LNG exports have been viewed as a panacea to the troubles facing U.S. natural gas markets, but challenges to the segment will continue as more export terminals are scheduled to begin operations in the next five years, according to a report from Wood Mackenzie.

There has been speculation that the greatest threat to U.S. LNG exports penetrating the European market in a large capacity will come from Russia; similar to how Saudi Arabia has undercut U.S. crude oil prices even before volumes were allowed to be exported into the global market. However, there are more important factors that will determine the amount of U.S. LNG that will be exported.

“Our analysis shows that while Russia’s export strategy is important, ultimately U.S. LNG export utilization will be influenced more by the price of other commodities: of U.S. gas, oil and, particularly, of coal, which will determine European spot prices through coal-gas switching in the power sector,” Stephen O’Rourke, research director of global gas supply at Wood Mackenzie, said in a release.

The research firm states that customer choice rather than a Russian response to U.S. supplies gaining market share in Western Europe would be more important to determining the amount of U.S. LNG imported into Europe.

“Should oil prices remain low, Russian oil-indexed contract gas will remain cheap and buyers will maximize their offtake of Russian gas. At low oil prices, customer choice rather than strategic Russian decision making would allow Russia to retain over 30% of the circa 490 billion cubic meters European market and threaten U.S. LNG export volumes. If coal prices also remain low, monthly European gas prices could fall to $3.85 per million Btu [British thermal units], and utilization of U.S. LNG export capacity could average 85% between 2017 to 2020,” O’Rourke said.

Russia should maintain a strong portion of the European gas market even if oil prices improve as Wood Mackenzie forecast that its market share would only drop to 25%. Russia could even increase market share by selling piped gas at spot prices rather than at prices linked to the oil index.

While this would limit U.S. LNG export utilization to 40%, the investment firm said this was unlikely though since this would push European spot prices to low levels for a sustained period. “In addition to undermining existing contractual supply agreements, securing additional pipeline access for export volumes would require the tacit support of Ukraine and the EU, a dependence that appears politically challenging,” O’Rourke said.

Based on these findings, Wood Mackenzie forecast that U.S. LNG export capacity utilization will vary from 54% to 100% from 2017 to 2020 with higher coal prices and U.S. gas prices remaining low being the supporters of the high side of this rate.

Frank Nieto can be reached at fnieto@hartenergy.com.