Europe may absorb more LNG in 2018 because of growing global liquefaction capacity. But Russia's response to increasing LNG supply remains unclear, panellists at the European Gas Conference in Vienna said.
Suppliers of pipeline gas to Europe may have to maintain lower prices to keep out uncommitted LNG cargoes, some panellists said - either through contract renegotiations or selling supply at European hub prices.
UK NBP gas prices would have to be at a premium to the US’ Henry Hub of $1.45/mn Btu or less to discourage additional US LNG imports, consultancy Gas Value Chain managing director Wolfgang Peters said - the premium covers variable liquefaction costs, around 50¢/mn Btu for shipping and regasification costs, he said.
But the UK premium could be as low as around $1/mn Btu to attract US LNG to Europe, according to BP head of Russia and CIS economics Vladimir Drebentsov.
Russian state-controlled Gazprom expects little competition from US LNG, at least this year. But it would be in the company's interest to compete with this growing supply source, given its declining domestic gas sales, Drebentsov said.
Gazprom's sales to Europe, excluding the Baltic states, and Turkey grew substantially in 2016 as it defended market share. It increased sales through trading subsidiaries and gas auctions to boost exports, although buyer nominations under long-term contracts were also strong.
Russian gas production rose by 0.68pc to 653bn m³ last year, but Gazprom's output of 406bn m³ was down by 0.7pc, despite record-high exports. The firm's declining sales in Russia will drive Gazprom to seek more market share in Europe, Drebentsov said. Gazprom plans to build new pipelines to Europe - including 55bn m³/yr Nord Stream 2 and 31.5bn m³/yr Turkish Stream - but increasing sales would also require some continuation of transit through Ukraine, he said.
Competition with US gas
US LNG will remain a competitive supply source in Europe, because strong competition in US shale gas production and incentives to minimise losses from projects continue to weigh on Henry Hub prices, Drebentsov said. Russia has already renegotiated long-term pipeline contracts in the face of competition from European trading hubs and will probably do the same to counter competition from LNG, particularly from the US, Peters said.
The option, alone, to import US LNG puts downward pressure on pipeline sellers' prices, BP's gas and marketing head of origination, Chris Schemers, said. Lithuania forced a price revision in its Gazprom supply contract in 2014 because of its LNG import capacity, Lithuania’s government said at the time. But the competition between pipeline and LNG suppliers should not be described as a "gas war", Schemers said.
And rather than generating a price war, the growth in US LNG export capacity establishes a floor for European gas prices, according to Italian utility Edison's chief operating officer, Pierre Vergerio - which he estimated as a $4-5/mn Btu premium to Henry Hub, including liquefaction costs.
Even if growing global liquefaction capacity results in excess LNG supply arriving in Europe, there would still be an incentive for European imports from the US, until Europe's premium to Henry Hub becomes too tight to cover costs. This could be about $1.45/mn Btu, if only variable costs are included.
But Russia is unlikely to lower its prices to keep US LNG out of Europe, that would be a "fool's errand", US exporter Cheniere's marketing vice-president, Andrew Walker, said. Most US LNG will head to premium markets, Cheniere senior trading manager Helena Wisden said. Flows to Europe will be much smaller than Russian exports and Gazprom will not need to adjust its prices, she said. There is enough room in the European market for Russian gas and LNG, according to Wisden.
But a tightening of the European premium to Henry Hub because of greater competition could be "uncomfortable" for term lifters of US LNG, Schemers said. Some offtake contracts appear profitable only if costs can be transferred to customers, he said.
Term supply contracts require buyers to pay a liquefaction fee of around $2.20-3/mn Btu - a fixed cost that is paid regardless of whether the cargo is taken. It could take years for some contracts to become profitable for offtakers, Schemers said. But firms have been hedging their supply and risk-management operations by European utilities has increased substantially in the past five years, he said.
Absorbing growing LNG supply will require "solutions" to generate demand, Schemers said - such as Cheniere investing in import capacity in Chile. And demand in Europe could come from firmer carbon prices, encouraging gas to displace coal for power generation, he said.
Global liquefaction capacity to rise
Argus expects global liquefaction capacity to increase by around 40mn t/yr this year - and it could even rise by 48mn t/yr, according to the Gas Exporting Countries Forum. But leading exporter Qatar's renegotiation of its LNG supply deals - especially with Indian buyer Petronet - higher Chinese and Indian consumption and strong demand growth from new importers has done much to absorb the ramp-up in supply so far.
The price sensitivity of the Indian and, to some extent, Chinese markets could curtail further demand growth in these countries, particularly if coal prices fall this year, conference participants said. And an excess of global liquefaction capacity relative to demand - excluding Europe - will probably emerge next year, participants said. This could result in suppliers offloading cargoes in Europe, at least while the transatlantic arbitrage remains open.
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