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The Americans are coming

The arrival of more US LNG in the Atlantic basin should cap European gas prices and help the bloc cut emissions

The impact of US shale gas production is starting to be felt in Europe, with Turkey receiving its first cargo of American liquefied natural gas, and Ineos its inaugural cargo of ethane. Two earlier US LNG cargoes have also made their way across the Atlantic and many more-both of ethane and LNG-will follow in the coming years. They should cap European gas prices and force established exporters, Norway and Russia, to cheapen the price of their gas, even as domestic European production shrinks.

Over recent years most of Europe's LNG has arrived from Qatar, Algeria or Nigeria, and demand is now edging up, helped by new Baltic regasification terminals. The US LNG deliveries should begin in earnest this winter. Provided Henry Hub prices don't rise much further-a recent rally took them above $3 per million British thermal units for the first time since 2014-the American cargoes should compete directly with piped-gas supply.

At present Henry Hub prices-about $3.30/m Btu-National Balancing Point, or NBP, and Dutch Title Transfer Facility, or TTF, prices in Europe will have to stay above about $4.30/m Btu to make the trade work, according to a report by Thomson-Reuters. But recent attractive margins on the trans-Atlantic route may have been locked in on the forward market, helped by a UK winter premium thanks to problems at the Rough storage site, which accounts for 70% of UK gas-storage capacity.

LNG spot sellers will have to compete with the Russians and Norwegians, which are both on track to achieve record exports to Europe in 2016. After a number of years of contraction, Europe's gas market is at least growing again and domestic output is down-so there should be room for extra LNG. Demand is growing because coal prices are rising, making the switch to gas more attractive. This switching might provide for 70bn cubic metres a year more consumption, if the spark spread remains positive, according to some estimates. This is more likely if continental environmental regulations begin to penalise coal for its higher emissions, as is the case in the UK.

Ethane shipments should be more regular: its price depends more on lightened petroleum products than natural gas benchmarks. In any case, the companies involved have committed to a long-term deal. By contrast, LNG sales are largely expected to be on a spot basis, and in competition with alternative export markets and the US domestic market.

Pumping gas

Switzerland-based petrochemicals firm Ineos and partner Evergas, a Dutch shipper, have commissioned eight Dragon-class ships, each capable of carrying over 27,500 cm of liquefied ethane at -90°C. They plan to import over 40,000 barrels of oil equivalent a day for the next fifteen years, under several contracts with companies such as US firms Consol and Enterprise Products Partners. Shipments will come from ports on the US east and south coast to feed petrochemical plants. The cheaper gas should make the plants more profitable, says Ineos.

Whether or not the US LNG actually ends up in Europe, greater volumes are clearly available for this winter. Exports from Cheniere Energy's Sabine Pass facility began last March, and Shell has a 20-year deal for up to 5bn cm/y from train 1. In August, Train 2 at Sabine Pass started production, and export capacity is expected to reach 4.5bn cm /y this winter. Shell's off-take was expected to begin in earnest in mid-October after a period of planned post-commissioning maintenance at both trains.

Other contract holders include Gas Natural Fenosa, which has a 20-year deal for up to 4.75bn cm/y at train 2 that starts in September 2017. Train 3 at Sabine Pass is expected to start in April 2017; train 4 in August 2017; and train 5 by December 2019. Each of them will have baseload capacity of 6bn cm/y and peak capacity of 6.8bn cm/y. After off-takers have nominated their volumes, Cheniere will control the rest.

All this new American LNG, alongside rising exports from Australia should displace Qatar as the dominant spot seller into Europe. Its surplus cargoes have supplied the bulk of recent deliveries to South Hook, in the UK, and Zeebrugge, in Belgium. Some Qatari spot supply may also be soaked up by Egypt, which is seeking about 120 LNG cargoes for next year-the last year it is expected to buy much, before recent discoveries add to domestic output. In turn, this will force out Algerian and Qatar sales, adding to the glut from which Europe might draw.

So even if the US supply doesn't actually arrive in Europe, the continent will benefit from its availability. It means Europe will enjoy the fruits of shale gas-even while fracking is banned in much of the continent. Indeed, without the US shale supplies, European prices would be higher, raising import costs and making gas less competitive compared to coal. This would hurt the EU's fight against emissions. It's Europe's dirty little shale gas secret.

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