Taps Coogan – October 15th, 2022

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The oft-stated reason for Germany’s decision to double down on Russian natural gas via NordStream1 and 2, while refusing to build LNG import terminals, was to gain access to ‘cheap’ Russian pipeline gas.

While there is no doubt that Russian gas could be delivered more affordably to the EU than LNG because of the advantages of pipelines, Russian pipeline gas rarely was much cheaper than LNG.

As the following chart highlights, Russia has been charging essentially LNG prices for its pipeline gas to the EU for years.

Since 2017, the average price paid by the EU for Russian gas has been $10.37 per mBTU. The average price of LNG delivered to Asia was just slightly higher at $11.98 per mBTU and includes greater shipping distances than incurred on US LNG going to Europe. The average cost of US natural gas during the same period was just $3.36 per mBTU.

The cost of US LNG in Europe prior to the current energy war had long been reported as the Henry Hub price plus 15% and then around $3.50 per mBTU for shipping. Using that formula, US LNG delivered to the EU likely cost an average of $7.36 per mBTU from 2017 to 2020, slightly less than the Russian pipeline gas price of $7.49.

That’s why there was a healthy but small trade in US LNG exports to the EU for years prior to the current energy crisis. However, the EU lacked sufficient LNG import capacity and interconnector pipelines to meaningfully create price competition in EU gas markets.

Ironically, more LNG infrastructure and interconnectors in the EU and at exporters, not another pipeline to Russia, would have been the best way for the EU cap Russian prices back then as less than US prices plus shipping and avoid Russia having the leverage to cut off supplies and boost prices now. What was missing was always price competition, not pipelines. Germany did the exact opposite. Now they have neither sufficient Russian gas nor LNG.