Hot Air Versus Hot Cash – The Europeans Prefer Russian LNG To US LNG

Yves here. The literature on cognitive biases has many examples of how presenting the same economic proposition in different terms, such as insurance versus a bet, will elicit different responses. Here we has the Russian gas cognitive bias. If it comes via a dedicated pipeline, as in no way, no how can Europeans kid themselves as to what they are buying, then it’s supporting Putin’s war machine and continuing to consume it would be sacrilegious. But LNG via tanker? Most Europeans seem to regard that as all a muchness.

Speaking of Putin, he was early to observe and make use of the Russian gas cognitive bias. He and Erdogan are confident that Russian pipeline gas, when it goes through a Turkish hub and will be presumed to have been mixed with gas from other countries, will be deemed to have lost its Russian character.

By John Helmer, the longest continuously serving foreign correspondent in Russia, and the only western journalist to direct his own bureau independent of single national or commercial ties. Helmer has also been a professor of political science, and an advisor to government heads in Greece, the United States, and Asia. He is the first and only member of a US presidential administration (Jimmy Carter) to establish himself in Russia. Originally published at Dances with Bears

When Ursula von der Leyen (lead image) was nominated in 2019 to be Germany’s candidate to lead the European Commission, German politicians from her own party privately described her as too stupid and potentially too corrupt to be risked inside Germany during the political succession race to succeed Angela Merkel as Chancellor. German military sources say von der Leyen was the stupidest defence minister in German military memory.

Since the war began in February, von der Leyen did not say a true word until November 30, when she announced that Ukrainian military deaths had reached more than 100,000, and civilian fatalities more than 20,000. Within hours these numbers were removed from the published record of her speech.   Von der Leyen’s admission implied the war toll of Ukrainian wounded is more than 300,000, and that the sum of military and civilian casualties has already reached half a million. Von der Leyen was confirming Russian estimates and contradicting the Kiev regime’s propaganda.

In September von der Leyen announced her support for a price cap on the international trade in exports of Russian pipeline gas and liquefied natural gas (LNG).   Last month she said the European Union is “ready to go” with a price cap on Russian oil exports.

However, the European and Asian gas and oil trade is not only contradicting what von der Leyen is claiming; it is demonstrating they are profiting from her public lies. In the gas market there is new evidence that the French, Dutch and Belgian governments are allowing the purchase of record volumes of imported Russian LNG, and the re-export of this gas at a profit to other European states, including Germany. The arbitrage – that is, the profit from buying Russian LNG at the Russian selling price and then reselling it at a premium to European consumers – is so lucrative, the Chinese are diverting their contracted volumes of Russian LNG to Europe.

Olga Samofalova, the energy market analyst at Vzglyad , reported yesterday on how the markets are defeating the sanctions.

Source: https://vz.ru/

The translation which follows is verbatim, without editing. The illustrations and URL links have been added.

WHY EUROPE IS BEING SAVED BY RUSSIAN LNG, NOT AMERICAN LNG

December 1, 2022
Text: Olga Samofalova

While pipeline gas supplies from Russia are under scrutiny, the European Union (EU) is quietly buying up more and more volumes of the other Russian gas – that is, liquefied natural gas (LNG). Europe’s costs of importing Russian LNG have soared to record levels, Bloomberg has discovered. How did Russia start supplying more liquefied natural gas to Europe and, most importantly, why do the Europeans themselves see nothing terrible in this?

As you know, Brussels has imposed a Russian coal embargo; an oil embargo will start operating in a week. A number of countries have refused pipeline gas supplies; others have let technical and bureaucratic problems of the “Northern Streams” take their course. They claim not to have noticed the destruction of the Nordstream pipelines or the way in which the Ukraine has been so unaffected by the present situation that it has restored the transit volumes of gas across Ukrainian territory.

At the same time, Europe’s costs for importing Russian LNG in 2022 have soared to a record level, according to Bloomberg. The EU has increased the purchase of LNG from Russia by about 40% over this year. The EU spent a record €12.5 billion ($13 billion) on Russian LNG from January to September – five times more than a year earlier. This is a bitter pill for many countries of the bloc, which imposed tough sanctions on the Kremlin in order to deprive it of funds to conduct its military operations in Ukraine, the western news agency writes.

Source: https://www.bloomberg.com/

Source: https://www.bloomberg.com/

As ship and port tracking data show, growing demand from countries such as France and Belgium has helped make Russia the number-two LNG supplier to northwest Europe this year. In the first place is Qatar, which traditionally supplies LNG to the European region. The current situation is that northwestern Europe accepts significantly more Russian than American LNG, although it was the United States which promised to save the Europeans with its gas after the removal of Russian pipeline supplies.

It should be understood that Belgium, the Netherlands and France accept Russian LNG, but then it is distributed throughout Europe. Among European countries, only the UK and the Baltic states have stopped buying Russian LNG.

Russian LNG will continue to flow to Europe, and most European countries are happy to turn a blind eye to this, says Anne-Sophie Corbeau, a researcher at the Center for Global Energy Policy at Columbia University. Because the EU is faced with a real physical shortage of natural gas, this leads not only to the high cost of the resource, but also to a reduction in the work of industry, and therefore of their  demand for fuel.

There are two LNG plants in the north-west of Russia. These are Gazprom’s Portovaya  and Vysotsky LNG. However, these are small plants; the first of them started working only this autumn.   Accordingly, we are mainly talking about the supply of Novatek’s Yamal LNG to Europe. Initially, the Yamal LNG plant was counting on delivering its supplies to Asia, primarily to China. And until 2022, the main volumes from Novatek did indeed go there.

Why has the situation changed so much this year?

Firstly, for the first time, the European market, not the Asian one, has become the premium market for gas. Until 2022, gas prices in Europe were always lower than in Asia. Now everything is the other way around, so the growth in Russian LNG supplies is explained by the economic or commercial factor, says Igor Yushkov, a leading expert of the National Energy Security Fund, an expert at the Financial University under the Government of the Russian Federation.

The second point is that there are ice restrictions for the supply of Yamal LNG to Asia. “As soon as the navigation season on the Northern Sea Route ends, LNG can only be shipped to Europe. But when the premium market was Asian, often what happened in winter was that Yamal LNG was shipped to Europe by ice-class tanker, , then reloaded on a conventional tanker, and then this LNG cargo went through the Suez Canal to Asia,” explains Yushkov. But this year, all free LNG from the market is being vacuumed up, not by China, but by Europe.

“Therefore, even in the summer, when Novatek Yamal had the opportunity to supply LNG via the Northern Sea Route to the East, the main volumes still went to the European market for economic reasons,” Yushkov adds.

The third reason is the overall increase in the capacity of the Yamal LNG plant, where all four stages are operating at full capacity this year. The design capacity is about 16.5 million tonnes, but by the end of the year, much more will be produced – about 20 million tonnes.

It is noteworthy that almost 16 million tonnes are contracted and have been delivered under long-term contracts to the signing customers. But the gas which the plant produces in excess of these volumes is not under contract and this is going to the spot market. The owner of Yamal LNG, Leonid Mikhelson, has said that the company now earns more from these surpluses, which amount to about 4 million tonnes, than it earns from the contract sale of all the other 16 million tonnes.

This is easily explained. The contracts were signed when LNG prices were significantly lower than they are now. Buyers of Russian LNG under these contracts are in a very favourable position for themselves. But Novatek  is already selling the “surplus” at spot prices – and they are many times more expensive.

Source: https://www.bloomberg.com/

“Even the Chinese company CNPC, which has a contract with Novatek, sells part of this LNG on the European market, acting as a trader,” says Yushkov. We are talking about the fact that it is profitable for a Chinese company to resell LNG to Europeans and get a favourable margin on the difference between the purchase price (which is prescribed in the contract) and the spot price at which Europeans buy.

Gas consumption in China has decreased, firstly, due to the ongoing lockdowns this year. Secondly, because of the increase in coal consumption against the background of the withdrawal of the European environmental agenda into the shadows. China has increased its own coal production and increased coal imports from Russia at attractive prices.

Thus, the growth of Russian LNG supplies to Europe is explained by economic factors. And that’s why the EU is quietly increasing its purchase and does not consider this a problem, whereas there is a constant chatter in European political circles about pipeline gas from Russia and the necessity of getting rid of it.

According to Bloomberg, the share of Russian pipeline gas in the region has decreased from 30% in 2021 to 10% in 2022. By contrast, the share of LNG in Russian supplies to Europe is now  close to half.

“Europeans do not perceive LNG as a kind of national gas. They do not have the same negative attitude towards LNG as they have towards pipeline gas. Perhaps this is all because of the  demonization of Gazprom, which has been obvious for more than a year now. This is because pipeline gas has always come from Russia and from Gazprom until now,” says Yushkov. Whereas LNG was initially perceived as the gas which would rescue everybody from Russian gas.  First of all, the United States actively advertised its LNG as the salvation for Europe. In other words, the European perception is all about effective PR and the right headlines in the media, which help to form the public and political distinction between “good gas” and “bad gas”.

Source: https://ycharts.com/
Bloomberg has been reporting the surge in Chinese “discount” buying of Russian LNG.

At the same time, Yushkov notes that, in principle, the Europeans have not refused Russian gas, with the exception of several countries. This is despite the fact that European politicians have talked about reducing the Russian gas share and in a few years’ time abandoning it altogether. However, problems have arisen with the failure to deliver this gas through the pipelines. The  reasons for that,  as you know, are well known and quite different.

The Yamal–Europe gas pipeline was closed by the Poles due to the nationalization of Gazprom’s share in the pipe operator. Ukraine refused to accept gas through the Sokhranovka pumping station, so only Sudzha has remained.

According to the contract, 109 million cubic meters per day should go through Ukraine, and for now the flow is two and a half times less – 42 million cubic meters. The flow to Germany through Nord Stream-1 gradually stopped by September due to sanctions problems with turbines.  The flow through Nord Stream-2 was halted due to the suspension of certification, and then both these pipelines were  blown up — in seemingly safe waters of Europe right in front of NATO forces. Europe would be happy to buy Russian gas through the pipelines, but there is no possibility, Yushkov believes. The channels have been completely cut off.