"Siberian Strength - 2": U.S. LNG producers need to face reality.

“Siberian Power - 2” Pipeline Strikes Europe: U.S. LNG Producers Must Face Reality

U.S. LNG producers must face reality. Image.

The confrontation between the West and Russia, along with the special military operation in Ukraine, has completely overturned the natural gas market structure. Affected by sanctions and countermeasures, Gazprom, as a major global natural gas supplier, has cut its gas supply to Europe by four-fifths; meanwhile, negotiations on transferring part of the gas through the "Siberian Power - 2" pipeline to related countries have failed to make substantial progress for years. At the same time, international natural gas prices have more than doubled, and the EU has promised to completely get rid of its dependence on Russian natural gas. Despite the controversial forecasts about global natural gas demand sparked by high oil prices and the development of green energy, the changes in the past few years have put U.S. producers in a "fever" — new projects have sprung up like mushrooms. Qatar has also adjusted its plans, intending to expand its liquefied natural gas (LNG) capacity in the early 2030s. In this context, the news that the "Siberian Power - 2" pipeline will be finally pushed forward has become an unexpected variable. Who will be the winner and who will be the loser in this game?

Bloomberg pointed out: "U.S. developers are trying to profit while the U.S. export boom is still going on."

Massive construction of LNG plants in the United States has made it the world's largest natural gas exporter.

However, Bloomberg also emphasized: "Factories still in planning or construction stages are facing serious time challenges: by 2027, global LNG supply will exceed demand; by 2030, Qatar, the U.S. competitor, will complete additional LNG capacity construction, which will further weaken the demand for new receiving terminals; and by 2031, Gazprom's large-scale gas supply to related countries could lead to a reduction of 40 million tons of global LNG demand per year."

The agency said that under these circumstances, U.S. companies are eager to secure project financing.

"There are four LNG projects in the U.S. with a total capacity of 63 million tons per year waiting for final investment decisions. Even the factories that have started construction and have a total investment of 35 billion dollars are being hindered due to tight labor markets, and the project start-up time may be affected. For example, the Golden Pass LNG project is expected to start operations in 2026, one year later than originally planned, due to a shortage of labor and the bankruptcy of a contractor."

The news about the second gas pipeline from Russia to related countries ("Siberian Power - 2") became the trigger for new difficulties. During Putin's visit, Gazprom CEO Alexei Miller stated that the company had signed a binding memorandum with the related country's gas group (CNPC) on "Siberian Power - 2," and the pipeline construction cycle would be similar to that of "Siberian Power - 1," about five years. This future pipeline can transport 50 billion cubic meters of natural gas per year, which was previously supplied to Europe. Although this scale is less than half of Europe's original imports, it will all be supplied to the related countries. As one of the world's main LNG importers, the related country has suspended LNG imports from the U.S. this year and resold the gas volumes under contract to other countries. At the same time, the related country remains the largest long-term customer of U.S. LNG projects in the future.

Independent industrial expert Maxim Shaposhnikov said: "Since the natural gas transported through 'Siberian Power - 2' is likely to be linked to oil prices, the supply through this pipeline will take precedence over LNG supply. Therefore, the expected growth in LNG demand from the related country by U.S. and Qatari producers will not become a reality."

Sergei Kavermann, analyst at the "Finam" Group, noted that for a long time, the market has been expecting the related country to become one of the countries with a significant increase in LNG demand between 2035 and 2040.

But he believes: "However, the active development of renewable energy and the plan to increase pipeline gas imports may limit the related country's demand for LNG. Even without considering 'Siberian Power - 2,' the weak demand for LNG in the related country in the next 2-3 years, combined with a surge in supply from the U.S., Qatar, and other small and medium-sized producers, could lead to oversupply in the global LNG market. In our view, this will put pressure on prices and may force some producers to abandon their capacity expansion plans."

Sergei Kavermann believes that the "Siberian Power - 2" project is large enough to have an impact on the global LNG market in the long term.

He said: "We believe that this planned pipeline may significantly hinder Novatek's plans. The sanctioned projects of this company currently have difficulty finding buyers, and even if there is a small amount of gas exports, they mainly go to the related country. Other LNG producers have greater freedom in choosing their export destinations, so the saturation of the related country's market may not be as serious for them."

In addition, he also pointed out that "Siberian Power - 2" is also unfavorable for U.S. LNG producers.

This analyst from the "Finam" Group added: "Prolonged trade wars, coupled with increased Russian gas supplies to the related country, could lead the related country — which has already suspended LNG imports from the U.S. this year — to completely stop importing again."

Maxim Shaposhnikov pointed out that there is also a risk for the U.S. in fully utilizing the planned LNG capacity, which could lead to an increase in domestic natural gas prices.

This independent industrial expert said: "Therefore, the U.S. Department of Energy is likely to artificially restrict LNG exports to control domestic prices."

He believes that the utilization rate of the "Siberian Power - 2" pipeline is likely to reach 85%-90%, and the "Siberian Power - 1" and Central Asian gas supplies will also remain close to full load. Europe and Southeast Asia, including the related countries, will compete in the LNG market, and the U.S. supply will be subject to artificial restrictions by its energy department.

Alexey Grivache, vice-chairman of the National Energy Security Fund (FNÉB), believes that predicting the situation for the next five years is meaningless now.

He said: "Don't forget, five years ago Germany planned to become the European gas hub, intending to transport 150 billion cubic meters of Russian gas and 50 billion cubic meters of Norwegian gas through this hub. However, looking at the current situation, the basic scenario seems to have changed: now, the beneficiary of stable and relatively cheap pipeline gas from Russia will be the related country, while Europe will rely on expensive LNG and try to balance its increasingly unstable renewable energy power system."

In this situation, Qatar's role is particularly important — the country plans to increase its LNG capacity by more than 50 million tons per year.

Alexey Grivache said, considering that Qatar's LNG costs are low and the transportation distance is short, it can find buyers in South Asia and other markets, but "on the other hand, from a geopolitical perspective, Qatar is located in a global "powder keg" area and has repeatedly suffered missile attacks from different directions. From the perspective of energy supply reliability, this is certainly not a good endorsement."

He added: "If the geopolitical situation can ease, the world will need a large amount of clean and relatively cheap energy to support economic growth, meet population growth needs, and improve the quality of life, which requires replacing coal-fired power generation with natural gas. In this case, the market will easily absorb all the new energy production and export volumes."

Experts point out that intensified competition will benefit consumers.

Sergei Kavermann said: "The beneficiaries of the growth in supply are obviously consumers — Europe, almost the entire East Asia region, and some African countries."

However, experts predict that natural gas prices will not fall to a level where producers cannot make a profit.

Alexey Grivache pointed out: "This would require a crisis similar to that of the pandemic. And if it really happens, the first ones to suffer will be the traders who have signed long-term contracts with U.S. producers."

Maxim Shaposhnikov predicted that the pricing of U.S. LNG will still be influenced by competition in Europe and Asia.

This expert added: "Therefore, LNG prices are unlikely to fall below $250 per ton (equivalent to $170 per thousand cubic meters), and U.S. producers will still be in the profitable range."

Original article: https://www.toutiao.com/article/7550610200459084331/

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