When Donald Trump promised to raise U.S. natural gas exports in Europe in a speech in Poland, he was cheered to the rooftops.

Such a reaction will have troubled executives at Gazprom, Russia’s state-owned energy group, as it marks an escalation in the battle over gas supplies in the prized European market.

That fight has been years in the making, with the growth of U.S. LNG exports set to challenge the established supplies of the company.

It is a market that Gazprom considers its backyard as the dominant supplier of European gas and with its monopoly on pipeline exports from Moscow.

At first glance, Gazprom has a strong hand in a competition where it has home advantage, vast reserves, low production costs, and ships its gas through pipelines, which is much cheaper than freezing it and loading it on to an LNG tanker—and then having to regasify it once it reaches its destination.

But the arrival of U.S. gas in Europe is also taking on a more political edge.

Fresh U.S. sanctions against Russia signed into law by Trump on Aug. 2 over alleged meddling in the U.S. presidential election could target energy export pipelines that Washington fears will increase Moscow’s influence over Europe’s gas supplies.

Jason Bordoff, an ex-adviser to former President Barack Obama, who runs Columbia University’s Center on Global Energy Policy, suggests that while LNG is normally more expensive, Gazprom will still face painful choices as supplies from rivals make their way to Europe.

The Russian group has to pick between “competing on price and defending market share” and “cutting back on supply to keep prices high,” he says.

If Gazprom decides to opt for the former, which Bordoff thinks the evidence points to, then it will need to accept it is entering a price war that may hit revenues even if it can keep raising sales in a region hungry for energy.

The U.S. president’s overture to countries such as Poland chimes with the mood among pro-NATO politicians in central Europe, who resent Moscow’s leverage over their gas supply with their web of import pipelines.

Some might happily rely more on the U.S. for gas, even if it means paying more.

Sanctions are also complicating the battle, particularly if they hit Gazprom’s Nord Stream 2 pipeline to Germany, which is under construction. That has rattled Russian politicians who are keen to talk up their ability as a cheap supplier of gas to Europe.

“The attempts to derail Nord Stream 2 are part of unfair competition practices by potential suppliers of LNG, which is more expensive compared with natural gas delivered by pipelines,” Russia’s energy minister Alexander Novak told the Financial Times before Trump signed the sanctions. “These politically motivated economic restrictions will ultimately make the energy resources on the market more expensive.”

Novak’s comments highlight the risks for some European countries, with analysts saying the EU will need to increase gas imports in the short term at least. This is due to falling domestic production in countries such as the Netherlands and the UK.

Nord Stream 2 is part of Gazprom’s response to that forecast jump in demand. It has inked an agreement with European energy majors including Royal Dutch Shell, Austria’s OMV, France’s Engie and Germany’s Uniper and Wintershall to finance half the €9.5 billion (US$11.3 billion) to build the pipeline, which will add 55 billion cubic meters (Bcm) of annual capacity to its European flows, delivered under the Baltic Sea.

Last month, it also began work on doubling the capacity on its under-construction Turkish Stream pipeline, raising capacity to 30 Bcm in annual shipments for Turkey and southern Europe.

The Russian group has already increased exports to Europe by an annual 12.3% in the first six months of 2017, following a 12.5% annual increase in 2016.

Gazprom CEO Alexei Miller believes there is no contest in the demand stakes.

“Our gas is enjoying increasing demand in Europe,” he says. “Our gas demand growth will continue.”

Gazprom officials argue that countries such as Poland will have to pay more for ships of U.S. LNG if they reduce their imports of piped Russian gas.

However, the growth of LNG from the U.S. and producers such as Australia and Qatar is connecting regional markets that were previously separate, allowing more gas to flow where it is most needed. Supplies of the super-cooled fuel are expected to grow almost 50% between 2015 and 2020.

This has already had the effect of partially transferring low U.S. prices, depressed by shale gas production, through to Europe and Asia.

Gazprom believes it still has advantages on price, particularly as it has started to loosen pricing controls to many of its main European customers.

Currently, the U.S. gas price is about $2.85 per MMBtu, a measure of energy content in fuel. This rises above $6 after factoring all the associated fees for shipping, liquefaction and gasification, according to Gazprom estimates. This compares with about $5 per MMBtu in much of Europe, where Gazprom accounts for about one-third of supply.

Gazprom, which historically used oil-linked prices, has also moved toward pricing more supplies against European gas hubs, which buyers think offer a fairer reflection of the market.

Some European countries would like to break the Russian stranglehold over the market.

“LNG is a point of leverage,” says Ira Joseph at the energy consultancy Pira.

Charif Souki, head of energy group Tellurian, points out that LNG was not meant to be a replacement for pipeline supplies as it could not meet the demands of the European market.

Instead, he thinks it provides flexibility. “Gas can now move where you need it in the world. That’s the biggest challenge for a company like Gazprom.”

The added flexibility and increased competition in the market may bring down prices for European customers. As a result, this may prove to be one U.S.-Russian battle where the winners are customers in Europe—from utilities in Germany to energy-intensive industries in the UK.

Centrica To ‘Take Or Pay’

Deal structure counters price risk for suppliers

While it may appear difficult for U.S. LNG to compete on price in Europe, the picture is more complicated than it looks.

Americans enjoy some of the lowest market-rate gas prices in the world thanks to the glut created by the shale boom.

But once the costs of liquefaction, shipping and regasification are added, the U.S. total starts to creep above those in Europe.

Many LNG deals have a fixed “take or pay” portion for which long-term buyers have to pay whether they need the gas or not.

One such buyer will be Centrica, which is due to start lifting enough LNG from the U.S. Gulf Coast in 2019 to supply 1.8 million UK homes.

Such sunk costs can make it more economical to lift the gas and sell it on, whether to customers or rival traders, even when gas from Russia or other suppliers is cheaper. That makes U.S. shipments of LNG to Europe viable.

Europe is also favored as a destination for excess cargoes because it has surplus regasifaction capacity. Centrica can take LNG imports at the National Grid’s Isle of Grain facility in Kent.

Russia has the ability to undercut U.S. LNG in Europe to protect its market share, and could even “flood the market with cheap gas,” said S&P Global Platts, the energy data provider, in a research paper. “[But] what is sure is that U.S. LNG is coming to Europe.”

—David Sheppard