Gas geopolitics: Is US LNG really a game-changer in eastern Europe?

Lithuania imported its first ever cargo of US LNG on August 21, the event celebrated by way of a special welcoming ceremony attended by key Lithuanian government figures.

The US State Department was also on hand to mark the occasion, tweeting that it wanted to "congratulate the government of Lithuania on receiving its first shipment of US LNG."

But does this single cargo of LNG from a privately owned US supplier to a very small European gas market actually matter? Is its geopolitical value being vastly overexaggerated?

Or does it signal the start of an influx of US LNG into eastern Europe as countries look to reduce their dependence on Russian gas, kickstarting a period of intense competition and a price war?

Clearly the shipment is important -- it is the first time a former Soviet Union country has bought LNG from the US. It comes as relations between the old Cold War foes sink to new lows, with Washington on August 2 passing a new sanctions law against Moscow.

US President Donald Trump can claim the Lithuanian delivery is further proof of the efficacy of Washington's new energy diplomacy strategy -- helping countries previously dependent on Russian gas to diversify their energy supply while at the same time pushing US gas into new markets.

And another cargo of US LNG is also expected to arrive in Lithuania in mid-September after a one-off deal with Gas Natural for a delivery from Sabine Pass.

But these are just two spot cargoes -- Lithuania's state-controlled energy holding company Lietuvos Energija already has term deals in place with Norway's Statoil and trading company Koch so it is unlikely to need additional cargoes in the medium term.

Lithuanian annual gas demand is only 2.6 Bcm and the size of the market is declining, so it is never going to become a significant buyer of US LNG.

In addition, the companies involved in these trades are pragmatists at their core -- economics still trump (pardon the pun) politics.

For the suppliers of US LNG cargoes (the likes of Sabine Pass operator Cheniere and current offtakers Shell and Gas Natural) it is a question of securing the best price in whatever market is available. Since the start of US LNG supplies in February 2016 the vast majority have gone to more premium markets in the Americas and Northeast Asia.

In some cases, US LNG cargoes are also being used as substitutes for other deliveries into specific markets -- Statoil for example bought a cargo of US LNG for delivery into the Gate terminal in the Netherlands this summer in place of its normal supply route from the Snohvit LNG facility in the Barents Sea, which was down for maintenance at the time.

For buyers, securing gas at attractive prices is also the key component in any deal, although diversification of supplies has been shown to give Russian gas customers increased bargaining power with Gazprom. Lithuania is a case in point.

Its LNG import terminal started operations at the end of 2014, proving immediately beneficial for the small Baltic country, enabling Vilnius to win a much better price from Gazprom for its Russian gas supplies in 2015.

But the effect was relatively short-lived: Lietuvos Energija CEO Dalius Misiunas told S&P Global Platts that the price offered by Gazprom for 2016 was actually higher again -- prompting Lietuvos Energija to forgo a contract that year. Instead, it imported Russian gas that had been left over from its previous contract.

Things returned to normal in 2017, though, Lietuvos Energija securing a one-year deal with Gazprom at what it called market prices.

POLISH IMPORTS

While Lithuania is more of a symbolic buyer of US LNG, there was a sign earlier this year that its larger neighbor Poland could look to secure a longer-term US LNG deal.

Polish President Andrzej Duda, during a much-hyped visit by President Trump to Warsaw in July, said commercial negotiations were under way for a long-term US LNG supply deal to Poland as Warsaw looks to position itself as a hub for moving gas onward into Central Europe -- particularly to Ukraine.

"After the relevant negotiations -- and I know those negotiations are already ongoing -- are concluded there will be a long-term contract for US LNG deliveries to our terminal in Swinoujscie," he said.

Trump said it would take "about 15 minutes" to negotiate an LNG import deal with Poland.

Poland's state-controlled gas company PGNiG and the US' sole LNG producer Cheniere Energy already agreed a spot LNG cargo earlier this year, which arrived last month at Swinoujscie.

The first US LNG cargo delivered in June to Poland was the first delivery of US LNG to northern Europe, and was also heralded by Warsaw as a "historic" event as it brings further energy independence to Poland.

PGNiG may be state-owned, but it is still governed by the rule of economics. It could be argued that the fact that the LNG came from the US was incidental. There was no talk at the time of PGNiG's 20-year contract with Qatargas, which will supply about 1.3 Bcm of gas to the terminal this year.

And deliveries from Qatar are set again to rise by 93% to 2.9 Bcm/year in 2018-2020.

For PGNiG, securing LNG at attractive prices is the priority, so much so that the Polish company set up its own LNG trading desk in London this year.

Still, as US LNG export capacity ramps up in the coming years, it would not be a surprise to see more cargoes landing at Klaipeda and Swinoujscie. Some of the gas may even by forwarded onto other markets in the region.

Further out, there is the possibility that US LNG could access other parts of eastern Europe via the planned LNG terminal in Croatia and a new facility in Greece.

But there is already an LNG import terminal in Greece, and so far it has not attracted any US LNG despite the fact that the gas could flow from there northward to Bulgaria, Romania and even theoretically Ukraine.

So what is the problem? Put simply, Russia. Russian gas is still cheap and abundant. And buyers in eastern Europe would be unlikely to turn down gas that makes economic sense, regardless of politics.

Poland has said it could eliminate Russian gas imports altogether in the 2020s through more LNG and a pipeline linking it to Norway -- but does it make economic sense? Warsaw has said it would carry on buying Russian gas "if the price is right." So, when it comes to the crunch, it looks like economics will still come out on top.

Watch this space.

US LNG EXPORTS TO EUROPE FROM SABINE PASS SINCE FEBRUARY 2016

Spain (7) Murgados Jul 22, 2016 Sagunto Jan 16, 2017 Feb 11, 2017 Cartagena Jan 26, 2017 Jul 21, 2017 Barcelona Feb 17, 2017* Huelva Aug 24, 2017

Portugal (6) Sines Apr 26, 2016 Feb 6, 2017 Feb 13, 2017* Jun 13, 2017 Aug 2, 2017 Sep 1, 2017

Italy (2) Livorno Dec 5, 2016 Jun 27, 2017

Malta (1) Marsaxlokk Jan 28, 2017**

Poland (1) Swinoujscie Jun 7, 2017

Netherlands (1) Gate Jun 8, 2017

UK (1) Isle of Grain Jul 8, 2017

Lithuania (1) Klaipeda Aug 21, 2017

* Partial cargoes delivered aboard the Clean Ocean ** Partial cargo that unloaded first in Jordan

Source: Platts Analytics' Eclipse Energy