A changing composition: LNG demand in Europe

The gas industry in Europe has experienced some diverging trends over the last year, few of which would have been predicted by many industry analysts five years ago. On the one hand, the effects of the global economic recession have resulted in gas demand contracting in many countries around the world, with countries in Europe experiencing varying degrees of shrinking demand. Yet, despite this challenging environment, imports of LNG have exhibited strong growth since the end of 2008, a period during which economic activity has suffered an unprecedented contraction. Not too long ago, the co-existence of these two events would have been unthinkable. Their existence raises two questions that this article attempts to answer, namely: to what extent have the dynamics of the European gas market changed and how sustainable are increased LNG imports into Europe?

Since the middle of 2008 the quantity of LNG entering the European market has continued to grow, with import volumes for the 12 month period to the middle of 2010 some 23% higher at 59 million t than the equivalent period a year earlier. However, statistics at the regional level mask the diverging trends that have developed within the market over the last five years. In the period to the end of 2008, the main engine of European LNG import growth was the Mediterranean market, particularly Spain.

Conclusion

The European gas market, particularly that in northern Europe, has proved that sufficient flexibility exists for prices and trade to respond to global market conditions. The outcome has been for competing gas suppliers, namely pipeline gas suppliers, to respond to supply competition from imported LNG by amending price terms that make their product more attractive to buyers that have alternative supply sources. Currently, while pipeline sellers maintain that such concessions are for a limited period only, retreating from this position may prove difficult in years to come which suggests that inclusion of spot gas prices in long term price clauses may become a permanent feature. 

Another conclusion is that only a relatively small amount of the recent increase in LNG imports is at risk from increased imports of competitively priced pipeline gas. Assuming that a price war between pipeline gas suppliers and LNG importers is avoided, then the LNG import volume at risk is estimated currently to be approximately 1.5 million t of LNG per quarter, with that volume reducing over time as UK domestic gas production declines.

The opportunistic LNG import volume quantified above has materialised purely as a result of a global gas supply glut that has evolved in recent months. Should global market conditions start to tighten again then it is likely that gas prices in northern Europe will strengthen, as gas supply/demand fundamentals tighten with the result that spot NBP and Zeebrugge gas prices will move towards the term pipeline supply prices. Once the price difference narrows in these two markets then the incentive to import LNG (or spot pipeline gas) into mainland Europe to displace term pipeline supply will disappear.

However, such an environment will likely only materialise once a premium price market emerges elsewhere in the world. Over the near to medium term it is expected that tighter LNG supply/demand fundamentals in Asia, rather than in North America, will emerge with the result that Asian spot prices are expected to strengthen relative to European prices. At such time flexible LNG marketers will shift their product into that market, which in turn will set the price of the marginal tonne of LNG available to the European market. Should such a sequence of events materialise then it is conceivable that spot European gas prices may trade at a premium to term pipeline import prices at which time opportunistic imports of LNG into Europe will disappear and European gas traders may start to regret having spot gas prices included in their term pipeline gas pricing clauses.

This article is a summary of the LNG Industry Winter Regional Report. Subscribers can sign in here to read the full report online.

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