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Britain positions for additional LNG as reloads begin

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LNG Industry,

A global glut of LNG saw deliveries into the British gas market surge over the first five months of 2015, just as the country started re-exporting cargoes for the first time. LNG imports since fell back below 2014 levels in June but could rise later in the year, when new liquefaction plants come online.

A sustained period of oversupply globally

Weak demand from key LNG importers, particularly Japan and South Korea, and additional new supply from Australia, has contributed to a sustained period of oversupply in the global gas market. This has freed up cargoes for delivery into other regions, including Europe. 

Coupled with the impact of the fall in the oil price, the excess supply has pushed spot LNG prices in the key East Asian market down by 60% y/y, and to only a small premium on British wholesale prices. 

On top of this, over 40 million t of new LNG production is due to start in the next year – adding another 17% to the global market – with the majority coming from Australia and the first US exports.

British wholesale gas prices for the winter 2015 contract are trading at a discount of 10 p/th to the year-ago equivalent at around 48p/th.

Concerns over availability of storage capacity and a cut in Dutch production

Aside from LNG, British gas supply concerns over availability of storage capacity, and a cut in Dutch production have been more than offset by an expected rise in Russian contract flows into Europe in 3Q15. Another mild European winter could set the market up for a period of oversupply.

Reduced incentives

The role of gas within the British power generation mix is still under pressure from coal and growing renewable generation. In recent years, the combination of cheap global coal prices and low carbon prices via the EU Emissions Trading Scheme has meant that there has been more incentive for generators to operate coal-fired plants over gas-fired generation. An increase in the carbon price support – a tax that fossil fuel generators have to pay on emissions – in April, has reduced that incentive and made gas more competitive in the fuel mix, but demand has yet to recover to anywhere near the levels seen before the financial crisis of 2008.

British gas supply

While global spot LNG trade should increase with new production starting up, the majority of LNG delivered to Britain is from Qatar and under long-standing agreements, rather than on a spot basis. Britain’s flexible traded gas market and three LNG import terminals make it an attractive destination for spare volume. A total of 42 LNG cargoes were delivered into Britain’s three import terminals between January and May, a 64% increase from 2014, according to ICIS LNG Edge, a real-time shipping intelligence platform (see figure 1).

Figure 1. LNG vessel arrivals into Britain (source: ICIS LNG Edge).

As a result, LNG has accounted for 13% of total British gas supply so far this year, up from 11% in 2014.

While imports have risen, Britain has recently started to export LNG from the Isle of Grain terminal in Kent for delivery into markets outside Europe. Grain has joined the likes of terminals in Belgium, the Netherlands, France and Spain, which can both import and export LNG, thereby boosting the physical connection between markets in Europe, the Middle East, Asia and the Americas.

A trial run saw LNG transferred from the tanks at the country’s oldest import terminal back out onto a waiting LNG vessel – called the Asia Vision – which then travelled to Brazil to deliver the gas to the state-run energy company Petrobras.

A second cargo was reloaded from Grain in May, which was delivered to the United Arab Emirates, while a third vessel reloaded from the terminal in mid-July.

Europe as a popular reloading location

Europe’s location between the Pacific and Atlantic has made it a popular choice for reloads, but closing trades out has become more challenging because of the narrower spread between European prices and those in premium importing markets.

The structure of the global LNG market is changing rapidly, with lower Asian demand offset by the entrance of Egypt, Pakistan and Jordan to the import market. Argentina and Mexico have also been major buyers this year with Europe being one source of supply.

A number of these countries will have higher seasonal demand for LNG during the British summer. This competition is one reason for the yearly decline in LNG imports into British terminals over June with greater demand for Qatari cargoes, among others, into potentially higher-priced markets.

LNG still holds a minority share in the global gas market with piped gas produced in the US and Russia accounting for the largest overall share. But LNG’s role is expected to grow because of new capacity over the next five years.

LNG demand from the world’s two largest importers, Japan and South Korea, has fallen sharply in the past year. A mild winter limited spot demand, with summer temperatures not high enough to boost gas-fired electricity demand for cooling. The drop has come even before the possible restart of Japanese nuclear plants, which would further eat into LNG consumption, although new nuclear generation in South Korea has recently started up.

The ICIS East Asia Index assessment

The current ICIS East Asia Index assessment for August stands at US$7.1/million Btu, a small premium to Britain. But this time last year the EAX stood at US$11.64/million Btu, an increase of almost US$5/million Btu. This means that while some spot LNG cargoes are currently moving to counter-seasonal markets, there is little incentive for cargoes to move away from markets in the Atlantic Basin to East Asia.

As the most liquid and deep gas market in Europe, Britain serves as the global market of last resort, meaning that flexible LNG will continue to flow to the UK as long as the Asian price premium to British wholesale prices is not sufficiently wide to attract cargoes east of the Suez Canal.

The benign global price environment and the expectation of additional LNG availability for the British market has already been a major factor in the softening of British wholesale gas prices. The price of gas to be delivered over the coming winter closed at its lowest point to date on 7 July and a fall of over a fifth from the corresponding period last year, according to ICIS data. With the surge of LNG production scheduled to enter the market and little sign of any immediate uptick in Asian demand to date, the UK may well find itself a more attractive LNG import option through 2015 and into 2016.

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