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A consultant's-eye-view | Is Europe’s gas market ready for US imports?

Posted by on 12 February 2016
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At last years’ Flame, there was a war game exercise for European gas. It was an interesting process in itself, with different tables representing the main suppliers and the market. There was also a US table that con­cluded, causing much surprise and disbelief in the room, that the US would send gas at a low price to Europe, while the Norwegian table concluded on more of a wait-and-see strategy. Here we are in 2016, US imports arriving, while Norway would like “guarantees” of demand to increase output. It will be interesting to see what the war room concludes this year!

Is Europe’s gas sector ready for US imports?

The difficult part of this question is defining the gas sector. There is not a coherent gas industry in Europe any more. We have oil and gas producers, commodity traders and utilities (coal, gas, electricity). Then we have regulators, both of energy, competition and emissions. Finally, there are gas consumers, large and small. The impact of LNG is different for each of these groups and for each of the countries. Some of the countries wanting new LNG will perhaps find it most difficult, as they have binding pipeline gas contracts and no LNG terminals. But, the LNG could enter any terminal and swapped with other supplies, now that there is more transparency and openness in the gas grid.

US imports could be large – or not

The State Department has announced that the US could send 100 bcm of “cheap gas” to Europe. Physically, this is possible – there is spare capacity in current LNG import capacity and there is a growing demand for LNG to ships and trucks. The volume is almost a third of current imports, dominated by Russia and Norway. If it comes on top of current supplies, prices would fall dramatically, perhaps even below the cheap coal Europe uses today. That could be good for utilities, consumers and the environment.

At some point, though not immediately (judging by the producer response to low oil prices), other supply could adapt, depending on price, costs and alternatives. The easiest way to adapt, the first step in production companies, is to delay new projects. So far, this has not been enough in oil, and perhaps not in LNG, either, to secure what they suggest are “sustainable prices” for business. A key question to all producers, also in the US, will therefore be, “how low can you go?”

How much LNG will really cross the Atlantic to Europe? Difficult to tell! Conventional thinking used to be that LNG will only flow where there is a lack of pipeline gas or people would pay more for other reasons. Now, in a buyers’ market, it is more how low the seller wants to go. That discards the traditional view that supply follows the cost curve – there is no such order, now we have over supply and very little production is turned down. So, of all the current projects, how many will be completed and which share of the LNG will come to Europe? The more we get, the lower the price, and the less they should send…

Perhaps the US suggested 100 bcm for Europe will be closer to 10, and perhaps lower prices will see more LNG going to new markets in Asia and Africa, where demand is growing.

The good news for consumers and regulators concerned about security of supply is that there is clearly no shortage of gas in the world. This reduces the need to have long term contracts and it makes it easier to shop around more often. Further, transparent hub prices and very mobile LNG makes gas more like oil, and it matters less which country imports have been produced. The lower the gas price goes, the lower the chance of new, unconventional gas production is – which may please some…

We may, in this situation, see more countries following the UK in retaining gas in the mix for longer and cutting costs faster. There are naturally complex considerations behind this latest policy shift, but falling prices was probably helpful.

So, is Europe ready?

Physically, there is room to import more LNG, both from the US and other countries. Prices are either at or around market prices, and as such not scary. Are the other exporters to Europe ready? Perhaps they are hoping for a similar development on the continent as we see in Great Britain – more gas, after all. But if demand falls, as the current Energy Union expect, what will happen to supply from non-LNG sources?

With US gas comes more transparency and customer focus that could be good for the market and perhaps useful for other suppliers. With new realities in demand, perhaps there will be more dialogue, customer focus and dynamic gas supplies – that would be good for Europe!

Karen Sund at Flame Conference

Karen will be chairing an ‘In The Boardroom’ Working Group. Be part of a small group discussing the specific industry elements of interest to you with industry experts, including:

  • 11:10-11.40: Hub Trading Doug Wood, EFET
  • 11:40-12.10: Gas, Power & Renewables
  • 12:10-12.40: How Can Natural Gas Contribute To Energy Transition? Hansch van der Velden, GASUNIE

Find out more here.

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