U.S. Strategy To Change Architecture Of Global Oil & Gas Market

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The U.S., being a maritime power, is trying to control the processes of oil transportation, increase the relevance of its energy carriers and “redraw” the map of economic corridors. Against the background of the Ukrainian crisis, the U.S. accelerated the process of implementation of its initiatives, which is reflected in several examples.

Asian refiners are trying to give up their purchases of the Russian Sokol crude, sold at the auction two weeks ago. The attempts to abandon Sokol oil are caused by the involvement of the Russia’s largest shipping company Sovcomflot, which transports oil produced at the Sakhalin-1 project to consumers in North Asia. The company’s tankers faced difficulties with obtaining insurance from international companies after the Sovcomflot Group was put on the British sanctions list.

In this case, Anglo-Saxon law serves as an excellent base for advancing British and U.S. interests, and the U.S. Navy provides stability to the law. Through the war in Ukraine, Washington aims not only to cut Russia off from Europe. The U.S. seeks to kick gas out of the pipelines “into the sea”. All maritime communications are controlled by the U.S. Navy, and the insurances are under control of Anglo-Saxon law.

In contrast to the continental model of integration through the pipelines, the sea transportation does not require synchronization of the interests of the supplier, the transiter and the buyer. It needs a regulator. The United States plays the role of a regulator on the oil market.

As for Russia, the effect of the oil embargo is likely to be insignificant for it since most of the raw materials are transported by tankers and Russia has an opportunity to divert them and sell oil in Asia at higher prices. Russia will reorient itself from one market to another, but the loss of the European market will still hit the country.

As for Europe, a telling example is Germany. Three LNG terminal projects worth several hundred million euros accelerated the pace of development after Germany declared them vital to end dependence on Russian energy. Earlier, these projects had been slowed down as the Nord Stream 2 pipeline reduced the need to diversify supply channels. Potential investors said they would develop the terminals as sites that could host future supply chains of alternative natural gases with zero emissions. Germany is also adjusting to favorable conditions and is doing so via the sea as almost all LNG terminals are located on water.

The U.S. has expanded LNG shipments to Europe. The U.S. Department of Energy has authorized increased exports of liquefied natural gas from terminals in the south of the country. The permits issued by the Department will allow for an increase in LNG supplies by 20.4 million cubic meters per day.

LNG container in Rotterdam

The U.S. has decided to expand gas to Europe amid the crisis in Ukraine, which became known back in March. The permits will allow the export of gas from the Sabine Pass and Corpus Christi terminals, which are located in Texas and Louisiana.

The U.S. Department of Energy said, “U.S. LNG remains an important component of global energy security, and the Department of Energy remains committed to finding ways to help our allies and trading partners supply the energy they need.”

That is, U.S. LNG supplies are seen as a security factor in global trade. Going forward, the U.S. hopes to increase supplies to Europe by another 20 percent. They will transport LNG across the sea, and the navy will ensure the security of supply.

U.S. Energy Secretary Jennifer Granholm said the country’s oil and gas production is growing and will increase to make up for the 1-1.5 million BOE loss in the market.  The increase in U.S. crude supply will be about 1 million BOE, primarily due to a record release of reserves from the Strategic Petroleum Reserve. Granholm also said that global and domestic oil markets may react if the EU bans imports of Russian oil. According to her, this would undoubtedly affect the price of raw materials, because it would lead to an increase in supply on the market.

At the same time, the U.S. is extremely profitable from high gas prices in Europe. Most gas supplies are under spot contracts (quick purchase-payment contracts), also American gas is cheaper than Russian gas, which makes LNG supplies more convenient, but in the future gas prices in both the global market and the US market will increase, so the stability of such trade relations raises questions. The volume of production is also affected, the Americans increase the average of 6 billion cubic meters of gas per year, which is not very much.

The U.S. exports gas to the Asia-Pacific region as well. Thus, in 2021 half of U.S. gas exports came to the APR countries. The complete redirection of U.S. LNG from the APR to Europe will lead to higher gas prices in the APR, which could provoke a crisis.

Thus, the U.S. continues to fight against pipeline supplies, traditionally carried out under long-term contracts, trying to create a single global spot market for LNG. However, long-term contracts play an important role in the LNG business as well, as a producer in an industry with a long investment cycle must understand the sales strategy for many years ahead. And the buyer also wants guarantees of getting the right volumes at a clear price formula. That is why 60-65% of the world LNG trade is carried out under long-term contracts.

Now America is trying to create a new architecture for the gas market in the world, the main tools of which are fleet and British law. However, the formation of such a structure is closely associated with new challenges and risks for all market participants. In this regard, the prospects of the new structure of the gas and oil market, especially the attempts to switch to spot contracts, seem very doubtful.

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