Nord Stream II nears completion; U.S. exports to Europe may be displaced

July 31, 2020
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The Russia-to-Europe pipeline is expected to be completed between 4Q2020 and 1Q2021. U.S. LNG cargoes may face competition with the additional 5.3 Bcf/d of Russian capacity to Europe.

In 2019, Europe became the destination of near half of U.S. LNG exports. After the Nord Stream II (NS2) pipeline is brought in-service, U.S. LNG exports to Europe may come under pressure

In the past few months, European LNG imports declined as the country’s storage tanks neared capacity. The drop in imported LNG has helped the European gas market rebalance. But as the excess inventory is worked off, Europe would again be a primary target of U.S. exports.

The European gas market is expected to see a very large increase in LNG demand over the next few years, according to the IEA. Gas production is expected to decline by half in Europe and imports are expected to compensate for the loss in production. According to the IEA, Europe has accounted for nearly 60% of the growth in global LNG trade in Q12020 before the Covid-19 pandemic.

But Europe has shown this year that it will only absorb LNG cargoes while it makes economic sense to do so. In the chart above you can see that Europe has become a significant buyer of U.S. LNG, accounting for 60% of U.S. LNG exports in February 2020.

NS2 would carry additional Russian gas to an already oversupplied European gas market. The extra supply threatens to drive down prices on the continent. If European gas prices remain depressed, American LNG would either chase those prices lower or find another market. LNG is a global market and gas would be redirected to other countries where the gas could be sold profitably.

The entire 5.3 Bcf/d of incremental capacity is not likely to be used at first. Estimates we have seen of initial flows, starting in 4Q2020, have been as high as 1.91 Bcf/d (S&P Global Platts), but some have been closer to 1 Bcf/d. Therefore, large, immediate substitutions of U.S. LNG are uncertain. Therefore, a large substitution of U.S. LNG would not be immediate.

Nord Stream 2 Map

The Nord Stream II pipeline has been highly controversial since the project’s inception. The U.S. is concerned that if NS2 is completed Russia would gain additional political leverage in the region and that Europe would become even more reliant on Russia’s for gas.  The U.S. has threatened additional sanctions despite opposition from the U.S.’s European allies.

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