This post is authored by Simona Griffith, a graduate assistant at CISSM and a Master's of Public Policy student at the School of Public Policy.
Developments in the global trade of liquefied natural gas (LNG) promise to substantially benefit energy-strapped European countries in the coming years, but they also have the potential to lead to increased competition between the United States and Russia—who are two of the most ambitious emerging LNG suppliers.
Until recently, Russia has managed to maintain its monopoly in many European countries’ natural gas markets. The dependence on Russian supply has proved to be a liability for many of these countries as the gas flowing from Moscow was mixed with a heavy dose of political pressure, energy insecurity, and unpredictable price increases. For the countries trapped in this Russian monopoly, the rise of LNG was a welcome change and the best opportunity to diversify their supply sources in decades. In the last few years, both Lithuania and Poland built LNG terminals and saw rapid diversification of their markets, as LNG-filled tankers from around the world delivered non-Russian gas. The first delivery of American LNG in the two Baltic ports (one in Poland and the other in Lithuania) earlier this year seemed to be a particularly poignant illustration of the decreasing Russian energy might in Eastern Europe.
Yet because of the flexibility of LNG, which does not need to be transported by conventional pipelines, competition among suppliers is also heating up. In the beginning of December 2017, Russia launched its largest LNG project to date in the Arctic peninsula of Yamal. The first Yamal gas shipment headed to the UK, where it will eventually be picked up and shipped further to more lucrative Asian gas markets. It is unlikely that Russian LNG will become the new major source of gas in either Western Europe or Asia. Nevertheless, the Yamal project demonstrates Russia’s desire to expand its energy reach into new markets.
Russian state-owned energy companies have a well-documented history of offering their products for lower than market rate prices when it has suited the Kremlin’s strategic political goals. This willingness to take on financial losses in exchange for political influence will further complicate competition with the growing number of American LNG producers, who are looking to take advantage of the U.S. shale gas boom. The French and Chinese involvement in the Yamal project may, however, force the Yamal project to behave more like a traditional business venture that would be less likely to engage in politically motivated price wars. In such case, American and Russian competition could simply benefit LNG buyers around the world by further diversifying the overall supply. Nevertheless, as both Russia and the U.S. flex their LNG muscles, 2018 promises to be an interesting year for energy markets in Europe and globally.