The news that German Chancellor Angela Merkel has bent under Trump’s pressure, deciding to spend government funds on the construction of the first German terminal for the import of liquefied natural gas, has traversed the newswire of most international news agencies.
Interpretations of Merkel’s move have framed it as an attempt to avoid Washington’s sanctions against Nord Stream-2.
Geostrategic bargains are part of Merkel’s move, but possibly not the core truth behind it.
The fact of the matter is that it is odd for the largest EU economy and largest gas consumer in the EU not to have access via import terminals to the global LNG market. In the face of growing dependence on Russian pipeline gas, this self-imposed restraint can hardly constitute a sensible policy.
The country imports more than 50 billion cubic meters of gas from Russia alone, and the quantities will leap following North Stream-2’s implementation to above 110 billion cubic meters. As there is no evidence of termination of the North Sea originating gas supply contracts, and as German gas consumption is not forecasted to increase dramatically, the only explanation left is that Russian gas will be re-exported to other countries in Western and Central Europe.
Berlin is positioning itself as the main distribution center for Russian gas in the European Union, which raises eyebrows among allies, questioning both the morale and the principles behind this pre-planned strategic partnership with the Kremlin, paid for by consumers and taxpayers in other EU countries that host current gas transit and that will use it in the end.
For a country claiming to be a leader of the EU and a trendsetter of Eurocentric policies and behavior, such egotism is hardly recognizable and even more difficult to be perceived as the epitome of European solidarity and core values.
Second, the absence of regasification terminals in Germany, indeed, does not allow direct imports of LNG from the United States or from any other LNG exporting country. President Trump is right to pinpoint the discrepancy between the security guarantees the United States provides to the largest European economy and the share of Russian gas imports, as well as the lack of any intake capacity for U.S. LNG. To make things worse, there is no level playing field for competition as Gazprom enjoys the advantages of an unrivaled incumbent after decades of joint exclusive work with the leading European gas companies that create a legacy base and traditions, hardly offering new entrants a fair share of the EU gas market.
Third, pipeline gas’s role is indispensable when it comes to covering baseload demand but is less effective in covering peak curves, as it requires balancing capacities or sufficient linepack reserves.
The LNG market is considered to be the most globalized segment of the worldwide gas market. There have been signs of a detachment of the gas-to-oil from the gas-to-gas segment in global markets, as significant production and gasification capacities come online worldwide. That means, with potential excess supplies in LNG, spot market prices over the next 3-5 years are likely be able to match and compete with pipeline gas based on long-term oil-based contracts.
Germany’s lack of interconnectedness with the global LNG market, therefore, does not present German political leaders as forward looking, particularly in the context of the quantum leap in single-source supply dependence resulting from the new Nord Stream.
There are four LNG terminal projects in Germany at present, in varying degrees of progress, in which the German government is likely to invest. The first two are located on both sides of the Elbe River near Hamburg in the towns of Stade and Brunsbuettel. The consortium involved in the Stade-based project is the Stade LNG Co. with the key stakeholders being the MacQuarie Group and China Harbor Engineering Co. The plan is to develop a regasification unit, with a capacity of up to 8 bcm, that could cover 15% of the country’s gas imports. On the other side of the Elbe river in Brunsbuettel, the project is owned by the German LNG Terminal Co., with other participants being the Nederlande Gasunie, Vopak LNG Holding and OilTanking. The envisaged project has a regasification capacity of 5 bcm.
Both projects are competing for the promised government funding of EUR 500 million as the breakeven stretched beyond 10 years, which in turn, makes project financing and commercial loans less likely.
There are two other LNG terminal projects in Germany on the drawing board. One is in the town of WIlhelmshaven and led by Uniper. The other is near Rostock, where Fluxys and Novatek are partnering.
Even if all four projects receive the green light, which hardly appears to be the case, given the difficulty of proving viability, assuming the average EU load factor for European gas terminals – about 30% – LNG in Germany is unlikely to displace pipeline gas from Russia any time soon. Given due time, LNG importers might be able to optimize cost structure and value chain, reaching operational scale and market share sufficient to create genuine competition to Russian gas, challenging payback scenarios for hugely expensive infrastructure as Nord Stream-2 and Turkish Stream-2, jeopardizing net gas sales proceeds that go into the state budget. This is no brainer, given the projected growth scenarios for natural gas consumption in Europe until 2030.
Gazprom is likely to be forced to compete on spot base rather than long-term indexation, in line with the detachment of the gas-to-gas market from oil prices, benchmarking its pricing strategy against Henry Hub, i.e. U.S. LNG, plus logistics costs. For now, the comparison is in favor of Gazprom, but U.S. companies enjoy significant buffers in cost optimization. So does Gasprom.
Therefore the Merkel’s “bending” under U.S. pressure thesis does not accommodate the elementary fact that regasification terminals are commonly accessible infrastructure that can be used by all LNG traders and shippers, including Qatar, Nigeria and Australia. The option of an American LNG is just one of many.
Before Chancellor Merkel announced the government’s intention to provide funding for an LNG terminal, European Commission President Jean-Claude Juncker had already committed the EU to import more U.S. LNG by building the necessary receiving infrastructure.
On the other side of the Atlantic, on October 11, 2018, Senators Chris Murphy and Ron Johnson proposed a bipartisan bill, the European Energy Security and Diversification Act, which if adopted, could provide $1 billion in funding for LNG receiving infrastructure – terminals, pipelines and storage facilities in the European Union – that could also allow for greater U.S. LNG imports.
Immediately after Chancellor Merkel’s funding plans were announced, the Kremlin’s propaganda went ballistic in Russian and Russian-controlled international media, with the empahasis on U.S. LNG’s lack of competitiveness versus Russian pipeline gas. The media heat was on Gazprom as news came in about the 20-year contract between the Polish gas company PiGNIG and the U.S. Venture Global LNG for the import of U.S. natural gas. Piotr Woźniak, CEO of PiGNIG, struck a raw nerve when he referred to the price of U.S. LNG as 25% cheaper than Russian gas imported in Poland. Two days later, Gazpexport’s Deputy Head Alexander Medvedev retorted that Gazprom sells the cheapest gas in Europe in 2018 Q4 at an average price of $248 per thousand cubic meters, which is well below current prices for LNG at spot market.
Real competition has yet to come, and Germany will only benefit from expanding its option base for gas imports. Long before U.S. LNG comes en masse to Europe, it has already sent shock waves felt in Moscow, as EU gas consumers benefit.