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Surf's up for LNG in Europe

Everyone expected a wave of supply to be hitting Europe’s market by now. It hasn’t arrived yet, but it will

The wave of liquefied natural gas expected to hit European shores in 2016 didn’t arrive, nor is it likely to in 2017, though volumes should be higher. But a global glut is approaching and it makes 2018 the year when Europe should see a surge in supply and possibly a price war erupt with Russian pipeline gas.

In a February report, the Oxford Institute for Energy Studies (OIES) likened the predictions of an LNG surge to Europe—often referred to as the “market of last resort” due to European prices tending to be the lowest on offer globally (if you exclude the net-exporter US)—as the boy who cried wolf.

“Since 2015 analysts and researchers have announced the imminent arrival of a surge of LNG into the European gas market, as supply projects from mainly Australia and the USA come on stream and LNG in excess of Asian requirements arrives at European import terminals. To date this has not happened, in fact 2016’s European region LNG imports were down 3.3% on 2015,” the OIES noted.

Understanding why the surge didn’t happen goes some way to predicting the likely course of the next few years.

Much LNG capacity, around 35m tonnes a year extra, came on stream in 2016, but actual LNG supply growth was only about 6%, equivalent of just 10m to 19m tonnes (depending on estimates), to around 260m-265m tonnes. Most of this came from the ramp-up of Australian LNG projects and Sabine Pass trains 1 and 2, which together added about 15m tonnes of LNG supply in 2016.

“Whereas you had a lot of new LNG plants starting up, actually because these facilities take a while to ramp up to full capacity and because a lot of them came on in the second half of the year, the impact of the volume of new supply on to the market wasn’t dramatic and the market was able to absorb those volumes,” says Gary Regan, a senior consultant for Gas Strategies. He says his firm’s outlook published in LNG Business Review in January 2016 had predicted 22m tonnes of new supply in 2016.

In addition, a lid was kept on the increase by the tendency for such huge LNG projects to be delayed because of problems like project schedule slippage, commissioning issues and feed-gas supply niggles. In 2016, the main supply delays came from Gorgon LNG suffering teething problems and delays to Malaysia’s floating LNG development.

That meant that the lower-than-expected volumes of new supply were readily consumed by existing and new markets in Asia (which added 17bn cubic metres of demand) and the Middle East (up 10bn cm). Six new importing countries have joined the gas-import mix since 2015: Colombia, Egypt, Jamaica, Jordan, Pakistan and Poland. South American demand fell, but only by 5bn cm, according to the OIES. All told, this left only around 50bn cm of LNG available for Europe in 2016, much the same level as has been the case for the past three years.

In 2017, therefore, the picture will see the ramp-up to near full capacity of projects that came on stream toward the end of last year (Sabine Pass’s trains, ConocoPhillips’s Australia Pacific LNG train 2, Gorgon train 1 and Angola LNG) as well as five world-scale liquefaction trains due to commence commercial operations in 2017—Australia’s Gorgon trains 2 and 3, Ichthys train 1 and Wheatstone train 1, and Sabine Pass train 3. This could result in an extra 36m tonnes of LNG coming on to the global market. In 2018, another 40m tonnes should hit the market.

Delayed influx

In short, the wave of extra supply was delayed, not avoided. For Europe, it’s still a prospect.

What impact will it have in Europe? “If the new wave of LNG finally arrives, it could help lower gas prices,” says Anouk Honoré, senior research fellow of the Natural Gas Research Programme at the OIES. “At present, the LNG market is tight because delays in bringing on new US and Australian LNG capacity have coincided with a cold Chinese winter and South Korea having some nuclear plants temporarily offline. Things are likely to change as 2017 progresses —I would expect higher European LNG imports in 2017 compared with 2016.”

Trevor Sikorski, head of natural gas and carbon research at Energy Aspects, says his firm’s latest global forecasts for 2017 put additional LNG cargoes available to Europe at just over 23m tonnes (or about 35bn cm) across the whole year, with that figure biased toward the summer: the first quarter will be up by 2m tonnes (2.7bn cm) and summer up by almost 17m tonnes (23bn cm).

For the OIES, two scenarios will determine the level of LNG hitting European shores in 2017: low demand for LNG in Asia leading to a surplus of supply; and faster LNG demand growth in Asia absorbing the growing supplies of new LNG, allowing Russian pipeline exports to Europe to stay above 150bn cm/y until 2019 and 2020.

Already, several signs suggest that high winter demand in Asia was down to specific factors—Chinese weather—rather than the start of a trend towards higher LNG demand. For example, the first ever LNG cargo from Peru will soon arrive in the UK market, some Asian buyers are already moving down to their take-or-pay commitments, and the first cargo of LNG was reloaded from Japan.

“If you think of Japan as the biggest market with very high demand for LNG, cargoes being reloaded and re-exported is something you wouldn’t have thought would ever happen three years ago,” says Gas Strategies’ Regan. “You are starting to see some unusual things happening in the market, which are perhaps early signs of distress.”

With so much new production anticipated by the second half of 2017, sellers in over-contracted Asia could have to start sinking surplus volumes in the liquid markets of Northwest Europe. If this coincides with low seasonal demand in Europe, it could lead to a quick and significant European price crash. This, in turn, could cause Asian spot LNG prices to fall back to April 2016’s $4 per million British thermal units—or even lower.

Prices are already falling quickly in the shoulder months of the LNG market, but Regan doesn’t see a price collapse happening just yet. “We are still in a transition, certainly a point where you could quite quickly see low prices.

“But I don’t think 2017 will necessarily be the year that the LNG markets are in a glut. I think 2018 may be the year in which we see a prolonged period of very low prices and further pain for LNG suppliers,” he says.

That should also prompt Russia to take steps to fight for its current European market share; it has already stated it wants to maintain a circa 30% share of the European gas market. Russian gas supplies to Europe and Turkey hit an all-time high in 2016, up 13% from the year before to 179.3bn cm, and a further rise is expected in 2017.

“Already, we’ve seen that Russia is going to fight for market share: in its public statements, in the fact that it supplied record volumes to Europe at relatively low prices last year and in the fact that it’s made moves to deliver more flexible commercial arrangements,” says Regan.

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