By now, we’re all familiar with the oil share war initiated by Saudi Arabia against other oil producers, mainly the United States. Investors are still trying to adjust to all the ramifications from the resulting lower oil prices.
I’m here to tell investors to get ready for even more turmoil in the energy sector.
The looming natural gas share (and price) war to be launched by Russia’s gas giant, Gazprom (OGZPY), later this year.
U.S. LNG Exports in the Crosshairs
You see, Gazprom has long been the dominant supplier of natural gas to Europe. Last year, it supplied 31% of the Continent’s gas needs.
But that could be disrupted later this year when the United States begins shipping liquefied natural gas (LNG) to Europe from its abundant shale gas fields.
That has put a frown on the face of Vladimir Putin and Gazprom executives. Russia is already getting squeezed by the fall in oil prices. Now, the U.S. is threatening to take its lucrative European gas revenues away – and Europe accounts for the vast bulk of Gazprom’s profits.
The similarities to the situation regarding oil are all too familiar.
Like Saudi Arabia and its oil, Gazprom holds the world’s largest natural gas reserves. And it has most of the spare capacity in the marketplace, about 100 billion cubic meters. That’s equivalent to 25% of its output and about 3% of global production.
And like the Saudis, Gazprom is one of the world’s lowest-cost gas producers.
James Henderson of the Oxford Institute for Energy Studies told the Financial Times his calculations show that the cost for Gazprom to deliver natural gas to Germany is $3.5 per million British thermal unit (BTU). For LNG exported from the U.S., the breakeven point will be around $4.3 per million BTU even at the current low gas prices.
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Russia denies that it will start a natural gas share and price war against the U.S. But don’t believe it for a second.
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Thierry Bros, European Gas Analyst at Société Générale, was quoted in the Financial Times on the cost to Gazprom of a “war” with the U.S. This year, he says it would only cost Gazprom $1.3 billion to price American LNG out of the market.
That’s less than 1% of its annual sales. A tiny cost in order to keep the U.S. out of the European gas market. However, the cost to Gazprom to defend its market share should rise in the years ahead. Estimates coming out of Russia are in the $25 billion range over the next five years.
But it’s still a small price to pay to keep the “Yankee imperialists” out of their backyard.
Another benefit to Gazprom and Russia will be the likely cancellation of major LNG projects in both the U.S. and Australia. Saudi Arabia’s “war” is already having that effect on oil projects globally.
U.S. LNG Dreams Disappearing
The anticipated Gazprom move is terrible news for the U.S. By 2018, our LNG industry will have the capacity to export about 3.8 billion cubic feet of natural gas per year.
Australia, like the United States, has also built up its LNG export capacity. It will be No. 1 in LNG, with the U.S. at No. 2. Over the next five years, Wood Mackenzie estimates over 130 million metric tons of gas supplies will come online.
Where in the world will all of this gas go?
Gazprom is defending Europe with everything it has. And it’s expanding into Asia. Beginning in 2019, it will be sending natural gas through pipelines to China.
Speaking of Asia, it was once the “promised land” for LNG exporters. Japan was the biggest global importer of LNG, followed by South Korea and China. But that dream is evaporating like a wisp of fog.
Demand from the likes of Japan, Korea, and China have plummeted. LNG prices in Asia have plunged from $18 per million BTU to below $7. And they’re still dropping like a rock.
As I’ve said before, the “golden age” of U.S. natural gas is almost over before it even starts.
The coming “war” from Gazprom will only put more pressure on a U.S. energy industry that’s already reeling.