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Obstacles or opportunities?

LNG Industry,


The LNG market is in a state of flux. With large additional volumes of LNG coming to market from Australia and Papua New Guinea (amongst others), the advent of US gas volumes to the export market, and un-contracted quantities from Qatar available on the spot market, there are now plenty of options for LNG importers. In conjunction with the current low prices, the balance has tipped in favour of buyers.

Wood Mackenzie’s review of 2015 estimates that the global LNG supply is presently approximately 250 million tpy, with a further 140 million tpy under construction, which should create sufficient capacity to meet global LNG needs until 2022.1 Meanwhile, the cost of buying LNG on the spot market has fallen by approximately 50% in the last 12 months. The Angola LNG facility has recently been re-started, with the first cargo loaded onto the Sonangol Sambizanga LNG carrier in early June this year (and with reports suggesting that the cargo had been sold to Vitol).2 In February 2016, Cheniere began the first exports of liquefied US pipeline gas from the Sabine Pass export terminal, destined for receiving terminals in South America, Asia and, more recently, Europe, with the first cargo arriving into Portugal in April of this year. Australia, meanwhile, is on track to overtake Qatar as the largest worldwide supplier of LNG by 2018. With the market entering a phase of oversupply, key oil and gas players, such as Shell, BP and the Saudi oil ministry, see gas markets returning to equilibrium in the next decade. While the lower-than-expected LNG demand from Asia has been well-documented, there is still an optimistic long-term view that it remains under-developed. Furthermore, the geography of the Asian continent, with the sea separating most demand and supply centres, means Asian markets remain a strong contender for future growth.

The change in status of the US from a net importer to a net exporter of LNG has coincided with the reduced demand from Asian markets. In 2015, LNG imports into Japan, South Korea, China and Taiwan reached a total of 152.8 million t, representing a 3.9% decrease compared to 2014. Japan’s Jera Co., globally one of the largest buyers of LNG, has agreed to sell as much as 1.5 million t between June 2018 and December 2020 to Electricite de France SA. This turnaround from importer to exporter underscores the extent to which the market has become oversupplied. With Asian LNG storage now nearing maximum capacity, exporters have turned to emerging markets in countries such as Argentina, Mexico, and Jordan, as well as the older established European import terminals, as destinations for more of their cargoes. This increase in European imports may, in turn, reduce the reliance of European buyers on pipeline gas from Russia and other sources, and give buyers much greater negotiating power in forming long-term supply contracts with liquefaction projects and reducing prices accordingly.

Growth of LNG demand in Europe

European LNG import terminals have recently spent a long time in the doldrums, with extensive investment in infrastructure leading to underutilised capacity at receiving terminals across the continent. However, there was a net LNG import surge in 2015, climbing 16.6% to reach 31.35 million t, with Italy, Spain and the UK leading demand. This has been attributed to a combination of increased regional demand for gas, declining local gas production and certain buyers taking advantage of competitive oil-indexed prices, according to Cedigaz, the international association for natural gas.3 This article examines these shifting trading patterns, based around sensitivity to prices, in the key European regions noted.

Italy

Cedigaz reports that imports have increased 31.8% to 4.18 million t, primarily owing to Edison importing LNG under its long-term contract with RasGas, at the Adriatic LNG Terminal (Italy’s largest LNG import terminal).3 The 4.6 million tpy oil-indexed contract was reported to offer a more competitive price at the relevant time than the Italian spot market, which was down to US$5.17/million Btu in October 2015, and so cargoes that might previously have been diverted away from Italy headed instead to the original intended destination. Total trade volumes generally between Qatar and Italy reached €2.3 billion in 2015, of which €1.3 billion was attributable to LNG.

With no nuclear power facilities and limited use of coal, Italy has been dependant on natural gas to fuel its power generation. While historically this has been imported principally by pipeline under long-term supply contracts with Algeria, Russia and Libya, the drop in oil prices worldwide has made imports to Italy under oil-indexed contracts with exporters from the Middle East more attractive.

Italy is also home to one of the first companies to take advantage of the new opportunities in Iran, following the conclusions of the International Energy Agency (IEA) that Iran had implemented the agreed nuclear-related measures as set out in the Joint Comprehensive Plan of Action and the subsequent lifting of all nuclear-related financial and economic EU sanctions on 16 January this year. During the visit of Italian Prime Minister Matteo Renzi to Tehran in April 2016, managers of Italy’s Enel Trade and the National Iranian Gas Export Company signed a Memorandum of Understanding (MoU), which, once finalised as a firm contract, would make Enel, and possibly therefore Italy (should the correct balance of price and demand arise), a receiver of Iranian LNG. While the Iranian LNG export plant is not yet complete, and its infrastructure is in need of refurbishment after being mothballed since 2009, as the holder of the world’s second largest reserves of natural gas, this may yet underpin Iran as a significant new player in the LNG market.

Spain

Reports suggest that net LNG imports climbed to 8.96 million t in 2015 – an 18.1% y/y increase from July to November, caused predominantly by a widespread drought, which reduced domestic hydro-electric power output by 26.5% y/y from January to October. Spain has significant LNG import infrastructure in place (six receiving terminals, of which Huelva, Barcelona and Sagunto are the busiest).

Qatargas continues to export LNG to Spain – a relationship which dates back to 1997. Spain is also receiving imports from Peru (which currently operates only one liquefaction and export facility) with cargoes departing for Spain as recently as 9 May 2016. Given the current underutilisation of European LNG regasification terminals, and the potential movement away from reliance on Russian pipeline gas, Cheniere’s Marketing President, Jean Abiteboul, has indicated that as much as 50% of its LNG production could be heading for European regasification terminals, including Spain, in the future.Looking further ahead, Iran’s Oil Minister, Bijan Zanganeh, was quoted in September 2015 as saying that Iran intends to bring its gas to Europe in part by shipping LNG to Spain, so again the return of Iran to the international stage will be one to watch in this region.4

The UK

Net LNG imports were reported to have increased by 20% in 2015, ensuring that the UK remained Europe’s top importer. LNG accounted for 31% of natural gas imports to the UK, with the remainder coming via pipelines. The UK currently operates three LNG import facilities: two in Pembrokeshire and one in Kent, which together are capable of meeting nearly 50% of annual demand across the UK.

The majority of LNG delivered to the UK is supplied from Qatar under long-term sale and purchase agreements (SPAs) rather than on a spot basis. Between January and May 2015, 42 LNG cargoes were delivered to UK LNG import terminals – a 64% increase from 2014. Re-loading facilities have allowed the UK to take advantage of low priced imports to re-export the cargoes to more attractive markets, including the Middle East and Latin America.

Spot market

The difference between LNG spot prices in the Atlantic Basin and the Asia Pacific Basin has narrowed considerably. Reports indicate that with the UK averaging US$6.51/million Btu and Japan averaging US$7.50/million Btu in 2015, the diversion of LNG cargoes to the Asia Pacific Basin and related reloading of LNG from destination markets has slowed. Spain, which accounted for approximately 60% of the reloading market in 2014 (reloading 3.99 million t in that year) saw re-exports drop by 1.05 million t in 2015. Countries in Northwest Europe, however, such as the UK and the Netherlands, which both received significantly more LNG in 2015 compared to the previous year, have managed to increase their reloaded volumes. The destination markets of these re-exports were principally Latin American countries, such as Argentina, Brazil and Mexico, and the Middle East, including the United Arab Emirates (UAE), Egypt and Jordan. Despite this increase, the overall decrease in re-loading, in the context of the current LNG oversupply environment and convergence of global prices, has, according to the IGU World LNG Report 2015, led to traders starting to use LNG import terminals principally as storage units in the expectation that the future price will be higher than the current spot price.5

New homes for LNG?

One of the key issues at present is to find a home for all of the LNG due to come on-stream over the next couple of years. Will Europe provide an immediate answer? In recent years, 7 GW of coal-fired power generation capacity in Europe has been retired, with a further 13 GW scheduled for retirement by 2025. Indeed, the UK has made it public policy to end the use of coal completely by 2025 or earlier (2023 has been mooted by ‘Bright Blue’, the UK government’s clean energy think-tank), making it the first major economy likely to do so. In order to plug the energy gap that will be created from this reduction, and to help meet the climate change targets arising out of the Paris Agreement (concluded at the international climate change negotiations in Paris, France, in December 2015), and with LNG import capacity available at most European terminals, LNG remains a potential reliable energy source for Europe, provided the price is competitive.

In addition to Europe, emerging markets, such as Argentina, Mexico, Egypt, Jordan and Pakistan, will attract LNG imports, perhaps moving cargoes away from Europe in the summer months to take advantage of any higher priced markets.

Small scale LNG projects

There have been a number of initiatives to develop small scale LNG projects and markets, with varying degrees of success. For example, the Isle of Grain launched its fully-automated LNG truck loading facility in November 2015. First fill saw Flogas drawing 20 t of LNG, and it plans to take 60 – 100 tpd for distribution to major industrial manufacturing sites across the UK. The facility offers two truck bays, 36 slots per day, and is open 365 days a year. Grain also has further expansion plans, including a third jetty for dedicated break-bulk operations, as well as increased truck capacity. According to press reports, Flogas has agreed to supply LNG to UK gas distribution company SGN, for an independent grid system that services four Scottish towns that run outside of the national gas network.6 However, not all small scale LNG initiatives have been successful. It appears that Stolt-Nielsen has suspended its projects in Canada and delayed decisions on the Port of Oristano terminal in Sardinia, Italy, due to the impact of low prices and general downturn in the energy market. In addition, use of LNG as bunkers, as a cleaner alternative to traditional use of heavy marine fuels, remains low with only 0.5% of the global shipping fleet using LNG.

New LNG trading routes

The re-opening of the Panama Canal has marked the end of a US$5.25 billion expansion project, allowing 88% of global LNG carriers to use the strategic waterway, up from 8.6% prior to the re-development. Panama expects 20 million tpy of LNG to pass through the canal, equating to almost one LNG carrier per day. This promises to reduce shipping transit times by approximately 10 days, which, for cargoes making the journey between the US and Asian markets, represents a significant saving of both time and money. Although the re-opening may have a significant impact on the speed and cost of bringing US LNG exports to Asian buyers, the reported US$650 000 cost for a round trip and the limitation of four passage time slots per day (only one of which can be allocated to LNG vessels), may limit its effect on the global LNG market. Whether the Panama Canal will be attractive to LNG shippers remains to be seen.

The future – obstacles or opportunities for LNG?

For LNG buyers, the future appears relatively attractive, as the balance has tipped in their favour. Nevertheless, LNG remains a premium fuel that needs to be viewed in the context of alternative fuels in the market. With low oil and low coal prices, gas may continue to struggle to gain a clear price advantage. To boost global gas consumption and LNG trade, an increase in oil and coal prices would be welcome, which together with a plentiful supply of gas, would keep gas prices low, and therefore competitive, and trigger increased global demand for gas. For new LNG export projects, the costs need to come down.Interesting times lie ahead. Perhaps there will be growth in global gas markets, as there is a transition towards a future based increasingly on renewable sources of power generation. If so, there may be a transition to LNG being traded as a global commodity, much like oil, which would be a major change for the LNG industry.

However, the prospects for LNG remain uncertain. Oil prices are likely to remain low, with OPEC continuing to resist any freeze, let alone cut production, and the threat of increased production from Russia still looming (despite Saudi Arabia’s new Oil Minister, Al Falih, confirming recently that the Kingdom has no plans to ‘flood the market’, in an effort to calm tensions among some members over how it manages a protracted supply glut). Coal remains a major threat as it continues to be a cheaper source of fuel than gas (although out of favour with some energy end users and financiers). In an oversupplied market, it is not surprising that LNG buyers, particularly creditworthy buyers, are no longer lining up to buy LNG.

The position is worse for potential new LNG export projects. For example, oversupply in the market has led to Shell stating recently that the focus of its new integrated gas business will move away from exploration and approving new projects, towards developing new LNG import markets. With pressure on all international oil companies to cut costs following the collapse of global oil prices, we may witness a plateau in active LNG export projects worldwide, and long delays to new LNG export projects, as LNG seeks out new global gas markets for the volumes available in the market over the next few years. Relationships, as ever, will remain key in the LNG industry.

Written by Nick Prowse, Penny Cygan-Jones and Will Scott, Norton Rose Fulbright, UK.

References

  1. Wood Mackenzie, ‘LNG: 2015 in review’, published January 2016, (http://www.woodmac.com/reports/lng-lng-2015-in-review-35307952).
  2. LNG World News, ‘Vitol grabs first Angola LNG cargo after restart’, published June 2016, (http://www.lngworldnews.com/vitol-grabs-first-angola-lng-cargo-after-restart/).
  3. LNG World News, ‘Cedigaz: European LNG net imports up in 2015’, published January 2016, (http://www.lngworldnews.com/cedigaz-european-lng-net-imports-up-in-2015/).
  4. Reuters, ‘Iran hopes to export gas to EU through Spain’, published September 2015, (http://uk.reuters.com/article/uk-iran-lng-spain-idUKKCN0R71DH20150907).
  5. International Gas Union (IGU), ‘World LNG Report – 2015 Edition’, published June 2015, (http://www.igu.org/sites/default/files/node-page-field_file/IGU-World%20LNG%20Report-2015%20Edition.pdf).
  6. LNG World News, ‘Flogas signs LNG supply deal with SGN’, published May 2016, (http://www.lngworldnews.com/flogas-signs-lng-supply-deal-with-sgn/).

    Read the article online at: https://www.lngindustry.com/special-reports/02082016/obstacles-or-opportunities-1257/


     

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