U.S. LNG In Central And Eastern Europe – Taking Diversification Seriously
By Mariusz Swora and Anna Mikulska
Last week President Trump met in Warsaw with Polish officials and Central and Eastern European (CEE) leaders at the Three Seas Initiative Summit. The event brought together countries from the Adriatic, Black and Baltic seas to discuss development of regional infrastructure necessary to reduce their energy dependence on Russia and ensure energy security. This happened shortly after the first cargo of U.S. LNG, carried by the 162,000 cbm-capacity “Clean Ocean, entered the Polish port of Swinoujscie. Both the U.S. and Polish governments lauded the cargo and, following the meeting with Donald Trump in Warsaw, Polish President, Andrzej Duda declared a possibility of signing a long-term agreement (LTA) for the supply of U.S. LNG into Poland.
Photo courtesy of Gaz-System S.A.
“Clean Ocean” in Swinoujscie
Much of Duda’s statement is political rhetoric given that LTAs are not signed between governments. Instead these contracts are commercial decisions made by individual companies. But the strong rhetoric coming from both governments in support for U.S. LNG exports to CEE is an indicator that beyond economic aspect, this trade has strong geopolitical dimension.
Given competitiveness of Russian gas and willingness of Gazprom to defend its market, it is highly unlikely that U.S. LNG imports would grant CEE (or Europe as a whole) natural gas independence from Russia. However, standing ability to deliver U.S. (or other non-Russian) gas to Europe provides “credible threat” and changes the bargaining positions of all parties involved. In such scenario Russia stands to lose not as much market share as geopolitical influence that it has derived from CEE’s dependence on its gas. And while LNG exports will not give the U.S. more geopolitical power in Europe per se (given the increasingly competitive global LNG market), Russia’s loss in this regard is a strategic gain for the U.S.
But can the U.S. and CEE governments truly affect the outcome of essentially commercial transactions? Can they effectively facilitate the ‘credible threat’ of U.S. LNG exports? And if so, how?
This ability depends on several factors. These include the usual: pricing and, given competitiveness of Russian gas, the willingness of the CEE governments to support a security premium on natural gas from a non-Russian supplier. But maybe more importantly the CEE and the U.S. need to ensure availability of channels via which U.S. (or any) LNG could be transported whenever shortages emerge. As such, policy makers should pay close attention to current policy decisions within the EU that relate to infrastructure and antitrust law, as these decisions may not only impact profitability but also feasibility of LNG imports well into the future.
Forces that Influence Europe’s Natural Gas Market
The European market, while not expected to be as robust as Asia over the coming years, will remain an important source of demand for natural gas suppliers. As reported by Eurogas, going forward Europe will need to import much more natural gas than suggested by demand growth alone (Figure 1). In addition, the region is attractive given dependability of the market and reliability of European governments and customers.
Figure 1. EU Natural Gas Demand through 2030.
Eurogas
EU Natural Gas Demand through 2030.
Source: Eurogas, “Natural Gas Demand and Supply: Long term Outlook to 2030.”
Much of the future makeup of European natural gas supply might be determined not only by market forces but also by geopolitical considerations and European Union legal and antitrust decisions.
The two main decisions currently on the agenda that will have broad and direct consequences for LNG trade in Europe are: 1) permitting of the Nord Stream 2 pipeline to carry Russian gas under the Baltic Sea directly to Germany, and 2) antitrust decisions by the European Commission related to Gazprom abusing its monopoly position in the CEE.
European Diversification and What It Means to Different Parties
Natural gas market diversification has become a hot topic in Europe following several breaks in Russian gas deliveries between 2005 and 2009. The 2014 crisis in Ukraine and complete shut off of natural gas supply flowing from Russia added urgency to the matter. In principle, all EU members agree that diversification is needed. But there is a visible rift between how diversification efforts are envisaged by the West versus the CEE countries.
Ukraine, Poland, and the Baltics in particular are pushing for diversification away from Russia. Their efforts include a buildup of LNG infrastructure, with the already functioning LNG terminal in Lithuania and the aforementioned LNG terminal in Swinoujscie. Plans are drawn already to expand the existing terminals, and new LNG terminals are planned in Estonia. Small-scale LNG projects are also in the works in the Baltics. In addition, the region is considering facilities for regasification, storage, rebunkering, and reloading, as well as investment in rail transport to support future LNG imports.
It goes without saying that such imports will never be realized unless the…
