Increased Russian pipeline gas imports into Europe may indirectly affect the U.S. market.

A move by Russian integrated energy company Gazprom to tie a portion of its sales of natural gas in Europe to spot prices may see increased liquefied natural gas (LNG) imports enter a recently oversupplied U.S. market, according to Barclays Capital’s Natural Gas Weekly Kaleidoscope’s “Pushing Russian Gas into the U.S.”

“A few years back, analysts following the U.S. gas market were expecting that by 2010, the U.S. would need substantial amounts of LNG to bridge the gap between supply and demand. Both liquefaction and regasification projects were constructed accordingly. While little of the LNG was committed to the U.S., LNG business plans did anticipate that the U.S. would be a large, liquid and hopefully lucrative dumping ground for any spare supplies,” according to the report.

However, the success of U.S. unconventional gas producers led to oversupplies in the U.S. gas market just as many of these LNG liquefaction terminals came online. Additionally, demand for natural gas fell in both Europe and in the U.S., which has made things especially rough for European gas producers.

Although LNG demand is growing on a worldwide basis, this growth hasn’t been fast or high enough to absorb the increased supplies of natural gas from around the world. The Barclays Capital report noted that in 2009, much of this increased LNG production was shipped into continental Europe.

“While aggregate European demand fell 3.3 billion cubic feet per day (Bcf/d), or 6.3%, through November, LNG imports rose 1.1 Bcf/d. This occurred at the expense of pipeline imports to Europe, which averaged 1.6 Bcf/d less than the prior year for January-November 2009,” according to the report.

The primary reason that pipeline imports could be pushed out of the market by LNG imports in Europe is because much of the piped gas in Europe is done through long-term contracts that are typically 20-30 years in length and are tied to the prices of a basket of crude oil, oil products or other energy products, with many of these prices linked to prices from six to nine months prior.

Consequently, when natural gas supplies overgrew demand, natural gas spot prices in Europe began to closely resemble U.S. natural gas prices and gave buyers a pricing incentive to turn to LNG imports rather than pipeline imports that were tied to much higher crude prices.

While these prices continue to benefit pipeline importers, they are also encouraging buyers to limit their intake to the contract minimums and reduce their volumetric intakes by 10% to 15%.

In order to increase its pricing competitiveness with LNG importers, Gazprom officials announced they would allow up to 15% of its sales in Europe to be linked with natural gas spot prices. The report noted this was the first time that Russian gas would be shipped into Europe under any form of spot pricing.

“Stated more directly, it appears to us that Gazprom has priced a portion of its gas precisely to compete head-on with other spot-linked supplies,” said the report’s authors, James Crandell, Biliana Pehlivanova and Michael Zenker.

This may result in the additional LNG shipments that would have flowed into Europe instead being diverted towards North America, where there is still significant storage capacity compared to other world markets. However, the authors noted that this doesn’t ensure that these volumes will be acquired or that additional LNG will be shipped into the U.S., but it does create more opportunities for increased LNG imports to arrive in North America.

“If European consumers turn to pipeline gas imports instead of spare LNG … LNG imports to Europe could fall relative to last year. This would push more LNG cargoes into the U.S., meaning that, effectively, Russian spot gas would push LNG into the U.S.,” the authors stated.

Should this happen, Barclays Capital anticipates U.S. LNG import levels increasing to 3.2 Bcf/d in 2010. However, it was noted that should LNG importers remain the preferred choice for incremental gas supplies in Europe, it would continue to draw LNG supplies away from the U.S. – Frank Nieto