Cooperation in the field of energy economics was the main topic of Donald Trump’s speech delivered in Warsaw. The first portion of American LNG supply to the terminal in Świnoujście shows that this cooperation is profitable to both sides. Even if multiannual contracts with American providers are not harmed by market uncertainties, the situation could shift over time.” Regardless of whether the gas reaches Europe, the increase in export of American natural gas is an important factor in the falling of prices at the world market that will also be noticeable for Polish customers.
One of the subjects discussed by Andrzej Duda and Donald Trump during the American president’s visit in Poland was the issue of American gas supply to Poland. The same issue came up in the speech made by the American head of the state at Krasinski Square, when President Trump made a public assertion that “Poland and its neighbors are never again held hostage to a single supplier of energy”, which suggested a very clear desire for further cooperation in this area. Such a declaration is not, however, sufficient to presume that American gas is going to either replace or significantly replenish the Russian supplies in the near future. The decision about concrete feedstock volume and its price depends on companies, not on politicians. In contrast to their Polish counterparts, American energy companies are private entities, which means that public administration has very limited influence over them. This is why the determining factor in transactions between companies is price and not a feedstock
I’s place of origin, though political climate, of course, is not without importance for trade cooperation.
The comparison of gas prices either at Polish or American markets has been one of the most frequently evoked arguments after the LNG terminal in Świnoujście opened. Gas prices in the States are 80% lower than in Poland. It is to be noted, however, that these measurements are authoritative if and only if the last price is increased by the costs of gas liquidation, transportation and regasification. Exactly these factors cause that American gas is not price competitive, regardless of today’s price differentials and cyclic discounts caused by temporary excess quantity of the feedstock at international LNG market.
How much would American gas cost us in standard non-promotional circumstances? Cheniere Energy, the key American export tycoon and the only company that is allowed to export gas from the USA, assumed in its strategy that the standard price is 115% of the indexed price in Henry Hub, which is the reference point for all transactions made at American market. Currently the price is 3 USD for 1MMBTU ((1 mln British Thermal Unit), therefore Cheniere can sell gas abroad for 3.45 USD per unit. Moreover, the company calculates the cost of liquidation at 2.25 USD and the cost of transportation at 1 USD. As a result, gas which original price is 3 USD, is sold for 6.7 USD even before it gets to a Polish terminal. Further, after the charge for regasification in the Polish LNG terminal is included, which is 9PLN/1 MWh (about 0,71USD/1MMBTU), the final price is up to almost 7.5 USD. In comparison, the current gas price at Towarowa Giełda Energii (Energy Commidity Exchange) in Poland totals about 70PLN/1 MWh, which is around 5.45 USD/1MMBTU. It means that American gas, even before it gets to the Polish transmission network, is much more expensive than the feedstock paid by Polish Petroleum and Gas Mining to Gazprom or what can be bought on the European market.
Thus, a much more intriguing question from the Polish point of view may be whether American gas poses a threat to Gazprom’s position over time. Skeptics point out that even a significant increase in the LNG export potential both in the USA and in Australia changes nothing, as the cost of non-conventional gas exploitation (and shell gas is this kind of gas) is higher than the price of conventional gas exploitation from Russia. Furthermore, the price of non-conventional gas must increased by higher price of transportation. As a result, American gas companies don’t have much room for price competition, in contrary to Gazprom, so even if they offer the feedstock at European market prices to their European partners, Gazprom can dump margin on purpose to defend its position and hold its shares in the market.
This calculation, however, ignores two important factors. First of all, in relation to supply and demand, LNG prices are inflexible . This is because investments in projects meant to increase the sales (for example, gushers, gas pipeline, and gas terminals) are a long term investment . Moreover, due to technical conditioning, the entities that deal with gas exploitation cannot afford to do temporary substantial enhancement of extraction. Hence those companies that sell gas prefer much more to sell it and receive at least partial return on investment even when prices are low. It also concerns the aforementioned Cheniere Energy which is not only a gas seller, but also an owner of an export terminal in Sabine Pass in the Gulf of Mexico.
Secondly, market fluctuation and chance events, like the accident in Fukushima nuclear power plant in Japan in 2011, may have substantial short-term impact on supply volume, which could cause significant changes to feedstock prices. It’s worth emphasizing at this point that the European market has only a balancing role to LNG sellers. The only units of gas that find their way there have not been sold on the Asian market, which is the key area of liquid gas demand and where lack of gas pipelines affects the world’s greatest LNG demand. LNG trade conditions offered to European receivers are then derivative to gas prices in Asian countries, which depend in turn on demand for the feedstock primarily in China, India, Korea, Japan and Taiwan. Having this in mind, since the swell of gas liquidation capabilities in the States is higher than the demand for LNG in Asia, the exporters might be forced to deliver the feedstock to Europe at very favorable prices.
Summarizing these considerations, an increase in American gas export is profitable from the Polish point of view even if the gas never reaches Europe. A greater supply of the feedstock on the international market increases competition and places price pressure on other providers. This is, then, sufficient reason to acknowledge a strategic significance of gas from the USA and to encourage the American administration to eliminate all kinds of barriers controlling the feedstock export.
Translation: Michał Rzeczycki
Revision: Tia Westhoff
Photo: public domain (http://photozou.jp)