In 2016 Gazprom set a record of delivery of natural gas to Europe — 179 billion cubic meters. The champion season proceeded in January 2017, when deliveries updated historical maxima again – 19.1 billion cubic meters.

The greatest growth of purchases of the Russian gas is in Austria, Germany, Italy and France. At the same time, as expected, the projects on liquefied natural gas production in the USA and Australia the competition with which was predicted the Russian company show inability to function effectively under modern price conditions.

Gazprom is prostrate and runs away

As it is known to our readers, inexpensive liquefied natural gas came to Europe from the USA and to Asia-Pacific countries — not less cheap liquefied natural gas from Australia. Today Gazprom is in emergency as it was imposed rigid price war in which it will inevitably lose because of poor control, inability to use available financial instruments and politicization of numerous gas transmission projects.
In any case, all this occurred if to trust forecasts of numerous experts which were sounded at the beginning of 2016. «The market of gas is waiting for price war», «Suppliers of the liquefied gas from Qatar and the USA force out Gazprom from Europe», etc. Headlines of various mass media in the first half of last year approximately sounded so. In the second half the apocalyptic chorus became silent. Forecasts came true quite the contrary.
Of course, our dear readers could examine even in the spring of last year our view of prospects of both price war, as well as the liquefied natural gas projects in the USA and Australia. On strange combination of circumstances our point of view was closest to the reality observed at the beginning of 2017. The advertised plants on liquefaction of gas were incapable to work under present price conditions and Gazprom opposite — safely passed test low prices.
Also the record of deliveries on Nord Stream 43.8 billion cubic meters was reached. That happened thanks to the got permissions to increase in loading of the OPAL gas pipeline (the European continuation of Nord Stream). Earlier Nord Stream could be loaded for 67% because of the operating restrictions. In 2016 this indicator grew to 80%. Since the beginning of operation of Nord Stream its annual loading continuously grows.
A share of Gazprom in the market of Europe which, on the majority of forecasts of large and dear analysts, had to be reduced, in 2016 increased and reached a historical maximum — 34%.

Young people are welcomed

Expectations of price war in the market of gas and reduction of a share of Gazprom in Europe contacted the new liquefied natural gas projects. Though generally it was talked of liquefied natural gas from the United States, we will begin with more remote and controversial projects in Australia.
There are four new large liquefied natural gas projects in Australia by total cost of 130 billion dollars. Thus the power of these enterprises is 36.5 million tons (about 50 billion cubic meters). Only one Chevron prepares for start the third line on liquefaction on the Gorgon project and plans to place into operation the Wheatstone project to the middle of 2017. The total cost of these enterprises is about 90 billion dollars.
In world practice the following ratio for estimation of cost of liquefied natural gas plants is stipulated: 1 million tons requires 1 billion dollars. At difficult projects which provide construction of mining and transport capacities, 1 million tons of power can cost more expensive. The Australian projects look unprecedentedly expensive. Each one million tons cost more than 3.5 billion dollars.
Certainly, investment decisions were made in the period of the high prices of oil and gas. However, the initial cost of some Australian projects was one and a half times lower than total. But here it is possible to refer to unaccounted circumstances and changes in the world market. That, of course, does not cancel a simple fact: if you decide to build a 15.6 million tons plant (about 21.5 billion cubic meters) for 37 billion dollars at the prices in the target market in 16 dollars for 1 one million British thermal units and on realization course the project rises in price for 17 billion dollars (while the prices fall twice), concerning payback of the project there have to be known questions. It is remarkable that even ardent supporters of growth of deliveries from Australia recognize — the Australian gas bargains now below cost.
By the way, some prominent experts when they said that the Russian gas is not necessary to China staked on the Australian gas. And, it seems, everything looked logically. When all liquefied natural gas plants which are now under construction in Australia are put into operation, the total power of productions will reach 100 billion cubic meters of gas a year. Today the estimated power of the Australian enterprises reaches 45.1 million tons (62.2 billion cubic meters).
It was supposed that Force of Siberia should compete with additional volumes of the Australian natural gas. However Force of Siberia will supply gas to those regions of China where there are no terminals for liquefied natural gas reception and it is unprofitable to deliver from the coast. Besides, efficiency of any project depends on its cost and power. Even if projects are equal at cost but one assumes deliveries of 21.5 billion cubic meters and the second one — not less than 38 billion cubic meters, the second project will be a priori more effective. And effectiveness is possible to understand as efficiency as well as resistance to price fluctuations.
As for the American deliveries, there was no miracle. That is the American liquefied natural gas did not become the competitor of the Russian gas in the market of Europe. As well as assumed our edition. It is necessary to notice that though plants in the USA on specific expenses are more favorable than Australian but the financial position of owners of these plants, as a rule, leaves much to be desired.
In fact only one plant Sabine Pass (power of two turns now is 9 million tons). The main deliveries from this plant in 2016 were made to the market of Latin America as this direction was more favorable than European or Asia at the expense of shorter transport shoulder. It was made one delivery to Portugal, as well as Indian direction is tested.
In the long term capacities of this plant have to be increased to 18 million tons. However customers now try to reconsider conditions of contracts, in particular to get rid of a condition «liquefy or pay». At the present prices in the market of Europe deliveries from the USA are catastrophically unprofitable. However, and at higher prices need to return to banks the credits taken for construction of plant will not get to anywhere. And the export alternative already pulls the prices of natural gas of Henry Hub up. Namely the analysts promising high efficiency of liquefaction in the USA hoped for low prices of the American platform.

The USA is the exporter

We criticize prospects of liquefied natural gas projects in the United States and after all the USA became the pure exporter of natural gas. Respectable world editions suggested us this idea. However, with the known reservation — the USA became the pure exporter only in November, 2016. Then the United States exported about 210 million cubic meters per day and imported about 198 million cubic meters. In annual expression this country all the same remains a net importer.
Forecasts that the USA shortly will become the pure exporter are heard in the world mass media not less than eight years. Development of slate production became a reason for these forecasts. Production of slate gas promptly grew, leaning on the multi-billion credits and state support. But if so-called slate revolution began against high wholesale prices — about 400 dollars and attracted investments at enough comfortable 250 dollars, on peak it went at 100 dollars beyond 1 thousand CBM. At that time the «slate» companies were catastrophically refinanced, gas prices did not compensate even operating costs. Slate oil became rescue. Gas continued to be extracted actually as a by-product. Production of slate oil grew — production of slate gas grew.
The fairytale ended with falling of the prices in the world market of hydrocarbons. By inertia production of black gold continued to grow till summer of 2015. But then its volume was reduced on 25%. There came the turn of slate gas. Continuously growing production since March, 2016 started decreasing. Then about 68.8 billion cubic meters against 69 billion in March, 2015 were made. In November 2016, (when the USA became net — the export) production decreased to 65.4 billion cubic meters and in November 2015 this indicator made 66.9 billion cubic meters.
Mexico was the main direction of export from the USA. Deliveries to this country it is planned to increase further, besides pipeline deliveries, but not liquefied natural gas. On the second place among recipients of natural gas from the United States is Canada. But this country also exports gas to the USA. And who delivered to the neighbor more will become known only in the spring of 2017. Against Mexico and Canada deliveries to other countries make an insignificant share.
Decrease in production, of course, can be compensated if the prices fly up and production of slate oil again will give support to slate gas in the USA. But such succession of events looks doubtfully. Oil production concerning minima of 2016, of course, increased, but to it is far to maximum — volumes fluctuate within 8.7-8.9 million barrels per day. In a situation when the sharp growth of production of black gold at any of large players can bring down the prices, further increase in production of hydrocarbons for the American companies will be equivalent to a suicide.
Under present conditions the future of natural gas in the USA looks as follows. Time production decreases and export deliveries grow and the prices in domestic market will inevitably spread up. And if this process touches pipeline deliveries to neighboring countries a little, liquefied natural gas will fall the main victim. Actually, transfer of terms of input of export capacities in the USA speaks for itself, as well as a choice of the main directions of deliveries. And there is no Europe among them.


Consumption of gas in Europe grew. In particular, Europeans started loading actively earlier standing idle gas power plants. In the middle of January, 2017 intensity of consumption of natural gas reached such indicators that, having increased import, the European Union nevertheless brought gas reserves in underground storages to 48.9% (49.5 billion cubic meters). It is the minimum indicator for all history of observations.
Now the European Union conducts a little inconsistent policy for gas. On the one hand, importance of energy security is postulated, on the other hand — obvious risks of some gas transmission routes are ignored. On the one hand, it is told about liberalization of the market, on the other hand — the rigid state regulation which is artificially reducing competitiveness of a number of gas transmission projects is carried out.
In sector of electric generation of the EU natural gas was the last five years in the family way of the poor relative. Its use depended not on competitive advantages and on volumes of renewable generation concerning which conditions of the maximum preference were created.
Among EU countries obvious split concerning supply of natural gas from Russia was observed. The most interested countries are Germany, France, Italy, etc. — support expansion of the operating gas transmission capacities which are not depending on transit risks. But such countries as, for example, Poland and Lithuania, continue fight against mythical Russian threat and not less mythical growth of dependence on the Russian gas. Fight is conducted both in the political plan and by creation a priori of the unprofitable liquefied natural gas terminals.
In May, 2016 representatives of Poland declared that they will not prolong the long-term contract with Gazprom after 2022. But do not refuse deliveries — simply want the honest competition and a binding of the prices of the Russian natural gas not to the price of oil and a basket of oil products, and to quotations on spot platforms. Most likely, it was told only to remind once again the audiences of the liquefied natural gas terminal in Swinoujscie. After all test supply of gas from Qatar soon had to begin.
At that time it was clear that this gas will be 1.5-2 times more expensive. Therefore quite powerful public relations were required to smooth unpleasant price prospects. It is not clear, how such liquefied natural will honestly compete in the market of Poland with pipeline deliveries from Russia. An example of the achieved «gas independence» of Lithuania says that «the honest competition» is reached only by a tough state policy at which large consumers buy expensive liquefied natural gas in the form of an order.
Annually Poland consumes 15-16 billion cubic meters of gas. Thereof it receives 9-10 billion from Russia. Terminal power is 5 billion cubic meters. After it is possible to increase it to 7.5 billion cubic meters but whether power tells about the volume of the future deliveries? No. Total power of the liquefied natural gas terminals in Europe reaches about 220 billion cubic meters. But import in 2016 besides contrary to numerous forecasts not only did not grow but also decreased to 50-55 billion cubic meters. Idle capacities would be enough almost completely to refuse the Russian deliveries. However the European market is not bonus. Suppliers prefer Asia where pay more. At the end of 2016 the difference in the European and Asian prices was double. Besides, Europe had to compete for liquefied natural gas with the Middle East and Latin America.
Also 2016 brought to the Polish liquefied natural gas terminal new measurement — geopolitical. Negotiations on construction of the gas pipeline connecting Swinoujscie to the liquefied natural gas terminal on the Croatian island of Krk began. This object has long and nice history of discussions which began about 17 years ago. It is now said that the terminal on the island of Krk will be constructed by 2018 or 2019.
So we see that the price on the European spot platforms creeps up because of record gas extraction from underground storages. At the time of writing of this article they made about 230 dollars for 1 thousand CBM (the British NBP). It is significantly higher than the offer of Gazprom which is formed by means of price of oil.
It is important that last year and at the beginning of current in spite of the fact that supply of liquefied natural gas to Europe in 2016 decreased, the EU increased import of natural gas. Gazprom provided about two thirds of this gain. Here also unambiguous appeal of low prices and decrease in own European production of natural gas, and growth of competitiveness of electric generation affected gas and low temperatures in the winter and partly one more factor. Ukraine.

The independent Ukraine

It is not a secret for anybody that the relations of Russia and Ukraine are far from being friendly today. It also affects the gas market. So, Ukraine in 2016 did not buy Russian gas. It prefers so-called European gas.
According to the Executive Commercial Director of Naftogaz of Ukraine Yury Vitrenko, his company in 2016 paid for all gas from Europe 1.6 billion dollars and all 11 billion cubic meters were bought. For some reason Commercial Director of the serious company considers that purchase of gas in the EU cancels the rule «take or pay» which is stipulated in the contract with Gazprom But in this case another thing is interesting to us.
The volume of the gas bought by Ukraine in Europe approximately corresponds to growth of pumping of the Russian gas via the gas transmission system of this country. If in 2015 about 70 billion cubic meters of the Russian gas passed through the territory of Ukraine, in 2016 this indicator exceeded 80 billion cubic meters. Thus overpayment volume for gas from Europe looks inadequately. According to the Head of Power Department of Ukraine Igor Nasalik, under the direct contract with Russia Ukraine could buy natural gas at 140 dollars for 1 thousand CBM but instead it paid the European intermediaries of 185 dollars.
It is interesting to note two moments. The first one: the leadership of Ukraine does not hide any more that the European gas is the Russian gas but is more expensive. The second one: the difference in the price clearly demonstrates insolvency of any justifications of similar «business» from the point of view of logic. So, earlier purchase of gas by Ukraine in Europe was explained to that The Independent Ukraine receives a payment for transit which is higher than a difference in the price from Gazprom. That is was supposed that Ukraine even earns on purchase of the «European» natural gas. But the difference in 45 dollars at least is twice higher than the payment for transit. Senselessness of the events became so obvious to internal audience that it was necessary to change urgently the thesis about benefit of purchase of gas at Europe to thesis about payment for independence. Like, yes, we overpay, but this is a payment for independence. On this inconsistent background Naftogaz asked the Verkhovna Rada to keep in secret the price of import gas.
There is also one more important point: general consumption of gas in Ukraine last year made less than 30 billion cubic meters. It is twice less than in 2008 and in one and a half than in 2013. Decrease in consumption happens because of degradation of the industry and unreasonable growth of tariffs for internal consumers. Since February 1, 2017 tariffs raised again — to 340 dollars for 1 thousand CBM for industrial consumers and to 375 dollars for 1 thousand CBM for the population. In conditions when consumer ability of simple citizens of Ukraine decrease and production of the local enterprises loses sales markets it is possible to expect further decrease in consumption of gas in Ukraine.
In the same time the Ukrainian government does not leave plans to raise a payment for transit of the Russian gas. Two years ago necessary resolutions were adopted but so far it was not succeeded to introduce their provisions in practice. However after 2019 Ukraine strongly intends to receive twice more money out of nothing than now. That, by the way, will make alternative routes even more favorably.

The Celestial Empire

As the most considerable event in 2016 in fuel and energy complex of China it is possible to consider the largest decrease in oil production for the last 26 years. In 11 months production of black gold fell on 6.9%, having come to the level about 4 million barrels per day. According to BP, in 2015 this indicator was 4.3 million barrels per day. Except other, this first decrease in production in the People’s Republic of China since 2009.
The event is directly connected with changes in price for oil as operation of a number of wells on old fields became unprofitable. The western analysts believe that in 2017 oil production in China will be reduced on 240 thousand barrels. Also investments in investigation decreased. By the existing estimates, the profitability point for new Chinese fields is at the level of 50 dollars for barrel. In 2016 three Chinese players of the oil and gas market PetroChina, Sinopec, CNOOC showed the worst financial results in recent years.
China thus increases oil consumption. It had to increase import on 13.6%. At the same time Russia for the first time in the history became the chief supplier of black gold in the People’s Republic of China, having overtaken Saudi Arabia and Angola.
At the same time China does not refuse plans for strengthening of gas production. By 2020 only one CNPC assumes to increase production from 120 billion cubic meters to 180 billion cubic meters. And PetroChina intends to intensify development of slate gas in the Province of Sichuan in 2017. The company intends to reach production level of 10 billion cubic meters of slate gas by 2020. And their colleagues from Sinopec are going to reach the same results but in Chongqing.
Earlier it was supposed that by the end of the current decade China will be able to bring production of slate gas to 100 billion cubic meters. But after more careful investigation and specification of expenses the target indicator was lowered to 30 billion cubic meters.
Also by 2020 (the last year of the current five-year period) China plans to lower a coal share in the structure of energy consumption to 58% (now about 63%), and to increase a share of natural gas to 10% (now about 5%). The research institute CNPC predicts that consumption of gas in China will increase by 2030 to 510 billion cubic meters and to 2050 — to 710 billion cubic meters. Forecasts of growth of import by 2030 differ — from 190 billion cubic meters to 270 billion cubic meters. Perhaps, thanks to prompt gasification of China there will be a chance to pay off even at the Australian and American liquefied natural gas projects. But they should wait for more than 10 years. Here is a question, whether the banks wait.
Summarizing, we will notice that in 2016 Gazprom showed the main thing — ability to work with profit even in the cruelest conditions of world crisis in the market of energy carriers. Actually there was an experiment which showed which companies are capable to remain competitive in the conditions of extremely low prices. Now «well-wishers» should reconsider hastily terms of death of Gazprom from super successful 2016 for the next years, though last year showed possibilities of the parties in the price war promised by numerous experts but which did not start in the market of natural gas. There is no more effective company than Gazprom in the target markets.