Europe’s liquefied natural gas imports have surged sixteen percent (from 40.9 bcm in 2016 to 47.4 bcm in 2017) to become the third largest source of gas supply after Russia and Norway. The re-emergence of Europe as a major LNG market came after years of coal and nuclear power plant retirements as well as steep declines in Europe.
In global gas markets, Europe looks like a bright star in terms of commercial opportunities over the next few years, as growing demand coincides with rising prices and strong imports. The United States, with four new LNG projects under construction, is in excellent position to seize the opportunity as a supplier in this dynamic market and assert the strategic role as it challenges Russia’s dominance as the region’s top gas supplier.
Europe’s energy market is undergoing structural changes that allowed natural gas to gain a larger share in the total energy mix over the last two years. After almost a decade of lackluster demand, market expectations for gas were tempered. Yet, contrary to this bearish outlook, gas consumption across the EU grew by 52 bcm (11%) between 2014 and 2016 and was called “one of the biggest surprises” by Venture Global LNG, Inc.
The driving factor behind the recovery was the coal- to- gas move in the power sector that reduced Europe’s coal fired capacity to 156.6 GW in 2017 compared to 190 GW in 2010. National public policies and market forced the retirement of most remaining coal plants by 2030. As Europe’s need for gas increased, production from the North Sea and Groningen field in the Netherlands has been steadily declining. Groningen’s output, in particular, was slashed from 45 bcm in 2015 to 12 bcm in 2017. Dutch regulators expect to completely shut down Groningen production by 2030. This in turn will create a significant supply gap within the European gas market.
As Europe’s gas demand grew in 2017 it turned first and foremost to Russia. Despite concerns over Russian dominance over supply, its export of “blue fuel” to Europe has grown to reach a record high 193.9 Bcf in 2017 - eight percent higher than its previous record set in 2016. It is commonly said that Russia is flooding Europe with large volumes of gas to undercut prices and keep LNG at bay. In reality there is no evidence of any price war. So far this year, prices at Europe’s two largest hubs in the United Kingdom and Netherlands rose by 25 percent while gas price at Germany’s border increased by twelve percent. Gazprom, the world’s largest gas producer, targets increased gas sales to Europe as a profit opportunity rather than a test case of irrational market behavior. Nonetheless, the surge in gas exports has led to a situation where pipeline capacity between Russia and the EU, including Ukrainian gas corridor (140 bcm/year) and Nord Stream 1(60 bcm/year) is fully booked, pushing prices to the highest level since 2015. If Gazprom decides not to renew gas transit contracts with Ukraine’s Naftogas in winter 2019 (an unlikely but possible scenario), a major gas price hike may be in store for Europe.
Europe’s hub prices are already nearing the Asian LNG price level--the world’s premium gas market and highest global price benchmark.
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North Asia Spot LNG versus Dutch TTF Hub (2017 - 2018)
Thanks to the price rally, more LNG from the Atlantic Basin found its way to Europe than in previous years. (a net increase of twenty seven percent from 37.51 bcm in 2013 to 47.4 bcm since 2017). Looking ahead, LNG traders may prefer Europe as a primary market rather than incurring higher shipping costs when sending supply further east. Under current price dynamics, there is little to no incentive to reload cargoes from Europe to Asia. The European Union is the only region that is able to effectively arbitrage between pipeline and LNG volumes, and which also has an underutilized re-gasification capacity.
Although U.S. LNG exports to the EU almost doubled in 2017 Europe has not yet proved to be the destination of choice for the U.S. producers. This can quickly change as European hub prices further diverge from Henry Hub; a shift that is already creating a strong commercial case for US LNG. The spread between day-ahead prices at France’s Trading Region South (TRS) gas hub and Henry Hub in Louisiana, for example, already exceeded $10/ MMbtu in the first quarter 2017.
Wood Mackenzie projects that almost 60 percent of U.S. LNG will go to Europe, making the United States along with Russia the main suppliers for new incremental demand by 2025. Today European buyers are already amongst the most enthusiastic supporters of US LNG with numerous companies contracting off take volumes from US projects, including Sabine Pass and Corpus Christi. In fact, final investment decision on Cheniere Energy’s Corpus Christi terminal (9 mtpa ) was partially supported by Portugal’ s EDP 20 year sales and purchase agreement for 0.77 Bcf. In November 2017 Polish gas supplier PGNiG signed a 5 - year contract with Centrica LNG Co. Ltd. for nine shipments of liquefied natural gas from Sabine Pass terminal (13.5 mtpa) in southwest Louisiana to Poland's gas port in Swinoujscie on the Baltic coast. In coming years we will see more SPAs being signed between the United States and European buyers solidifying energy trade between the two biggest economic partners and key allies.
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Global LNG Flows and US LNG Exports (2016 - 2017)
After years of decline, gas demand is growing again, reaffirming the importance of the fuel for Europe’s energy future. At current gas production levels of 74 Bcf/d, cost-competitive U.S. LNG producers have the potential to fill the growing gap in Europe’s gas supply and become an irreplaceable trading partner in the process. Europe offers market liquidity, creditworthy counterparts and physical demand which will make it a premium market in coming years. Against the backdrop of trade war and tariffs, U.S. LNG can prove to be a driver for better Transatlantic trade relations.