A new trade route for Russian liquified natural gas (LNG) is opening up north of the Arctic Circle as some of the warmest temperatures on record are melting the ice caps that lock ships out of the area. This is giving Russia an edge in shipping its LNG to its core European market, thus sparking a new form of "gas wars." This is a setback to U.S. LNG exporters who are looking to increase their market share in Europe at a moment where the Trump Administration is alienating it trade relationships with China.
Europeans currently depend on cheap Russian gas with at least 33% of imports coming from Russia. Russia's state-controlled gas giant Gazprom (OGZPY) has consistently increased export volumes to Europe by building the TurkStream pipeline in southern Europe through the Black Sea and the Nord Stream 2, the second tranche of the pipeline under the Baltic Sea. The first part of the Nord Stream pipeline was built to circumvent any land transit for Russian gas through the Baltic states and Poland, thus directly influencing the supply of gas to Western Europe. Gazprom is the majority owner of Nord Stream with 51% stake, and is also the operator and sole producer, seller and transporter of the gas.
Earlier this year the Eduard Toll vessel, a Teekay (TK) owned and operated vessel, became the first LNG icebreaker tanker to cross the full Northern Sea route in the winter. It traveled from a South Korean shipyard to Sabetta and collected a cargo there from the Yamal LNG plant, then delivered it to France, cutting 3,000 nautical miles off the traditional route through the Suez Canal.
This new route is a boost for Russia's efforts to expand its reach in the European gas market, most notably around the Yamal LNG gas liquefaction plant in northern Siberia. The project, owned by Total SA (TOT) and Novatek (NOVKY) , includes 15 custom-built tankers capable of cutting through the Artic ice, enabling them to sail without help from icebreakers to Europe year-round and to Asia during the summer months. This reduces shipping costs for LNG companies, benefiting buyers and traders of the fuel, including buyers like PetroChina (PTR) and traders like Gunvor Group.
According to a Bloomberg article, the Bering Sea between Alaska and Russia lost about half its ice coverage during a two-week period in February. Routes like that may save Yamal $46 million in shipping costs for the remainder of the year and those savings could quadruple by 2023. The Northern Sea route saw 9.7 million tons of cargo shipped through it in 2017. There were 615 voyages along the Northern Sea route this year through July 15, about the same as in 2017. The Russian government is targeting cargo traffic through that route totaling 80 million tons by 2024.
European and U.S. efforts to open and diversify the natural gas market in Europe seems a distant wish as Russia carries forward its pipeline expansion with the support of Germany. Russia's gas cannot simply be replaced by U.S.-sourced LNG, as it represents only a small supply compared to the continent's overall gas consumption. The upside for European markets is that U.S. LNG supplies increase the energy security and stability of Europe.
