Can Europe absorb a wave of new liquid natural gas?

Pricing, infrastructure and security of supply were at the heart of this Flame 2016 panel discussion, hosted by Richard Tyler, partner in the energy team at Hogan Lovells.

The impact of increased supply

First, Tyler challenged the panel to outline first the impact of the likely increase in US capacity on the European market. The belief of Ignacio de Aguirre, head of strategy at Gas Natural, is that there is potential for the European market to absorb the LNG excess, but that Europe still relies on long-term contracts and therefore the ‘gap’ to accept this potential flood of LNG energy is limited, especially as the demand in the European market has, in his view, already peaked.

Benjamin Marueda, senior VP from Engie LNG, disagrees. He predicts that around 60 million metric tonnes per annum (mmtpa) will be imported into Europe by 2020, with 30 and 40 mmpta coming from the US. “I think the European markets - not in the peninsula, but in the TTF or NBP - are liquid enough to absorb that amount of energy and the price will react to according to the supply and demand balance at any point in time.”

Marueda believes that, for Russia, there are two possible responses to this over-supply: either they can fight for market share or defend the price – in the past they have absorbed the excess of energy coming into Europe, for instance from Qatar in 2009. He believes that this time they might decide to fight for market share and subsequently put downward pressure on price. “Up to what point, that will be the key question, and it will really depend on the spread between the Henry Hub and the European gas price, at what point in time US plants will have to shut-in.”

Gas versus coal in Europe

The panel discussed the potential for low gas prices stimulating the European market demand. De Aguirre believes this will be the case, especially with the current competition between gas and coal in the marketplace. Benjamin Marueda agrees with this potential for a switch from coal to gas – especially in a more regulated European energy environment.

“It is up to the industry to advocate for gas – but it will depend on the individual governments as to whether they want to put a cap on emissions or increase CO2 prices. The UK has done it and it had an impact there,” said Marueda. “But, whatever governments do, the price will be the main reason for the switch and all the regulation will be of an additional Maruedaefit to that.”

For De Aguirre, it’s not only price that will have an impact: the regulatory changes introduced as a result of the COP21 commitments from 2020 will also result in a shift away from coal.

European import capacity

Much of the US LNG available to Europe is unable to benefit all countries because of access issues and according to Martin Jahan de Lestang, CEO of Elengy, in the past there have also been issues with the consistency of supply.

“You were never sure that the gas would be there when you need it,” Martin says. “We see that there has been a fundamental shift in the industry with a lot of flexible LNG coming on stream and representing a bigger part of the global market. We can now rely on LNG for spot optimisation…which was not the case ten years ago.”

The opportunities provided by LNG reloading, especially for short-term or spot optimisation trades, were also discussed. Martin told the audience that this year to date Elengy has already made eight reloads at its terminal – compared to just three reloads for the whole of last year.

New markets, new opportunities

Tyler challenged the panel to outline their predictions and strategies for driving future revenue in the current marketplace. For Benjamin Marueda of Engie LNG there were three: the development of new energy markets, the growth of the energy trading business and the development of small-scale LNG as a way to grow in the future.

For De Aguirre, there is still plenty of space for gas to be consumed, especially in emerging markets. “We still believe that gas has its place, even with the emergence of renewables”, he added.

Martin Jahan de Lestang outlined the potential from energy bunkering and smaller volume transactions – he confirmed that some cruise vessels are ready to start using LNG and there is continued potential in truck loading. “In the Netherlands they opened the way,” he told the Flame audience, “and we are trying to work on the French market to do the same. It’s very useful for our business to rely on small volumes that can play a role in energy transition and transportation.”