Nord Stream 2 pipeline. More in detail, there are three main requirements that the project will necessarily have to meet to fully operate: separating the operator of the pipeline from the gas suppliers (unbundling); ensuring that any supplier wanting to ship gas through the pipeline holds the right and ability to do so (third party access); publishing its tariff methodology for approval by the German regulator.

American LNG as a game changer


With its increasing demand for natural gas (+7% in 2019), as well as decreasing gas production (-9% in 2019), the European Union is an appealing outlet for American exports. At the same time, importing LNG from the US may help the European Union to improve the security of supply, boosting the ambitious European energy diversification strategy and reducing the dependence on Russian gas.  In 2019, 36% of the total US exports went to the EU markets. According to the European Commission’s official data, by early 2020 the EU imported more than 24 billion cubic meter LNG from the United States since April 2016.

US LNG has the potential to act as a game changer, increasing the competition and gradually transforming the market’s dynamics. Even if the European markets has been so far a market of last resort for US LNG, the growing flexibility of the commodity has put the EU in a favorable position. With the global market oversupplied and, consequently, low gas prices, the US LNG and Russian gas have been competing for the EU, with significant effects on both the availability and price of gas, and on the structure of the LNG market; this indeed seems in the process of becoming a deep liquid market, reducing market manipulation by oligopolists, separating gas trade from politics and de-anchoring gas prices from oil prices. Against this background, competition between Russian and American gas has proved particularly advantageous for the EU.

More on this topic

“Bringing Paris into the EU’s Energy Infrastructure Policy: What Future for Gas?” Marco Giuli

https://www.iai.it/sites/default/files/iaicom2047.pdf

“Competition between US LNG and Russian gas is great for Europe”, Luca Franza

https://raamoprusland.nl/dossiers/economie/1551-competion-between-us-lng-and-russian-gas-is-great-for-europe

“Deal or No-Deal? Beyond the Hype on Ukraine Gas Transit Negotiations”, Danila Bochkarev

https://www.iai.it/sites/default/files/iaicom1945.pdf