Is Europe’s gas market ready for US imports?

The first shipment of American Liquid Natural Gas, from Cheniere’s Sabine Pass LNG plant on the coast of Louisiana, is expected to leave by early March, when loading of the Energy Atlantic, a 290 metre LNG tanker, is complete. European customers, who have signed LNG sale and purchase agreements with Cheniere Energy, include Centrica, a UK utility, energy company BG Group with a 20 year contract to buy most of Sabine Pass’s first train output, Spain’s Iberdrola SA and Gas Natural Fenosa and France’s Total. Cheniere’s Sabine Pass and Corpus Christi LNG export terminals have signed contracts  to ship the equivalent of around 700 million cubic feet of gas a day to Europe according to the U.S. Energy Information Administration.

US LNG exports to Europe are arriving at a region where demand for gas has fallen by around 20 per cent, due in part to a substantial switch away from gas power generation, towards officially promoted and heavily subsidised renewables and uninhibited use of cheap domestic and US coal, boosted by a collapse of Europe’s carbon pricing market.

Import capacity

In terms of LNG import capacity, Europe is ready for US LNG exports. Europe’s 45 operational LNG import regasification plants are currently running at 20 per cent of capacity leaving room for another 160 billion m3 of imports according to Gas Infrastructure Europe, July 2015. Western Europe’s LNG import terminals include South Hook in Wales with a yearly total processing capacity of 15.6 million tonnes, enough to satisfy a fifth of UK demand, and the Isle of Grain situated in South Wales, which is linked by interconnectors with Ireland and Holland. These import terminals are well located to supply US LNG for distribution into Europe’s major gas markets (UK, Netherlands, France, Germany, Italy and Belgium).

However, Eastern and central European countries are not so easily accessible although, in an effort to reduce  their dependence on Russian gas, both Poland and Lithuania have recently opened import terminals. Poland’s Świnoujście LNG import terminal began operations in 2015 to supply the domestic market, Czech Republic and Slovenia whilst Lithuania’s Klaipeda LNG floating storage and regasification terminal, currently supplied by Statoil, is in talks with Cheniere. However, it is central European markets which are currently not easily accessible for US gas. As Paweł Olechnowicz, Chairman of the Board of Directors, CEEP (Central European Energy Partners) states “we definitely need to enhance our LNG receiving facilities and gas pipeline infrastructure. At the moment, none of the existing LNG import terminals is in a position to fully serve the vulnerable flanks of Europe ( central European states)” reports CEEP May 2015.

Gas distribution weaknesses

According to ENTSOG’s Ten Year Network Development Plan 2015, there are crucial weak points in Europe’s gas distribution infrastructure. Congestion is a major problem at three strategic points in the network, namely along the  pipelines linking the Baumgarten hub in Austria with Oberkappel in Germany; the Pyrenean interconnector between France and Spain and the North South Baltic Adriatic interconnector (NSBAI) between Poland and Croatia. Improvements to the Pyrenean interconnector will double capacity to 14 bcm from Spain to France thereby allowing gas imports from North Africa to rise to as much as 10 per cent of current Russian supplies claims  Spain’s gas industry association. Completion of the strategic North South Baltic Adriatic  interconnector “would integrate the different and still largely separate economies between the Baltic, Adriatic, and Black Seas. This will allow gas and other resources to flow freely wherever needed, increase energy security, and benefit consumers” says Olechnowicz, opening up these markets to world gas supplies.

Upgrades to the gas distribution network and new interconnectors along with de-indexing of gas prices from oil will further stimulate Europe-wide cross-border trade in gas.

Other competition

This imminent shipment, inaugurates the arrival of the US as a gas supplier to the world and provides strong competition for rival LNG plants such as those proposed in Russia, Western Canada or East Africa. The arrival of US LNG will hold down energy costs in Europe and provide competition for Chevron’s huge Gorgon and Wheatstone projects in Australia due to come online this year, creating a supply glut and a  buyer’s market. However, in the short term, deteriorating market conditions, new supplies and the growth of the LNG spot market may constrain future US LNG exports. Only five US LNG export plants have signed up enough customers on long term contracts to guarantee their revenues. They are Cheniere’s Sabine Pass and Corpus Christi plants with estimated total output 31.5 million tonnes a year, Freeport LNG due early 2018 with an estimated annual output 15 million tonnes, Cameron LNG due early 2018 with 13.5 million tonnes  capacity and Cove LNG on east coast of Maryland.

The difficulty for US LNG suppliers, is that Europe has access to both pipeline gas predominantly from Russia, Norway and North Africa and, from further afield, from Central Asia as well as LNG imports from the Middle East, Algeria and Nigeria. Algerian supplies are well integrated into the European market via the Trans Mediterranean pipeline to Italy, the Maghreb Europe pipeline linking Algeria via Morocco to Spain and the Medgaz line linking Algeria with Spain. Standing capacity of this network stands at 54 Billion cubic metres (Bcm) a year more than double Europe’s current imports of 25 Bcm of Algerian gas. The timing of US LNG exports could not be worse for Cheniere. With Benchmark UK National Balancing Point Gas dropping by almost half since 2013 to around $ 5.20 per mBTU, LNG exports from the US to UK terminals are unlikely to be economically viable. Therefore, for the conceivable future, Russia and Norway will continue to supply around half of Europe’s demand for gas and more, if Gazprom’s proposal for a  Nordstream II, supported by Germany, becomes a reality. If, and when, European demand for gas revives new supplies from the Caspian Sea, Eastern Mediterranean, North Africa and perhaps even Iran will be available. Essentially, it remains an open question whether U.S. LNG will become an important source for European markets since gas prices in Asia have been historically higher than in Europe.