With 28 countries and a combined population of around 512 million people, the European Union is something of a prized market — and political battleground — for the world's largest energy exporters, particularly when it comes to natural gas.
Russia has long been the dominant source and supplier of natural gas to Europe's mass market but the U.S. is looking to challenge Russia by stepping up its imports of U.S. liquefied natural gas (LNG) — gas which is super-cooled to liquid form — making it easier and safer to store and transport.
Europe certainly appears keen to wean itself off Russian gas, and all the geopolitical implications that reliance entails, while making overtures to the U.S. Last July, European Commission President Jean-Claude Juncker and President Donald Trump agreed to strengthen U.S.-EU strategic cooperation with respect to energy and the EU said it would import more LNG from the U.S. "to diversify and render its energy supply more secure."
Twenty-four percent of U.S. LNG went to the EU in October 2018, a month which saw the largest volume ever of EU-U.S. trade in LNG of almost 0.6 billion cubic meters. In the whole of 2017, only 10 percent of U.S. LNG exports went to the EU. The Commission, the EU's executive arm, expects U.S. gas exports to the region could double by 2022 and has vaunted the construction of LNG terminals across Europe.
"The fact is that U.S. LNG, if priced competitively, can play and increasing role in EU gas supply, enhancing diversification and EU energy security," the EU said in a document detailing the state of EU-U.S. LNG trade in late November.
US vs Russian gas
The U.S. became a net natural gas exporter in 2017 for the first time in almost 60 years, according to the country's Energy Information Administration (EIA). It saw exports of its LNG rise 58 percent through the first half of 2018, compared with the same period in 2017. In fact, while U.S. LNG exports have continued to grow in 2018, U.S. natural gas pipeline import and export volumes have either remained relatively flat or declined from 2017 levels, the EIA noted.
U.S. exporters looking to Europe have a big obstacle in the region, however, and that's Russia.
Russia remains the largest supplier of natural gas to the EU in 2018, according to the Commission's latest data on EU imports of energy products in October. The other main suppliers are Norway and, at a lower level, Algeria and Qatar.
Showing the extent of much of the EU's reliance on Russian gas, the Commission noted that 11 member states (Bulgaria, Czech Republic, Estonia, Latvia, Hungary, Austria, Poland, Romania, Slovenia, Slovakia and Finland) imported more than 75 percent of total national imports of natural gas from Russia in 2018, largely due to their proximity to the country.
Gas from Russia is supplied to the continent by state-owned gas company Gazprom via pipelines, giving it an advantage in terms of cheaper transportation costs and established infrastructure and supply. It has a number of major pipelines in operation, or under construction, with European energy and infrastructure companies.
As well as the Nord Stream pipeline and its expanded version, Nord Stream 2, linking Russia to Europe via the Baltic Sea (the expanded pipeline is seen as a way to bypass transit countries like Ukraine), Gazprom and partner companies in Poland, Belarus and Germany oversee the 2,000 kilometer Yamal-Europe pipeline that sends gas from one of its production centers in Torzhok (via Belarus and Poland) to Germany.
The company is also constructing the TurkStream pipeline for gas exports from Russia across the Black Sea to Turkey and south eastern Europe.
Geopolitics
Pipeline projects have prompted criticism in Europe and in the U.S., with Trump accusing Germany (the largest foreign buyer of Russian gas) of being "captive" to Russia. His former Secretary of State Rex Tillerson said earlier in 2018 that Nord Stream 2 undermined Europe's energy security.
Despite its reliance on Russia for gas, the EU's relationship with the country is a rocky one. Relations deteriorated when Russia annexed Crimea from Ukraine in early 2014 and supported a pro-Russian uprising in east Ukraine, after which the U.S. and EU placed sanctions on Moscow.
Penalties were placed on Russian oil companies (including Gazprom and its oil arm Neft) in 2014 that sought to hinder these companies exploration and production of energy. The U.S. warned in November it could still seek to thwart the Nord Stream 2 project with further sanctions (essentially fines) on companies involved in the project.
Five EU companies are involved in the construction of Nord Stream 2 and the EU has expressed concern over such sanctions. Given Russia's established and growing infrastructure in Europe, commodity strategists like RBC Capital Markets' Christopher Louney said the geopolitical dimension to the U.S. promotion, and European adoption, of LNG is hard to ignore.
"There is definitely a geopolitical nature to it (the competition for European LNG customers)," Louney told CNBC Monday.
"The geopolitical nature of the U.S. gaining market share in European gas is highlighted by Trump's opposition to Nord Steam 2 (I'd note that there is also some more critical debate happening in Germany itself now)."
While there are other reasons to increase imports from the U.S. right now, including having a diversity of supply source and pricing, "it's hard to argue against geopolitics being at play here as well," he said.
Louney believes there's a long way to go before Russia's natural gas dominance is challenged, however.
"Europe taking U.S. LNG and U.S. LNG challenging Russian pipeline supplies for dominance are two very different things," he noted. "Europe has already taken U.S.-sourced LNG over the past two years with just a couple of export terminals in operation (i.e. U.K., Netherlands, Italy, Spain, Portugal etc.)."
"With more U.S. export facilities coming online, the number of takers and volume taken can both increase, but there is a long way to go to compete (with Russia) for pre-eminence," he said. "That said, Europe's imports will likely grow leaving room for the U.S. to send additional volumes given the growth of exports here in the U.S."