US LNG will not trigger price war

The ramp-up in US LNG deliveries into Europe will not trigger a price war with Russia’s Gazprom, according to panel participants speaking Monday at Europe’s annual natural gas & LNG conference Flame.

“We are estimating the short-run marginal cost of Russian gas supplies to Europe at $3.50-$3.90/MMBtu, so right now Russian supplies are already done with very small margins — it can’t go below that,” Tatiana Mitrova, head of oil and gas at the Energy Research Institute of the Russian Academy of Sciences, told delegates at the conference held in Amsterdam.

The TTF month-ahead contract averaged just $3.96/MMBtu (Eur11.914/MWh) in April, according to Platts data. “We have to remember that US contracts are flexible and at some price it’s going to be more profitable not to lift that gas and we are not too far from that,” Nazim Osmancik, director of fundamentals at UK firm Centrica, said.

“I think, maybe here or there [we will see prices pushed lower], but I would call that optimization rather than a strategic price war — I think the scope for that is not quite there,” he added.

RAS’ Mitrova said that if a price war did arise, it will not be between Russia and the US, but instead between the countries such as the US and Qatar looking to deliver spot LNG into the European market.

“Gazprom will also participate in this competition, but generally it is not their core business [as most of their volume is sold under longterm contracts],” she said.

Talk of a price war has been fueled by the sharp growth in Russian gas deliveries into Northwest Europe, which rose 36% year on year to 37.5 Bcm in the first four months of 2016, according to data from Eclipse Energy, an analytics unit of S&P Global Platts.

The hike in Russian deliveries comes amid low hub prices and ahead of the imminent ramp-up in US LNG deliveries into Europe, with the first cargo landing last month in Portugal.

Norwegian deliveries into Northwest Europe have also jumped, rising by 12% on the year for the period January-April to 39.6 Bcm, Eclipse Energy said.

“It’s very similar to what is happening on the oil market — the prices are low, but everyone keeps producing,” Mitrova said. “It’s a sort of price war because everyone is keeping prices low, but it is not a real aggressive price dampening; I really doubt that any of the market participants will go for real price dampening,” she added.

The exception to this would be where a price war was initiated for geo-political reasons rather than based on an economic rationale, Mitrova added.

Reginald Ajuonuma is a reporter at S&P Global Platts.