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Europe to benefit from US exports

Rising US supplies, expanding European demand and much available regasification capacity should increase liquidity in the Atlantic Basin

While Asia-Pacific consumed the lion's share of the extra liquefied natural gas exported last year, the world's second-largest LNG market showed how developed hubs and the steady increase of American supplies are increasing market flexibility in the Atlantic Basin. This let gas buyers limit the effects of short-term supply and demand fluctuations. Gas's steady globalisation is especially visible in the trade between Europe and the US.

Industry group Cedigaz estimates that European gas consumption grew by a strong 5% in 2017 from a year earlier, suggesting that the EU gas market expanded to about 315bn cubic metres during the year. According to the EU Commission, preliminary data indicated a spike of 14% in third-quarter year-on-year gas-demand growth. The rise brought a significant jump in trading volumes.

EU gas consumption was broadly based, benefitting from accelerating economic growth, considerable switching from coal-fired to gas-fired power generation, increased gas use in the transport sector, and lower-than-expected power generation from hydro and nuclear plants. Within that growth, northwest Europe, widely regarded as a demand sink for the global LNG surplus, was relatively quiet. Southern Europe, however, considerably increased its LNG purchases—partly to balance relatively expensive Algerian pipeline gas. Spain's surplus LNG regasification capacity, in particular, allows for sharp ramp-ups in imports when demand or market economics come knocking.

US LNG exports rose alongside this increase in demand. In the third quarter of 2017, American sales to Europe represented 6% of the market, according to the Commission; and eight countries have now bought US LNG since exports began from Louisiana in early 2016. All told, EU countries have accounted for about 10% of sales from Cheniere Energy's Sabine Pass liquefaction facility in Louisiana, according to the US Department of Energy.

More LNG is expected in the first half of this year, when Dominion Energy's Cove Point liquefaction facility opens. After that, the trickle will turn to an onslaught, as more plants are completed on the Gulf, Atlantic, and West Coasts. By 2020, the Energy Information Administration expects the US to be exporting as much as 95bn cm a year of LNG (or almost 70m tonnes a year), compared with about 15bn cm/y now.

Trading boost

Trading activity around EU gas hubs increased significantly in 2017, according to Pegas, the gas trading unit of Germany's European Energy Exchange. It reports that activity on its gas-trading platform reached a record 1,978 terawatt-hours in 2017, up 14% from 1,733 TWh in 2016. While volume continued to be concentrated on Pegas's TTF platform, which showed a 26% increase, it rose across the board. Activity at Austria's CEGH VTP trading platform, on a key entry point for Russian gas imports to EU countries, increased by 26 times 2016 levels. UK NBP volumes remained high, but difficulties at the UK's key Rough storage facility increased seasonality.

Southern Europe's major gas markets, Spain and Italy, suggested improvements to the Spanish Mibgas and Italian PSV markets in attempts to closer link the two to the more popular and liquid North European TTF market. Mibgas proposes to expand services on its derivatives-clearing platform, as well as to expand into LNG and storage-terminal products, but awaits regulatory clearance. Italy's government has proposed that national regulated entities, perhaps including the operator of its transmission system, Snam Rete Gas, acquire unused Swiss transmission capacity to lower transmission costs for gas importers.

While the principle of both countries' attempts to boost volumes on their domestic gas hubs is laudable, gas-market observers say both countries' historical tendency to intervene when markets don't conform to government priorities will impede growth in trading. Spain also remains essentially a gas island with excess import capacity.

10%—Share of Sabine Pass's LNG exports bought by European customers

Spain's pipeline interconnections with the French market have long been in need of upgrading to promote market liquidity. Both Italy's and Spain's gas markets are particularly susceptible to swings in French electricity generation—an ever-more frequent occurrence as France's nuclear power park ages. A drop in power output in France means a consequent rise in gas-fired power generation in Spain and Italy.

Growth in Europe's gas market and US LNG exports has spurred interest in indices and derivative products useful in hedging transatlantic price differentials. Price-reporting agencies, including S&P Global Platts, Icis/Heren and Argus Media, publish FOB US Gulf assessed prices, initially based on Cheniere Energy's Sabine Pass liquefaction terminal.

So far, "there's not enough liquidity out of the US" to justify derivatives contracts for FOB US LNG prices, market participants say. But they point to nascent interest in derivative products that would allow management of exposure to the basis risk between US domestic gas hubs and liquefaction-terminal deliveries. Currently, most US LNG contracts charge a fixed premium, usually 15%, over Henry Hub futures settlement prices to cover delivery to liquefaction terminals. Price reporting sources add that interest in products allowing management of price and currency risk between Henry Hub and NBP and TTF deliveries is also picking up.

While South and Central America and the Caribbean have so far been the leading market for US LNG exports, evolution of specific trading products to support sales to those markets has not really emerged, say participants. The assumption appears to be that, in the long term, these markets will be dominated by Henry Hub-based pricing.

The increase in LNG spot trading has extended to the shipping markets and its indices. LNG shipping has for some time been dominated by dedicated long-term charters on regular routes between liquefaction plants and regasification terminals. But the expansion of short-term LNG-contracting and single-cargo sales has encouraged the London-based Baltic Exchange, or Baltex, to consider establishing an LNG Index. It announced this in January and has created a working group to evaluate various routes for inclusion in an index.

This article is part of a report series on Global LNG hubs. Next article is: LNG hubs—more global, more liquid

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