Surging imports to Europe of liquefied natural gas (LNG) are driving down prices.
Surging imports to Europe of liquefied natural gas (LNG) are driving down prices, but in the long run that is seen as a benefit to gas producers in the region. For years Europe has been considered the market of last resort for LNG shipments, which has led to an active spot market and a wide variety of physical and financial hedging systems.
“The price of gas at European hubs continues to drive LNG price formation globally,” according to a global LNG analysis released at the end of October by S&P Global Platts. It noted further that competition is increasing between the two major trading hubs in Europe, the UK gas trading market, the National Balancing Point, and the Title Transfer Facility in the Netherlands.
“Meanwhile, Europe’s LNG import infrastructure remains severely underused,” stated the S&P Global report, “bringing Europe’s traditional role as market of last resort into sharp focus. With no liquid onshore gas markets in the Asia Pacific region, the well-developed onshore gas hubs in Europe are expected to continue growing in importance as a global pricing floor and destination of last resort in an oversupplied LNG market.”
In a classic economic model, high prices have stimulated supply, and the resulting low prices are expected to stimulate demand. In Europe, which is a mature industrial economy, that is primarily expected to be fuel switching for electrical power generation. And, indeed, the S&P report noted that, “European hubs have often laid the foundation above which other prices form, with market participants often citing shifts in European pricing as reasons to move bids or offers into Asia Pacific and elsewhere.”
Further, S&P found that, “the depth of the European gas market also allows it to absorb a loose cargo with little difficulty, particularly given the underutilized import infrastructure available throughout the continent. Given the challenges faced by numerous gas trading hub initiatives in Asia, this trend is set to continue, with European markets and their gas hub prices expected to remain integral to the formation of a more liquid, flexible and transparent global LNG market.”
While the influx of LNG that is underway is expected to drive down gas prices in Europe, that may be to the long-term benefit of gas producers in the region. Europe is often portrayed as an LNG destination of last resort, but importantly S&P noted, “European buyers are unlikely to go out of their way to purchase spot volumes. LNG infrastructure in Europe remains largely underutilized, with terminals across Western Europe, including Spain, seeing an average of less than one third utilization over the past few years. However, this is the result of ample pipeline gas supply from Russia and Norway in the north, as well as domestic European production – albeit falling – from the North Sea and the Netherlands.”
For power generators, security of fuel supply is paramount. And while gas imports of LNG and by pipeline from Russia tend to be the low cost options, they also come with some supply-chain risk. Domestic production is more expensive but more reliable. As independents continue their North Sea renaissance and move into on-shore unconventional development, gas from within Europe will contend with LNG and pipeline imports.
It also bears mentioning that there is a ratchet effect in that power market: once coal-fired generating stations are taken out of service, they are often mothballed or dismantled, rather than merely idled. Thus switching back is limited. That has already been seen across Europe and the U.S.