Gazprom’s Overseas Challenge Rising LNG Competition Shakes Up Gas Market

By Lada Ponomareva, June 17, 2013

Today’s gas market is experiencing a significant influx of new LNG project that, according to Ernst & Young, could double global LNG capacity by 2025. The rise of LNG is leading to greater competition among gas suppliers and will likely result in lower global prices for natural gas. Yet, such an outcome would negatively affect Gazprom’s LNG and dry gas businesses, increasing pressure on the company to offer concessions to its customers in order to maintain its market share.

Gazprom’s main causes for concern are new LNG supplies coming online in the United States and Canada. In North America alone, approximately 20 new LNG terminal projects have been registered, increasing the continent’s total LNG export capacity to 370 billion cubic meters (bcm) (300 bcm in the U.S. and 70 bcm in Canada, according Skolkovo Energy Center). The U.S. Department of Energy is also currently considering granting an additional 18 LNG export license applications (see map). 

Over the past 50 years, the number of LNG producers has been constantly on the rise (see Chart 1). At first, countries like Algeria, Malaysia and Indonesia led the way. Qatar and Australia soon followed. Since then over 25 countries have entered or are planning to enter the LNG market, according to Ernst & Young’s “Global LNG Report: Will New Demand and New Supply Mean New Pricing?”. Though many of these countries are only beginning to develop LNG production capacity, by 2020 only 25 countries will produce nearly 30 percent of the world’s LNG supplies.

North America and Western Canada could well become key global LNG exporters due to their pricing policies, E&Y analysts reported. Unlike other global LNG exporters, American and Canadian companies will most likely rely on spot prices for their gas sales (gas prices of most other market players are in some way linked to oil prices). In the medium to long term, Ernst & Young analysts anticipate that global LNG suppliers will move away from oil-indexation pricing schemes towards hub-based or spot prices in order to remain competitive. LNG suppliers will have to attract customers by the relative discounts of hub-based pricing.

Maria Belova, a senior analyst at Skolkovo Business School’s Energy Center, believes that American LNG (with an average production cost of $300 per thousand cubic meters) offers the most attractive market value. “Even if, in the long term, the U.S. market price will increase to $250 per MCM (from the current $120 per MCM), LNG supplies to Europe (if the current price level remains) will remain profitable for gas pegged to the price of oil, but this pricing scheme would be unprofitable with the rise of hub-based spot prices.   <...> Canadian gas producers currently use a formula that links the price of gas to oil in their contracts. It is unclear whether U.S. producers that follow the success of Sabine Pass (LNG terminal of U.S.-based Cheniere Energy – editor’s note) and receive gas export licenses, will remove the oil-indexation price clause in their contracts. Yet, Cheniere Energy has