U.S. Natgas No Bargain for E.U. -- Options Limited

August 20, 2013 10:01 AM

The United States currently has two export terminals for LNG sendouts and as the U.S. wrestles with what to do with abundant natural gas supplies, Europe eyes the import possibilities. European natgas demand has grown and imports from outside Europe are expected to grow from today's 50% to nearly 80% by industry watchers by 2030. Much of Europe's natgas supplies come from Russia followed by North African sources and Nigeria.europeatnightfromspace

At present, North Africa is a hotbed of uncertainty. Bloody clashes in Egypt and Syria along with labor difficulties and strikes at Libyan refineries and ports make those troubled locales unreliable sources at best. Russia has plenty of natgas to sell, but the Great Bear has shown itself more prone to use teeth than talks in times of dispute. Neither of these present an attractive prospect for long-term security when it comes to LNG sendouts.

Also note an earlier story from today that highlights the tensions between old-guard Soviet Russia, and a Ukraine that transits nearly all of the natgas piped from Russia to Europe. Tensions between Russia and Ukraine over Ukraine's E.U. aspirations have already inspired Russia to impose prohibitive import policies in recent days to convince Ukraine it had better side with Russia.

Natural gas production from the U.S. is much cheaper than European gas as priced at the Henry Hub, but exporteers report the necessary transit costs price U.S. natgas above current agreements between Moscow and Brussels. If European importers are looking to capture Henry Hub spot prices, they are going to have to find a way to transit the gas at a price below the E.U.'s current offtake deals around $11. There's the rub.

If producers in the United States want to discount away their margins, they could easily beat the current Euro-spot price, but they would all go broke, leaving E.U. natgas demand in the hands of either an old-school dictator or an unstable North Africa. Natgas production in the U.K. could help mitigate a portion of imported natgas and LNG, but Britain is leagues behind the United States in its ability to capture non-conventional gas, and experts believe, even running at full capacity, U.K. production would amount to little more than 10% of annual domestic demand... a drop in the bucket.

freezing at st michaels 1 lUkraine is the linchpin in all of this. A Ukraine aligned with Russia makes downstream E.U. stops on the pipeline subject to Putin's whim. On the other hand, A Ukraine aligned with the E.U. would go against Putin's overtures to Kiev all but guaranteeing natgas shutdowns like those in 2006 and 2009 -- remember, Ukraine has until November of this year to sort out their loyalties.

The European Union is stuck. Their heavy reliance on natgas imported from despots does nothing for energy security. The United States, once thought to have the magic natgas reserves that would change the world, cannot ship natgas or LNG to Europe at a competitive price. Meanwhile, as the brutally crisp European winter edges ever closer, the E.U.'s friends in low places seem to have the upper hand.

Photo credit: NASA's Marshall Space Flight Center / Foter / CC BY-NC

Photo credit: Stuck in Customs / Foter / CC BY-NC-SA

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