European LNG imports have surged during the first quarter of 2019.
Some EU wholesale gas markets have been more attractive than others in absorbing these additional LNG volumes.
What are the key differentiation factors enhancing the attractiveness of the European regasification terminals?
The long-awaited return of LNG to Europe is starting to materialize. The EU LNG imports bounced during the first quarter of 2019 from ~7.8 Mt in Q1-18 to ~17.5 Mt in Q1-19 as illustrated in the Exhibit 1.
This sharp increase is notably driven by the global LNG market dynamics: the spread between the spot Asian LNG prices and the European gas prices (JKM-TTF spread) has strongly narrowed, making Europe more valuable than Asia notably for Atlantic LNG supplies.
The JKM-TTF spread reached even negative values at the end of March 2019, therefore opening an arbitrage window for spot LNG cargoes from the Middle East to Europe rather than Asia.
Russia has significantly increased its LNG deliveries to Europe during the first quarter of 2019. Indeed, a substantial part of the Russian LNG volumes, which were intended to be transshipped in Europe and continue their route to the Asian markets, have finally been regasified in Europe. As a matter of fact, the Yamal project delivered a record LNG amount to the European market in February 2019 (~1.4 Million ton) surpassing Qatar and therefore becoming the biggest LNG supplier to Europe for the first time since the project start-up in December 2017.
Nevertheless, the role played by US LNG in the European LNG supply mix, has been lower than expected. In February 2019, US LNG exports to Europe were limited to 9 cargoes (~0.6 Million ton), their lowest level since November 2018. This can be mainly explained by maintenance operations planned in the US liquefaction plants. Furthermore, the economics of the US LNG deliveries have deteriorated under Q1-2019 market conditions.
Indeed, both European and Asian spot gas prices reached very low levels close to the profitability threshold of US LNG in these markets.
The LNG market is likely to remain oversupplied within the coming months; the competition between the different sources is likely to intensify as three new US LNG projects (Cameron, Corpus Christi T2 and Freeport) are in their completion or start-up phases. Additional volumes are expected to start hitting the market in the second half of 2019.
The increase of LNG imports is seen across all the Western European markets. However, the Spanish market has been the only one to capture a very limited part of the additional LNG volumes as illustrated in the Exhibit 3.
Despite its large regasification capacities located on both the Mediterranean and Atlantic coasts, Spanish LNG imports have only shown a very small increase, maintaining the utilization rate of the regas terminals at a low level of ~23% as compared to other European regasification terminals. The illiquidity of the Spanish hub is one of the main hurdles impeding it from attracting more LNG volumes.
All the other western European countries with wholesale markets offering a minimum level of liquidity and tradability, have significantly increased their LNG imports in Q1-2019. The drivers of these increases vary from one market to another:
A detailed analysis of LNG import increases by regasification terminal brings out the Northern European terminals as the most attractive in absorbing additional LNG volumes as illustrated in Exhibit 4. Indeed, the Northern wholesale gas markets, being more liquid, offer more reliable and easily accessible opportunities for capturing the value of additional LNG cargoes.
Beyond market liquidity, the long-term transshipment agreements concluded between Yamal’s off-takers and the Zeebrugge and Montoir regasification terminals substantially favored the unloading of additional LNG cargoes. The LNG volumes initially intended to be transshipped to Asia, have largely been “trapped” and regasified in Europe; the market conditions being in favor of deliveries in Europe rather than in Asia as the JKM-TTF price spread was lower than the additional logistics costs required to ship LNG to Asia.
Moreover, the further development of new Arctic LNG projects based on seasonal transshipment services of ice-breaker LNG carriers may prove an opportunity for Northwest European regas terminal operators. However, this potential opportunity needs to be assessed carefully as Russian authorities are supporting the development of ad hoc transshipment terminals in Russia.
The Southern LNG regas terminals, mostly located on the Mediterranean coast, have attracted less LNG volume. Indeed, the LNG glut is concentrated on the Atlantic Basin as it mainly results from the ramp-up of the US LNG projects and the Russian LNG volumes taking the “winter route” based on planned transshipments in Northern European terminals. However, clear distinctions have to be made between the various regas terminals in Southern Europe:
– On the one hand, the Spanish regasification terminals did not attract significant additional LNG volumes beyond the structurally contracted imports9, despite the price premium offered by the Spanish market compared to North West Europe. This is mainly due to the very poor liquidity of the Iberian gas hub. The existence of a reliable wholesale gas market showing a minimum level of liquidity is a prerequisite to attract additional LNG volumes as it allows market players to easily optimize their positions.
– On the other hand, the two Italian regas terminals OLT and Adriatic LNG, have been running near full capacity (~92%) during Q1-2019. In addition to the ~1.5 €/MWh price premium offered by the Italian wholesale gas market, these two terminals adopted an innovative capacity allocation procedure based on auctions starting from a reserve price lower than the previous tariffs and linked to the LNG market prices. Italy’s former high regasification tariffs tended to discourage the unloading of spot LNG shipments, whereas the new methodology has shown efficient in attracting more volumes.
The global LNG trade is surging thanks to the wave of new LNG supplies coming from various sources including US, Australia, Russia, etc. This is generating a shift toward a more interconnected global gas market.
In such a context, LNG shippers are requiring more flexibility to be able to optimize their positions within the short-term. Therefore, the attractiveness of regasification terminals largely depends on the range of services they offer, e.g. regasification, reloading, transshipment and the option for shippers to reactively shift from one service to another depending on market dynamics and pricing.
In that respect, the commercialization by terminal operators of structured commercial offers combining competitive and optional add-on services in addition to traditional core services (e.g. a regasification core service combined with a reloading optional add-on service, or a transshipment core service combined with a regas optional add-on service) could constitute an attractive way to generate value for market players.