LNG glut vs. Gazprom’s unused capacity

The previous two posts may seem an exercise in pedantry: so what if Britain is less dependent on Gazprom than Germany or Poland now? Shouldn’t we look beyond 2016 – beyond 2020, even – to a time when Gazprom becomes the only major supplier of piped gas not facing an irreversible decline?

Let’s use 2015 production and consumption data but assume the UK stops exporting gas to Belgium and the Netherlands and keeps sending about 5 bcm per annum to Ireland (a contractual obligation perhaps). The UK would then need 77 bcm per annum, including 72 bcm for its own use. As in 2015, 41 bcm would come from domestic production, mostly the North Sea. Most of the remaining 36 bcm would be imported from Norway, with LNG making up the balance.

The long-term problem with this setup is more or less clear. Output from the UK is bound to fall because it’s the North Sea. The same will probably happen to Norwegian production because it’s also concentrated in the North Sea, although Norway has Arctic fields to fall back on, to a degree.

Gazprom, in the meantime, has a spare capacity that is probably larger than annual gas consumption by the whole UK. (A separate question is whether it was wise to invest in adding that capacity at a time when US shale revolution was beginning.) It should be able to fill any emerging import gap with limited additional investment. It production costs are low; its transport costs can be reduced through swap agreements. Is Gazprom inevitable?

It’s not, because there is the LNG option. First, the UK has underutilized import and regasification facilities. No wonder, since it imported 13 bcm in 2015 compared with 26 bcm in 2011. Second, the LNG market is becoming a buyer’s market thanks to the inflow of American and Australian exports.

There’s less certainty and visibility about future inflows with LNG than with piped gas, but LNG is almost free of the Gazprom political risk. If you’re seriously concerned about the security of Gazprom’s flow, you should be ready to pay a premium to hedge against the risk of its interruption.


    • One had to be a senior manager at Gazprom to miss the coming LNG supply and the consequences for oil linkage 2014. I’m exaggerating, of course, but not that much.

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