Unfortunately, most countries will not play ball. Either they have enough of an internally generated resource base to help reduce dependence on Russian energy, or they have multi-integrated economic ties to Russia. Or both.
The crisis in Ukraine has taught us a devastating lesson: The failure to reduce dependence on Russia, in combination with a multi-integrated economic union with Russia, exposes a client state to geo-economic warfare. In Ukraine, this situation eventually led to President Viktor Yanukovych refusing to sign an Association Agreement with the European Union, which in ignited the Maidan protests that led to the president’s overthrow and Russia’s annexation of Crimea.
James Stafford: Where will politics and geopolitics head this off? What is Russia’s weak point, it’s Achilles’ heel?
Robert Bensh: Russia has done a good job of tactically focusing on each client state, recognizing their weaknesses and exacerbating them to suit their needs. The only countries that can head this off are those with independent economies and diversified energy supplies. Russia can only provide oil and gas supplies and energy infrastructure development. It cannot provide expertise in oil and gas drilling or service, which really comes from the United States.
And Gazprom OAO (PINK:OGZPY) (FRA:GAZ) (MCX:GAZP)‘s Achilles’ heel—that which makes it a fragile giant—is the prospect of losing the European market to LNG. And it eventually will, at least in part, though it won’t be tomorrow.
James Stafford: What does the LNG pricing look like right now?
Robert Bensh: LNG is always about $1 less than Gazprom. The U.S. wants to sell their LNG, period. Asian prices are higher, anywhere from $3-$4 higher. But long, steady supply will always get sold. Unless Gazprom comes down in its prices, to make LNG uneconomic, there will always be an LNG marketplace in Europe. There will always be enough supply to meet demand in Europe. All Gazprom has to do is drop its prices down $1 and LNG will be uneconomic. But you have some countries in Europe who are willing to pay a premium to reduce their dependence on Russian gas. LNG supply and the development of internal resources is a strategic decision being made by each country.
There won’t really be U.S. LNG hitting Europe until 2017-2018. There isn’t enough LNG coming from the U.S. to supply both Asia and Europe. Until there are more export terminals built in the U.S., there will always be significantly more demand than supply, from a U.S. standpoint. For now, U.S. LNG does not impact Europe—we’re not transporting enough in the next five years.
James Stafford: Last month, amid the crisis in Ukraine, Russia and China inked what is viewed as a highly significant gas deal. What are the implications of this deal for Europe?
Robert Bensh: Let’s put this into perspective a bit: This Russia-China deal might not be squeezing out potential supply to Europe, but making up for the likely disappearance of the market for gas from Ukraine. A decade ago, Ukraine was buying 52 billion cubic meters of gas annually from Russia, and last year, this was down to 28bcm. The take-or-pay agreement signed in 2009 was for 42 bcm, which is more than the annual supply as per the China deal. It is not unreasonable to think of Ukraine being totally self-sufficient in gas over the next decade as rational energy pricing reduces very inefficient consumption, while Ukraine has lot of opportunities to hike production — assuming it remains unified.
This is part one of a three-part series of interviews examining the prospects for Black Sea LNG.
By James Stafford of Oilprice.com
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