Will Russia Lose Its Battle for the European Gas Market?

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The gas market is one of the most competitive in the world. It is not surprising that often it even becomes a stage of brawl between the great powers.

Polish Protest

Following a “test” liquefied gas delivery that took place last June, Poland has a long-term contract with the United States under its strategy to get rid of Russian fuel-related dependency.

The PGNiG head of the Polish joint-venture company Gasprom, the entrepreneur Piotr Wozniak, announced that the country has entered into an agreement with the US company Venture Global LNG for a 20-year term with a delivery of 2 million tonnes annually.

The statement comes amid growing Polish alignment with the Americans as the Eastern European country also views the US as its main defense ally, buying Patriot systems and installing them in unprecedented proximity to the Russian border.

The project of the Russian North Stream 2 pipeline is one of the reasons for discontent on the part of Warsaw, which considers it a “knot in its neck”, as well as causes concerns of the White House that, in turn, aims to reduce as much as possible Russian influence on the European continent, including through sanctions.

It is worth noting that the recently concluded contract corresponds to the so-called “Free on Board” formula. According to it, the Polish company becomes the owner of the commodity from the moment it is loaded in the tanker, that is, the destination of the cargo depends on the buyer. This, in addition to several other factors, leads many economists to believe that the contract has, above all, a political character.

Price issue

In announcing the agreement, Piotr Wozniak made a point of underlining the extent to which it will be advantageous for the Polish side, with prices “almost 30% lower than the Russians.” Meanwhile, the concrete figures in the document were not revealed. With this, of course, politicians are given ample space for maneuvering their statements and creating market expectations.

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Note that the Polish side has been quite capricious in the issue of fuel prices that it buys. Thus, with Russia being the main supplier to the country’s market to date, with highly advantageous prices compared to its competitors, Warsaw on several occasions has asked Gazprom to reduce this figure.

The country even appealed to the Arbitration Institute of the Stockholm Chamber of Commerce in 2015, urging the entity to recognize its right to demand a reduction in Russian fuel prices. The answer was partly positive, however, for which the Polish side needs to prove that Gazprom’s pricing policy is not fair – which seems difficult, given that these are now less than the spot market.

Turning to the question of the contract between PGNiG and Venture Global LNG, it is expected that the terminals for shipping in the United States will be built only in the years 2022-2023. Of course, the respective deliveries can not be started before the same deadline. As early as 2022, the Russian-Polish bilateral agreement on gas purchases, signed in 1996, expires.

Obviously, the Polish side was concerned beforehand with the search for alternative partners, given its anti-Russian rhetoric. However, the question that causes frustration in many experts is the following: how did the Polish entrepreneurs manage to predict the price of gas for the next 5 years? Given the high volatility of the commodities market, assuming that the price of Russian gas would be much higher than that of the US seems at least a slightly cautious calculation, especially taking into account that following the test delivery the imports from the American suppliers ended up being 30 % more expensive than Gazprom’s.

Future of the European gas market

Their analysis, coupled with expensive projects to build the necessary infrastructures and recruit specialized cadres, makes it very clear that the purchase of US liquefied gas simply can not be cheaper than that of Russian fuel, especially after the completion of the new gas pipeline Nord Stream 2.

More than that – supplies to the European continent can not be advantageous for the American side either, as buying prices in Asian markets, where the demand for liquefied gas is booming, are traditionally much higher than in Europe. Under such conditions, it would be far more reasonable to sell commodities to Japan or China, which is so interested in the US product that it did not even include it in the list of commodities charged in the midst of the trade war with Washington.

Added to all this, what would be the real intention of the United States in this energetic “crusade” across the European continent? The opinion of the market analysts is unanimous: from the economic point of view, it has no advantage at all, even because of geographic distance. In this context, the answer seems to be just one – the political factor.

It is further reinforced by the fact that the US Congress has proposed to the European Union a $1 billion grant to help “reduce dependence” on Russian commodities. Was it this sum that secured the price so surprisingly cheap that Piotr Wozniak announced? In the context of increasing US efforts to increase its presence in Europe, no matter what it costs, it is likely to.

Anyway, for now the prospect of the whole of Europe redirecting its imports of gas to the US supplier at the expense of its economy seems very clear. Proof of this was a rather harsh reaction from several EU countries in response to the US attempt to penalize those who collaborate with Russia on the Nord Stream 2 project. In fact, the market, when free, is governed by its own laws, and these are not always consonant with politics.

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