The option value of Gazprom's spare capacity under threat of US LNG on european gas market

As part of its policy to establish a single, competitive market for gas, one of the priorities for the European Union is to diversify its sources of supply, in the face of the oligopoly formed by Russia, Algeria, Norway and Qatar. Under these conditions, the prospect of massive US LNG experts from shale gas development is challenging the strategy of the EU's incumbent suppliers. The structural and cyclical deveiopments of this market-competitive market, excess supply (overcapacity of liquefaction), weak demand-have already led incumbent suppliera to adapt to maintain their market share. The present article seeks to determine how US gas exports to Europe might change the behaviour of major incumbents and the strategic options open to them. The Russian gas company Gazprom may serve as a baseline for our analysis. With a 30% share of the EU gas market, it is a major supplier, exerting an influence on prices and enjoying several comparative advantages (Boussena and Locatelli, 2016). US LNG exports could thus compete strongly with Gazprom in the NorthWest Europe market, the heart of the Russian company's strategy. On the latter, Gazprom is a major player, but it is net a "price maker", especially since most of its sales (nearly 80%) are made in the form of long-term contracts (TOP), with a price indexation formula based on those of oil. Today, the major challenge for Gazprom lays not so much in current US LNG exports as in future projects because of the resulting export volumes. This new conjoncture is forcing Gazprom to review its strategy. For the time being, with an oversupply market, the latter have simply adapted passively, mainly by revising some clauses of the long-term contracta which govern sales to the EU and more particularly by decreasing its prices (due to its low production costs, one of the main comparative advantages). However with the threat of growing competition, such strategy may not be enough to cope with the scale of US LNG experts. Therefore, Gazprom's strategic behaviour, in the image of Saudi Arabia in the oil market, couid be to define a strategy of uncertainty about future market conditions. To this end, Gazprom has a second comparative advantage, which is that of its unused delivery capacity (in terms of production and transport). With a significant spare capacity (150 Bcm) since the beginning of 2010 and in the specific context of the European gas market-hybrid, in overcapacity and not totally globalized-, Gazprom is able to influence the evolution of prices by using it or net on the spot markets. Likewise, the spare capacity may be a strategic variable that will strengthen the context of uncertainty in which decisions concerning new LNG projects are made. Seminal theoretical contributions (Spence (1977) and Dixit (1980)) have attempted to take into account the excess capacity and its rote in competition among firms. In recent years, real-options literature (Smets (concentrated on the effect of uncertainty on competition and interaction between firms in a market.