With Europe’s gas demand forecast to surge nearly 30% to 400 Bcm by 2035, Russia is eager to grow its market share. Eager to top rival suppliers, Gazprom is seen reviewing its traditional, pipeline-based export model and turn to LNG instead, avoiding quarrels over new interconnectors like with Nord Stream 2.
The second leg of Nord Stream, a 55 Bcm/y pipeline between Russia and Germany through the Baltic Sea, has been met by fierce opposition from Eastern European states and the U.S.
Unlike piped gas, Russian LNG is less likely to be met with such objections, given its flexibility to respond quickly to price and market signals. Analysts see this as “crucial” amid the decarbonisation and diversification efforts in Europe.
“The expansion of Russia's export capacity via LNG will be competitive on a cost basis against new pipes and competing global LNG projects,” said Kateryna Filippenko, global gas supply analyst at Wood Mackenzie.
Aspiring to become Top 3 LNG exporter
The Putin administration has big plans for Russia’s LNG industry – it aims to produce about 120 million to 140 million tonnes per annum of LNG by 2035, becoming one of the top three LNG exporters in the world with up to 20% market share. At present Russia’s market share is only 8%, but growing. Indeed, Russian LNG volumes into Europe for the first half of 2019 total 8 million tonnes, making it the second largest supplier after Qatar.
“Assuming that Russia maintains 60 Bcm of Ukraine transit capacity and develops new LNG projects, the country’s export capacity available to Europe will grow by around 80 Bcm between 2019 and 2035 – almost matching the increase in Europe’s import dependency,” Filippenko said.
But she cautioned that opting for additional LNG rather than new pipeline projects will mean less direct tax revenue for the government. On the positive side, LNG exports would broaden Russia’s reach into new markets – notably in Asia – while “derisking against European decarbonisation and diversification efforts.”
European buyers embrace LNG
Europe’s LNG imports over the first five months of 2019 are up 50% year-on-year already, and net LNG imports into Europe will are forecast to grow to 71 bcm in 2019, up from 32 bcm in the previous year. Still, pipeline gas supplies cover the lion’s share of Europe’s demand, with over 300 Bcm originating from Russia and another 50 Bcm from North Africa and Central Asia.
Going forward, an anticipated record number of global LNG FIDs this year will result in a second wave of US LNG in the mid-2020, competing with Russian piped gas for market space.
New interconnectors unlikely
Gazprom tries to also boost pipeline gas supplies to its traditional European buyers, as it intends to maintain a market share above 35% – or a third of the EU’s overall gas imports – through to 2035.
But observers caution it is unlikely that any new pipeline will be build beyond Nord Stream 2 and TurkStream. New gas interconnectors would need “unified support” from regulators and policy makers which is highly unlikely following the quarrels over Nord Stream 2.
“Ukraine transit will also help Russia increase piped supply post-2030,” Ms Filippenko said. In her view, infrastructure availability is vital to meet European demand and Ukraine transit would allow Russia flexible supply into Europe in during seasonal demand peaks, maintenance periods and ramp up of new pipeline infrastructure.