European Energy Seen to be Dominated by Putin’s Russia for Two Decades

Ever since supplies from its eastern neighbor dropped during freezing weather in 2009, Europe has wanted to wean itself from Russian natural gas. However the region has never been more dependent almost a decade later.

Gazprom PJSC accounts for about 34 percent of the trading bloc’s use of gas and shipped a record amount of the fuel gas to the European Union. Gazprom PJSC is Russia’s state-run export monopoly. Echoing comments by BP Plc in January, Royal Dutch Shell Plc said last week that Russia will remain the biggest source of supply through 2035.

With liquefied natural gas delivered by tanker from the U.S., where production of the fuel skyrocketed last year, EU lawmakers have had their hearts set on diversifying supplies. So far, amid a lack of firm contracts and higher prices outside Europe, those shipments have failed to materialize.

“Russia will for sure remain Europe’s largest gas supplier for at least two more decades,” even if most of the incremental gains in EU imports are met by LNG from somewhere else, said Vladimir Drebentsov, chief economist for Russia and CIS at BP in Moscow.

2017 European exports are expected to be close to last year’s level, Gazprom Chairman Viktor Zubkov reiterated on Monday.

But according to London-based analysts from Energy Aspects Ltd. to BMI Research, as the company’s oil-linked prices become less attractive relative to market rates, the company may face greater competition from LNG this summer.

Supply options for customers would be increased as new plants start producing the fuel in the U.S. and Australia and more LNG will arrive in Europe from about mid-year. And after last year’s 52 percent gain in Brent crude, Russian gas will also become more expensive.

However means to remain competitive is available with the company. Media quoted sources saying in October that Gazprom has diluted the influence of oil prices in favor of linking revenue to Europe’s traded gas markets after adjusting price formulas in its export contracts. This means that if a sudden inflow of gas from elsewhere depresses the market, its prices will adjust.

Because of the natural aging of fields in the North Sea and production limits at the Dutch Groningen field, Europe’s biggest, Europe’s domestic output is declining.

“There should be space for both increased LNG and Russian gas” in light of shrinking domestic production in the EU and improving demand, according to Christopher Haines, head of oil and gas at BMI Research. That’s provided “Russian gas prices continue to evolve to more closely reflect European hub prices,” he said.

President Vladimir Putin said in December that Russia has enough reserves to remain Europe’s main gas provider for years to come.

“Gazprom is supplying more gas to Europe than Russia or the Soviet Union ever did,” he said. “We have enough gas for ourselves, even considering the growing requirements of the Russian economy, and for our counteragents, the buyers of our gas.”

Deputy Chief Executive Officer Alexander Medvedev told investors in Singapore Tuesday that Europe will remain Gazprom’s “priority market” and no one else can provide gas at the same price. At the same event the company’s management board member Oleg Aksyutin said that U.S. LNG costs some 30 percent more than Gazprom’s gas in Europe supplied through its “most expensive” route.

“There are so many moving parts now,” said James Henderson, an analyst at the Oxford Institute for Energy Studies. “So many more things are happening around the world that have an impact on the European gas market.”

(Adapted from Bloomberg)

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Categories: Economy & Finance, Geopolitics, Uncategorized

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