Russia Losing Dominance In The European Energy Market -- February 26, 2016

Two interesting data points show up today. The first from the EIA:

In Europe, the combination of low winter heating demand, high refinery runs, and increased imports have kept distillate fuel oil inventories in the Amsterdam, Rotterdam, and Antwerp (ARA) area far above normal. Higher inventories have lowered distillate futures prices in the ARA area to a point where inventories are being held in floating storage and imported cargos are being diverted to longer voyages. --- EIA

The second, from The Wall Street Journal, front page, big story: Europe's energy escape valve -- US Gas -- Gulf Coast exports of liquefied natural gas, or LNG, are expected to loosen Russia's dominance in the European energy market.

ABOARD THE INDEPENDENCE, Lithuania—On the deck of this floating gas terminal, Mantas Bartuska awaits a tanker to pass a narrow inlet on the Baltic Sea with the first natural gas shipments from the Gulf Coast that many hope will transform Europe’s energy market.

“Soon, hopefully, U.S. gas will come,” said Mr. Bartuska, chief executive of the operator of the Independence, the gas terminal docked at the port city of Klaipeda, Lithuania.

After a yearslong effort, a tanker chartered by Cheniere Energy, an American company, left a Louisiana port this week with the first major exports of U.S. liquefied natural gas, or LNG. This shipment isn’t going to Europe, but others are expected to arrive by spring.
“Like shale gas was a game changer in the U.S., American gas exports could be a game changer for Europe,” said Maros Sefcovic, the European Union’s energy chief.

Many in Europe see U.S. entry into the market as part of a broader effort to challenge Russian domination of energy supplies and prices in this part of the world. Moscow has for years used its giant energy reserves as a strategic tool to influence former satellite countries, including Lithuania, one of the countries on the fringes of Russia that now see a chance to break away.

Some are building the capacity to handle seaborne LNG, including Poland, which opened its first import terminal last year. In Bulgaria, which buys about 90% of its gas from Russia, Prime Minister Boyko Borissov said last month that supplies of U.S. gas could arrive via Greek LNG facilities, “God willing.”

The shale boom has reshaped the world energy market over the past decade, with the U.S. emerging as a new energy exporter, and the beginning of gas exports represents a big moment in this new world. Deutsche Bank estimates the U.S. could catch up with Russia as Europe’s biggest gas supplier within a decade, with each nation controlling around a fifth of the market. Russia supplies about a third of Europe’s gas via pipeline.

U.S. gas exports will improve energy security for its allies, said Chris Smith, assistant secretary at the U.S. Energy Department. Those include Lithuania, which was the first Soviet republic to declare independence in 1990 but remains reliant on Moscow for energy.

Until 2014, Gazprom owned 37% of Lithuania’s national gas company, Lietuvos Dujos, and dominated its boardroom, said current and former officials.

“There was no negotiation about gas prices,” said Jaroslav Neverovic, Lithuania’s energy minister from 2012 to 2014. He said Gazprom would send Lietuvos Dujos a list of gas prices, which the board automatically approved.

Mr. Neverovic said negotiations always took place on New Year’s Eve, when Gazprom would threaten to cut off supplies during winter’s coldest days. Gazprom denied setting unfair prices.

This is a huge story. Yesterday I had a long note on the headwinds facing both Russia and Saudi Arabia, ending with:

As Russia's footprint grows larger in the Mideast, it may behoove Saudi Arabia to find a better working relationship with Russia. This business about Saudi Arabia and US shale "living together" is not the story. The story is whether two arch enemies, Russia and Saudi Arabia can coexist.  

It appears Russia now faces another headwind, competition from the US to supply Europe with natural gas.

The story gets more and more interesting.

And in a sense, the story continues with a post by RBN Energy, today, of all things. How coincidental. Natural Gas Flowing To Sabine Pass LNG Export Plant – Part 2.

After years of debate and speculation regarding prospects for U.S. exports of liquefied natural gas (LNG), the first cargo left the Gulf Coast around 8:30 pm EST Wednesday (February 24, 2016) from Cheniere’s Sabine Pass terminal, according to Genscape’s global LNG cargo monitoring service. The vessel carrying a little more than 3.0 Bcf of LNG is reportedly bound for Petrobras in Brazil. The incremental export demand that this LNG cargo and others like it to follow represent, is potentially good news for U.S. gas producers, with benchmark futures prices at Henry Hub, LA closing yesterday (February 25, 2016) near record seasonal lows at $1.711/MMBtu in the face of mild winter demand, record production and brimming storage levels.

Today we look at how this first cargo was supplied and what that tells us about current and future impact to flows and regional prices.Last time, in Part 1 of Commencing Countdown, we looked at gas flows into the Sabine terminal in preparation for this historic cargo and showed that since Dec. 1, 2015 Sabine Pass received close to 7.5 Bcf of gas supply from two separate pipelines – Creole and NGPL –as part of start-up testing and commissioning activities for the first two liquefaction trains. Since then, receipts have climbed to more than 8 Bcf. Of that, 4.0 Bcf (50%) has come from Creole Trail while the other half has come from NGPL. These volumes are not large enough to make a dent in the overall U.S. supply/demand balance. However, they may provide an early indication of how the terminal and subsequent exports will be supplied. So this time we look at where the gas is coming from.