Gazprom to face new challenges after U.S. starts LNG shipments to Europe

The February delivery will be of U.S. liquefied natural gas (LNG) transported by sea to custom built terminals, challenging Russia's land locked pipelines, as producers turn from the wilting Asian market to Europe, according to the report.

Europe has attained strategic importance for the United States, where companies that have already invested $60 billion in building giant export infrastructure are offered a lifeline by the continent's deep markets and dozens of under-used import terminals.

With U.S. exports set to exceed 60 million tonnes per year in 2019, EU regulators see LNG as the solution to rising Russian market dominance, the report notes.

"If you have massive U.S. LNG building up in 2017 and 2018, new Australian supply and Qatar - this means lots of LNG into Europe, at that point Russia will have to fight," senior gas analyst Thierry Bros of Societe Generale said.

The question is whether Gazprom will defend its market share by expanding output and lowering prices or by restraining production, as it did during the last gas market glut in 2008-2009, Stephen O'Rourke, director of gas research at Wood Mackenzie, said.

He believes Gazprom would need to reduce spot gas prices below $4 per million British thermal units (mmBtu), versus around $5.65 per mmBtu now, to shut Europe off to U.S. imports.

Gazprom declined to comment on strategy.

Thanks to a weaker ruble, the company has managed to cut its production costs, while profits on dollar-denominated sales of gas to Europe have soared, making the producer more resilient to lower prices.

Gazprom is also said to have huge gas reserves and spare pipeline capacities with which to boost exports.

However, the coming of U.S. LNG has already changed behavior of the Russian energy giant.

Gazprom held its first public auction for spot gas supplies in October, a U-turn on previous policy built around sticking with long-term deals.