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Will Spanish LNG help Europe?

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LNG Industry,

Amidst the Russian-Ukrainian crisis and worries over disruption of Russian gas supplies to Europe, the Spanish Gas Association, Sedigas, has suggested Spain could help Europe become less dependent on Russian gas. MIDCAT, a 190 km long pipeline planned for construction and set to be operational between 2017 and 2020, will increase the gas flow capacity between Spain and France by 14 billion m3/yr. Sedigas is optimistic that Spain has the ability to cover up to 10% of Russian gas exports to Western Europe. According to European transmission system operators, the total Russian exports to Western Europe (Germany, Belgium, the Netherlands, France and Italy) were 95 billion m3/yr in 2013. 10% of Russian exports annually would indicate a level of 9.5 billion m3/yr, or 25.6 million m3 of gas flows on a daily basis. While this is quite promising for Europe, it poses one question: whether Spain has the technical capability and available volume to export to Europe, and whether it is profitable for the Spanish gas importers to do so. 

Overview of the current Spanish gas market situation

Spain’s main sources of gas supply are imports from Norway and Algeria via pipeline, and LNG from various countries, the latter of which accounts for 50% of total annual imports. The country has been struggling with an oversupply situation over the last few years, due to long-term contract commitments in gas imports, stagnant demand following the economic downturn, and decline in CCGT (combined cycle gas turbine) generation. Contract commitments require Spain to receive and unload a certain volume of LNG every year, which has led to Spain re-exporting some of the surplus LNG imports to other places. LNG re-export or ‘reloading’ occurs when LNG shipments are unloaded from a tanker into storage at a regasification terminal, then reloaded onto tankers for delivery to other countries. In 2013, Spain reloaded 3.8 billion m3 of LNG cargo (equivalent to 4% of Russian volumes to Europe) back onto ship for export to Latin America, Asia, and Europe. However, if Spanish gas companies would like to cover up to 10% of Russian supplies to Europe, they will have to import more to have such volume available for export.

There are technical limitations in the current pipeline connection between Spain and France, and gas has been mostly exported to Western Europe through LNG reloading, which is costly and has resulted in European buyers paying higher prices for LNG. Thomson Reuters Point Carbon estimates that with transportation costs, the cost of LNG reloading could be as high as US$ 6/million Btu for a conventional LNG tanker to France, and US$ 8/9 USD/million Btu for a tanker to Latin America or Asia, while it costs only US$ 1- 2/million Btu to regasify the LNG and transport it via pipeline. In the beginning of April 2014, the Peg Sud DA (the traded hub price in France), was US$ 8.9 USD/million Btu, whereas the LNG landed spot price (data from Waterborne) was at US$ 13.1/million Btu, indicating LNG was at least 50% more expensive than pipeline gas. 

With the connectivity bought about by MIDCAT, the new pipeline connection between Spain and France planned to open in 2017 at the earliest, Spain’s export capability to Europe will be enhanced, as pipeline exports are cheaper than LNG reloading. The MIDCAT pipeline may result in more gas flows from Spain to France and the rest of Europe, providing the price differences between Asian LNG spot prices and European hub prices continue to favour gas exports to Europe via the pipeline. Our calculation shows that when the difference between the Asian spot and Peg Sud is less than US$ 9/million Btu, Spain is better off sending gas to France via pipeline at hub prices, provided it has the capability. However, the price relationship may change and it could become more economically viable for Spain to reload to Asia Pacific or Latin America rather than exporting to Europe via pipeline - unless Europe is willing to pay the higher prices required to attract Spanish LNG reloads away from other regions. 

LNG’s role in the Spanish gas system

This winter, Spain experienced unexpectedly cold weather and low renewable output for power generation. As a result, gas for power demand peaked, and gas for residential use increased by 300 million m3 from November to December 2013. Imports from Norway via France increased, as did the level of withdrawal from gas storage, to cover this rise in demand. Spain also imports gas from Algeria via pipeline, but total Algerian export to Spain seemed to be capped at 51 million m3/d from November 2013 to January 2014. The country had to reduce LNG re-export in order to increase LNG send out domestically. In January 2014, LNG re-export from Spain went down significantly compared with December 2013 whereas landed spot price (data from Waterborne) reached US$ 16/million Btu, reflecting the tight domestic system. This shows that LNG also plays an important role in Spain’s own gas system, helping to balance domestic supply and demand throughout the year when needed.

Prospects of future gas availability from Spain to Europe

From late 2016, Spain’s Gas Natural Fenosa is expected to receive LNG from Cheniere’s Sabine Pass project in the US, with an annual contract quantity of 5 billion m3/yr. This may provide Spain one step closer to helping European countries become less dependent on Russian gas. The main uncertainty is whether the LNG will be diverted away from Europe to regions with higher prices. The Panama Canal expansion, expected to be completed in 2016, suggests that the time it takes for an LNG tanker to travel from the US to Asia Pacific will be reduced from around 60 days to 40 days, lowering the transportation cost from North America to Asia by 10%. The completion of the Panama Canal therefore increases the possibility of US LNG being diverted to Asia given the right price incentive. 

Additionally, economic growth may be picking up in Spain, meaning demand will increase and LNG terminals as well as CCGT plants may be more utilised. The IMF projects Spain’s GDP to rise by 0.9% in 2014 and 1% in 2015, and the unemployment rate to lower. Overall, we may not see much LNG volume available to Europe if the Spanish gas demand picks up or US LNG is diverted away from Europe.


While there are currently limitations in existing pipelines, MIDCAT’s successful operation would enable Spain to optimise its gas usage and allow different options to export excess gas supplies. Spain is now selling its surplus LNG through the costly process of reloading, and an expansion of pipeline capacity connectivity with France will enhance Spain’s export capability. This, however, does not indicate that the country will be able to export 9 - 10 billion m3/yr, or 10% of Russian flows to West Europe. If Spain would like to achieve this volume annually, the country will have to import more gas, most likely LNG. Our analysis also shows that LNG plays an important role in the domestic Spanish gas system, and has helped ease system tightness when needed. This indicates that if Spain sells gas to Europe via pipeline, it is more likely to be on a spot basis, similar to LNG reloads, than on a long-term basis, given the right price incentive. Spain may also send the LNG to Asia or Latin America where prices are more favourable, suggesting there may not be as much gas volume available for Europe. 

Overall, Spain may provide gas to Europe to some extent, but Europe will have to continue to rely on Russian gas as a stable, long-term supply source. Before the pipeline becomes operational, European countries could buy LNG reloads from Spain, but only if they are willing to pay higher prices to attract Spanish LNG reloads away from Asia Pacific or Latin America.

Written by Mai Phan, Natural Gas Market Analyst at Thomson Reuters Point Carbon. Edited by

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