With US LNG Exports, the EU May Not Need Nabucco

In a scenario of a gas supply boom by 2020—with US LNG exports as a core pillar of incremental LNG growth along with other new suppliers and planned projects coming online by decade-end—Europe may not need Caspian gas any longer. US LNG exports appear as a more attractive supply option for European gas buyers than Caspian gas for three main reasons:

First, in terms of timing, Nabucco West is expected to come online by 2018 at the earliest, while US LNG exports could start in 2016 but with a slow ramp-up to 2020. The first approved and fully contracted US shale-to-LNG project, the Cheniere’s Sabine Pass plant, located in the Gulf Coast will operate its first two trains by 2016-2017, followed by two additional trains in 2018-2019 to reach 16 million tons of export capacity. In the event that the US Department of Energy approves 2 or 3 additional export projects in 2013-2014, the US could add about 45 million tons of LNG (62 bcm) in the global gas market by 2020.

Second, regarding volume, the Southern gas corridor (TANAP and Nabucco West and/or TAP) will bring a modest amount of 10 bcm of Azeri gas into Europe (and 6 bcm into Turkey), while it is reasonable to expect that ¼ of US LNG exports (equivalent to some 15 bcm) will end up in Europe —providing a minimum of 3 to 4 additional projects will receive their license for exports to non-free-trade agreement nations.

Finally, both supplies will address the concern of security of supply. US LNG exports and Azeri gas will bring a net improvement into EU security of supply by adding a new source of gas and a new pricing into the EU (both US LNG exports and Azeri gas will be hub-linked), while reducing further EU's dependence on Russian gas.

In this context, why is the EU still politically pushing for Nabucco West and the opening of the Southern Gas Corridor (SGC)?

The key rationale beyond the SGC is ‘destination security’—which cannot be provided by LNG. Even in a scenario in which the US exports 45 million tons of LNG by 2020, there is no 100% guarantee that 25% of this volume will come into Europe, which is about what Azerbaijan will send to Europe by 2018-2020.

There is an intrinsic risk to LNG imports: European demand for gas could be overshadowed by Asian demand or any other growing niche markets. LNG shippers often pursue the highest paying market, currently Asia, meaning that European regasification terminals face risks of underutilization in a tight supply environment, a factor that implies significant security of supply risk given the flexibility of destination provided by LNG. As a result, the EU is still pursuing extremely large, fixed, cross-border gas pipeline projects because they provide ‘destination security’ without risk of diversion or profit-seeking strategies. In other words, the EU is willing to take the risk of committing to a pipeline that links buyer and seller for up to 40 years with the concomitant risks of pricing revision and transit country disputes because it ensures better security of supply. Although amidst the Eurozone crisis financing is a concern, the SGC’s aggregrated cost of roughly $20 billion is manageable if the EU, various utilities, and upstream players share costs.

That said, the EU is pursuing a multi-dimensional security of gas supply strategy where both diversified LNG and pipeline imports are core elements along with relying on better connectivity, liberalization, and deeper integration of the EU’s gas market through the Third Energy Package.

In terms of geopolitical implications, the combination of US LNG exports and Azeri gas into Europe is a nightmare scenario for Gazprom, which has yet to come with a coherent and competitive business strategy to defend its market power in Europe.

By Leslie Palti-Guzman, Global Gas analyst at Eurasia Group, a global political risk research and consulting firm headquartered in New York