The Asian gas market, especially China, likely has the biggest demand growth potential in the world. Thus, competition between gas from Russia, which is willing to diversify its export markets, and the United States, which looks at the Asian premium markets as its potential main source of margin, is nearly inevitable.
This competition should also be assessed in terms of LRMC and SRMC with one significant difference compared to the European market: Russia does not have any established pipeline infrastructure in the region, so there is no SRMC for pipeline gas at all—figure Basically, Russian gas both pipeline and LNG seems to be cheaper, so in the longer term it might have better prospects.
Apart from the purely commercial considerations, there are also significant geopolitical consequences of the United States becoming one of the major players in the global LNG market. It is tempting to view competition between Russian and US gas through this geopolitical lens.
Moscow could interpret recent statements from the United States to mean that Washington is following Russia in its rhetoric about being an energy superpower, utilizing gas as a tool for its geopolitical goals. A recent Atlantic Council paper suggests the following:. As an emerging energy superpower, the United States should take on a leadership role in the global natural gas markets to support its allies in Europe, contain its adversaries, and reshape relations with rising Asian powers.
Overall, the recent shale revolution has provided the United States with the power to take a leadership position in the global gas sector and the geopolitics of gas.
Outsiders could get the impression that the Trump administration is following a similar playbook. Rather, the authors think that rhetoric will continue, and meanwhile suppliers find their customers in the global marketplace, albeit in Asia, Latin America, or Europe. However, such rhetoric is not always without impact, and can be interpreted falsely by others, in turn incentivizing bad policy decisions.
It is important for policymakers everywhere, including the United States, to carefully craft statements, in order to avoid tit-for-tat decision-making, and zero-sum thinking. Of course, a relevant question to ask is: Who exactly decides to supply gas from the United States?
Northeast Asia in the Eighteenth Century
Right now these decisions are chiefly made by private companies, global aggregators, and traders who add US LNG to their portfolio and then optimize this portfolio depending on the market situation. The very business model is designed in such a way that in an unfavorable market environment, LNG would either be diverted to markets that are more attractive or not produced at all. Further events in Crimea and in eastern Ukraine have reinforced the already strong political motivation to reduce dependency on Russian gas.
As Boussena and Locatelli point out, EU policy explicitly seeks to guard against dependence on Russian imports, which are seen as accounting for too great a share of the overall total. With increased interest, European consumers are assessing every additional gas import option from other sources, and US LNG is very seriously being considered both by European politicians and by commercial companies. The concept of the United States as a new energy superpower, promoted by President Trump, includes both traditional opposition to the Russian pipeline projects such as TurkStream and Nord Stream 2  and active political support of LNG exports to Europe.
These arguments raise understandable questions: is the US administration really driven by the worries concerning European energy security, or is it inspired by the desire to market US LNG? It does seem like the current administration is pushing European countries to wean themselves off Russian gas and switch to American gas in a move that would benefit American companies.
The authors are well aware of the fact that the views on European natural gas markets within various branches of the US government are nuanced, and that many well informed policy makers have spent endless hours distinguishing between the need to further develop and open up European gas markets on the one hand, and promoting US companies on the other.
Yet all those efforts and nuances are easily lost on the wider public, when Secretaries and Presidents undo them when captioning personal views in a short press statement, or single Tweet. According to some analysts, another way the United States could support energy-vulnerable states in Europe, Asia, and beyond is by sharing its know-how or financing feasibility studies for pipeline infrastructure, gas storage caverns, and LNG terminals. In this context it is not surprising that sanctions against Russian LNG the Uzshno-Kirinskoe field development at Sakhalin and Novatek and the whole opposition against Nord Stream 2 including the recent Countering Russian Aggression Act of , which explicitly targets this pipeline are regarded by Russian leadership as unfair competition against Russian gas.
According to the Europeans, the United States wanted to gain unfair profit. Now, however, these [US] efforts have intensified, including through the attempt to force Europe to purchase the American liquefied natural gas at prices that cannot be competitive with the price of the Russian gas. This was definitely motivated by economic interest.
In the end the authors do not believe that increased political tensions and harsh rhetoric from either side help the credibility of natural gas as a fuel source.
The Russian Far East and Pacific Asia: Unfulfilled Potential
Considering the already daunting challenges that the global energy transition brings with it, this is an additional complication that the EU and other parts of the world could do without. For the United States, increasing its energy exports to China would not only help to change the trade balance, but this increase could also become an important argument in the other complicated discussions like those surrounding North Korea, the South China Sea, and some other issues. And all the recent trade disputes demonstrate how controversial these relations could be.
This is not to say that the Asia-Pacific region offers a wealth of new political allies for Russia, but at least the countries there appear more open to doing business than those in Europe. Another key element of the pivot to Asia for Russia is the development of its own Eastern regions.
These have been largely neglected in the post-Soviet era, with the result that their population has declined and their economy has stagnated. Russian authorities are keen to reverse this trend, not least because it leaves Russia weakened in its relations with China, and Russia has therefore embarked upon a redevelopment program based on the construction of key infrastructure, such as oil and gas pipelines, in the region. The absence of Asia as a major market for Russian commodities had become an anomaly that is now slowly being addressed, but further development of Eastern trade will continue to be an important theme for the foreseeable future.
This can then offer Russia political and economic diversity and can remove some of the threat of isolation that is apparent in its current relations with the West. Generally, it seems that as Russia becomes more isolated geopolitically, it will find itself more dependent on China.
The Russian influence driven by energy exports will decrease in Europe and in CIS with the further diversification of their supply options , while in Asia, due to US and Australian LNG, Russia will not be able to build such a uniquely dominant position as it has in Europe. The question is whether it is in the long-term interest of the United States to keep Russia isolated geopolitically. Now the competitiveness and overall attractiveness of Russian gas exports, for the first time ever, are compared with US gas exports: customers in Europe and in Asia now have a choice.
In this situation, everything will play a role: not only costs and geopolitical image but also contractual flexibility; speed of decision making and getting approvals and permissions; the availability of investments, employers, and service companies; and the overall investment climate. The evolving US LNG industry is now developing a brand-new institutional model see the fundamental institutional differences between the two systems in table 1. It appears that the US system has much more flexibility and is driven by private capital, in contrast to Russia, where the decision-making process even for private companies like Novatek largely depends on the state.
It will be very interesting to see how exactly these competing institutional frameworks will transform in the future. This means that all potential losses would be related to the European market. Lower revenues in Europe would be, of course, bad news for the company, which is already struggling with growing expenditures due to the need to simultaneously finance several extremely expensive pipeline projects. But Gazprom still has a low debt-to-equity ratio of 0. Nor would it be catastrophic for the Russian federal budget, which is indeed very much dependent on the hydrocarbon revenues and taxes—but mainly from oil, not from gas gas usually represents only 10—20 percent of oil revenues.
And it has already demonstrated its resilience to the dramatic drop of oil and gas revenues, from 51 percent of the federal budget in down to 34 percent in But for the state and for the Russian gas industry, even the most pessimistic scenario is not that dramatic. How would Russia react to this competition in Europe—would Russia ignore it and follow its old pattern, or would it try to adapt and change its own system?
The Russian side does not add clarity to this discussion. What strategy might Gazprom adopt in its efforts to preserve its existing market share? Gazprom is certainly a major supplier of gas to the EU market. Yet despite its size, Gazprom has never been a price setter, as it only enjoyed limited market power in the competitive Northwest European market. It has consequently had to adapt to the growth of free markets spot markets and gas hubs and a decline in demand since by making more or less substantial changes to its long-term contracts…Within the framework of TOP-type contracts, Gazprom has only a limited amount of leeway to manipulate prices, constrained by its obligations regarding supply and the price terms in its contracts.
Once a TOP contract has been signed, Gazprom has little room for maneuvering, even if the contract allows for price review. The TOP clauses in long-term contracts also hamper any strategic behavior regarding volume. Suppliers are required to guarantee the minimum deliveries stipulated in the contract, limiting their ability to influence prices by restricting the volume they export.
To preserve its market share in Europe, Gazprom must strike a balance between prices and volume. Initially in — , the firm opted to give priority to prices, but as Gazprom lacked real market power in the key market of northwestern Europe, this behavior resulted in a substantial drop in overall market share.
Responding to this setback, Gazprom sought to restore its competitive edge through contractual adaptation by increasing its share of spot indexation. The authors' analysis suggests that Gazprom is not trying to develop one single strategy but rather is very closely following market development in order to adjust properly to this changing environment, with its primary goal to sustain its current market share.
In addition, Gazprom hopes to maximize revenue generated by its 33 percent of the market. So its future strategy will mainly depend on the market scenario. Of course, there is always the option to keep things as they are, which so far seems to be preferred by Gazprom and the government. And it could well be that if Asian gas demand stays high, this scenario would be the most reasonable choice for Gazprom.
In the case of high Asian demand and low oil prices, gas demand in Asia would keep rising, spot prices in Asia would increase, and new LNG would be absorbed by this premium market without significantly interfering with the European supply-demand balance. There will of course be some US LNG sent to Europe sporadically, but the price differential in Asia will be more attractive for the aggregators. In this scenario Gazprom actually would not need to adjust its export policy and prices if oil-linked prices remain below spot prices, as was the case for a period of time in In certain situations Gazprom might even slightly manipulate the market by limiting supplies in order to drive prices up and to increase its rent—but very cautiously, as this might lead to demand destruction and prompt new FIDs on US liquefaction capacities.
Global oil price dynamics will determine the gap between LTCs and hub prices, as well as the attractiveness of LNG export to Europe from the US: the higher the margin, the more stimulus for the US LNG offtakers to increase export volumes to this destination. In the scenario of high Asian demand and high oil prices, Asia would generate a slightly higher margin for US LNG, but due to high oil prices, the European market could also be very attractive for the aggregators: US LNG would be fairly competitive in this price environment.
But as in the longer-term case, high prices will attract more competitors to the markets, so it is important for Gazprom to keep its own prices in a corridor that would avoid competition and keep the margin of the aggregators supplying European markets below their margin in Asia. And as Boussena and Locatelli correctly point out, until the complete liberalization of the EU gas market, Gazprom is in a position to create uncertainty about the price of natural gas instead of simply starting a price war.
Thanks to several comparative advantages—primarily the size of its reserves, the proximity of its current markets, and its spare capacity—it remains a key player in the EU gas market. For Gazprom, one of the priorities will be to reduce, as far as possible, the predictability created by the current form of these contracts. Put simply, Gazprom might remain in its current position if it is not too greedy. In a scenario of low Asian demand and low oil prices, the market conjuncture might become so unfavorable for the company that it would have to go for stronger adaptation and much more proactive market-oriented behavior.
On the other side, as the economics of US LNG exports are based on a wide differential between domestic gas prices and global oil prices, these low prices, stagnant global demand, and an oversupplied market will make it difficult for additional US LNG export projects to reach FIDs. And simultaneously it will incentivize the company to use more proactive marketing approaches, developing new markets both in Asia and in Europe , employing more flexible and creative marketing, and improving the efficiency of all its operations.
In this scenario if Gazprom still tries to keep its former approach, losing the market, it might finally force the authorities to pursue further export liberalization. Novatek and Rosneft could become powerful new players, ready for spot indexation and more flexible behavior. Novatek will most likely promote an aggressive LNG export strategy—it claims that its LNG production potential in the Yamal and Gydan peninsulas is over 70 mtpa. If the company is able to build strategic cooperation with China, it will not only get a strong position in this growing market, but it will also be able, together with Chinese equipment suppliers, to develop downstream markets in the countries of non-OECD Asia.
So its adaptation strategy is also related to increasing competition between domestic market players, opening access for international companies, and optimizing its project portfolio from its less-efficient gas projects, decreasing state tax offtake, and creating more flexible market behavior and pricing. Given the scale of its sales to Europe, Gazprom could become one of the most influential spot market players. But it has so far avoided any large-scale intervention in such markets, preferring to secure its sales through long-term contracts.
In the scenario of low Asian demand and high oil prices, not only adaptation voluntarily decreasing contractual prices and creating demand but also the more aggressive strategy of starting a price war could be potentially applied. There are some objective preconditions for such an approach: Russia is indeed one of the lowest-cost gas suppliers, and Gazprom has sufficient reserves for margin reduction in order to engage in price competition. In this scenario Russia would feel pressure from the increased competition not only from the United States but also from all existing low-cost LNG suppliers first of all, Qatar , which may have to switch their supplies to Europe and keep gas prices at a low level.
In order to protect its market share, Gazprom will have to engage in this price competition as well, flooding the market using spare capacities and driving the prices down to the level of its SRMC, which will disincentive US LNG aggregators to offtake this LNG. In , after the opening of the Lithuania regasification terminal, Gazprom already responded in this way by discounting the price of its gas by 23 percent. So by further cutting prices, it could manage to shut in to-be-opened US liquefaction.
But there are also some important tradeoffs in this strategy that will most likely make it unacceptable for the Russian leadership. First of all, in order to drop the prices and to pump all this additional gas to Europe, Russia will have no other choice than to use the Ukrainian route, which it is trying to avoid for the obvious geopolitical reasons. In terms of commerce, Ukrainian transit might be more expensive—it means higher transportation costs, thus further increasing Russian losses from this strategy while—surprise—Nord Stream 2 construction will increase opportunities to dampen prices.
Secondly, European gas demand price elasticity is very low—as the market response to the recent twofold gas price decline shows—so price dampening will result in further revenue loss for Russia. At the same time, US LNG projects are large scale, driven mainly by big companies under long-term capacity agreements—they will not disappear from the market in one to two years. Finally, this decision requires resoluteness, prudence, and the ability to take the risk of sacrificing short-term revenue in favor of long-term strategic benefits.
Russia must also have enough strength to protect the chosen strategy. Only the president himself can make such a decision, but he is busy enough with other problems, so he will pay attention to this issue only when it becomes pressing. For Gazprom and Russia, this is the least preferable scenario associated with low revenues—Russia does not seem to be interested in initiating this price war; it could only be a response. This strategy could also be applied sporadically in order to compensate for high oil prices and corresponding gas demand destruction. At the same time, this does not mean that this strategy would never be applied.
There could be geopolitical circumstances in which Russian leadership not Gazprom could decide to play this card; for example, if new sanctions are applied and the US-Russian relationship further deteriorates. Then, at a certain point, for purely political reasons, the gas market might become a battlefield—if Russian leadership decides to show the Americans who the real master of the European gas market is. Russia is in a good position to defend its market share in Europe, but this defense will require a very cautious policy, depending on how the global gas market develops.
Loss of a significant argument in its relationship with gas-consuming countries in Europe is the most unpleasant consequence of advancing US LNG for Russia.
The country is used to applying this gas argument in different negotiations on the state level, and now, for the first time, there will be an equal counterargument: the existence of US LNG as an alternative, which is increasing liquidity and competitiveness in the globalizing LNG trade. Overall, the market will become much more efficient and liquid. In this case, at the end of the day the role of politics will diminish, and gas markets will have the upper hand in the gas trade.
Another much more negative scenario would be if the United States follows the Russian example of trying to manipulate gas transactions in order to achieve its geopolitical goals, as unlikely as that seems at the moment. Abdelal, R. Adelman, M. Arentsen, M. Kunneke, eds. National Reforms in European Gas. Oxford: Elsevier, Barteczko, A. Boersma, Tim, and Tatiana Mitrova.
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