Will Europe become the preferred 2016 destination for U.S. LNG?

LNG terminal
Source: WikiCommons

Following the falling Asian demand for LNG, causing the spot prices reaching a low of US$6.90/mmbtu, U.S. LNG exporters are in search for new markets.

Chong Zhi Xin, Principal Analyst for South-Eastern Asia and Australasia Gas & Power research at Wood Mackenzie was quoted as saying: “In 2015, weak market environment forced companies to adjust strategies and tactics. Sellers started to look further afield to emerging markets in Middle East and Africa and new opportunities in Asia, while buyers exercised more caution in contracting.”

While the global LNG production reached 250 million tons in 2015, the majority of this production did not come from the U.S., where only one of several planned LNG export terminals – Cheniere’s Sabine Pass – is currently operational. Instead it was Australia’s key CSG LNG projects that added 18.5 mmtpa of nameplate capacity.

Giles Farrer, Research Director for Global Gas & LNG supply at Wood Mackenzie says: “We saw a four Mt increase in LNG volumes globally, compared with 2014. The increase is primarily due to the start up of key coal seam gas (CSG) projects in Australia – BG’s QC LNG in January and Santos’ GLNG in August 2015. A third project, ConocoPhillips’ APLNG plant, shipped its first cargo at the start of January 2016. The commissioning of these facilities, which have a combined capacity of 26.5 mmtpa, marks the start of the country’s ascent to become the world’s largest supplier of LNG by 2019,” he said.

With the Asian markets no longer willing to soak up huge amounts of LNG at high prices – a situation partially caused by the slowed growth in China – LNG suppliers are looking for new markets. There are the new entrants such as Jordan, Pakistan, and Egypt, who imported combined 5.8 million tons in 2015. Another market is Europe – traditionally dependent on pipeline gas supplies from Russia. With some countries – like the ex-Baltic republics; Lithuania and Latvia – getting 100 percent of their gas from their huge neighbour, there is a lot of appetite for diversification. Both Lithuania and Poland have recently built large LNG import terminals in Klaipeda and Swinoujscie respectively.

There is some debate whether American LNG is likely to be competitive with Russian gas. Cheniere, however, made it no secret that exporting to Europe is high on their priority list.

According to Platts, some 50 percent of Cheniere’s future LNG supply from the U.S. is likely to go to Europe, with the low cost of the gas also offering European buyers the option to send cargoes onward to other markets.

Taking a TTF price of around $6.40/MMBtu, Cheniere Marketing President Jean Abiteboul said in November 2015 that an exporter of U.S. LNG could still expect a margin of $2/MMBtu once all costs – including the cost of the gas, liquefaction and transportation – were factored in.

“So it’s still very much acceptable,” he said.

He also pointed to the fact that in the US, liquefaction costs are around $600-$800/mt, compared with costs of as much as $3,000/mt in some cases in Australia.

“So the US should be well-placed to supply any new demand growth in both Europe and Asia, as well as new markets like South America,” he said.

He added: “We don’t have long to wait to see the impact of U.S. LNG on the market in general and in Europe in particular.”

Europe was also tipped off as the preferred destination for American LNG by a recent study by Wood McKenzie.

Giles Farrer, Research Director for Global Gas & LNG supply at Wood Mackenzie said: “With the lower oil price driving down Asian LNG prices, the spread between European gas prices and Asian LNG prices narrowed. Consequently companies with Atlantic supply were drawn to European markets offering more attractive returns,”

According to Abiteboul, at present, the long-term contracts signed by Cheniere in Europe, amounting to some 16 million mt/year, represent 5% of the total European gas market.

Adding U.S. LNG to the global market was certainly a landmark event of 2015, however, according to analysts, it is not the most important development the industry has seen.

Alex Munton, Principal Analyst – Americas LNG & Gas research at Wood Mackenzie said: “The biggest corporate news of 2015 was Shell’s planned acquisition of BG, announced in April 2015. Already a major LNG player, Shell has tried to capitalize on the downturn with the takeover, a move which if finalized, in turn, creating the largest LNG marketer in the world – meeting 15 percent of global demand. Within Japan, the TEPCO-Chubu Electric merger was implemented to strengthen corporate balance sheets and this resulted in the formation of JERA, the world’s largest LNG buyer.”

Chong Zhi Xin concluded: “As we move into 2016, the initial focus will be on the U.S., with the start of exports from Sabine Pass, signifying a key milestone. However, the pace of new project ramp up and the threat of a prolonged outage at Yemen presents downside risk to LNG supply availability. Indeed the reality is that the wave of LNG growth will not hit the market until after 2016.

“Several key dynamics will affect prices and flows and we will be watching these closely over the course of the year: coal to gas competition in both Europe and Asia; Chinese energy policy; access to regas capacity in Europe and contract flexibility will all become more important as the year unfolds.”

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