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Turkey tucks into bargain US LNG

Russian pipeline imports are flexed lower in an effort to profit from LNG supply glut

Turkey cut its total pipeline imports by 3.55bn m³, or 18pc, to 16.15bn m³ in the first half of 2019, ramping up instead LNG deliveries as the Atlantic Basin bathed in a sea of plentiful supply and low prices. 

Russian pipeline imports—it also receives cross-border flows from Iran and Azerbaijan—took the most significant hit. Delivered volumes in the first half of the year were down by 4.5bn m³, or 36pc, to 8bn m³, leaving Russia supplying just 34pc of Turkey’s import requirements. In contrast, Russia took a 47pc slice of Turkey’s 50.35bn m³ 2018 import pie. 

Pipeline imports have lost out to LNG, with ship-borne volumes totalling almost 7.15bn m³ in the first half of 2019, up by 0.9bn m³ from just under 6.25bn m³ in the same period last year. In particular, there has been a significant increase in LNG imports from the US. In January-to-June this year, Turkey imported 884mn m³ via five cargoes of LNG from the US, compared to six cargoes for the whole of 2018. 

The key reason is low prices and Gazprom’s refusal to reduce its price, says Ellinas

And Turkey is not alone in finding LNG from the US to its liking. In the whole Mena region, a total of 18 cargoes were delivered in 2018, while up to June this year the tally of arrivals had already reached 15. Jordan leads the way with six cargoes in the first half of 2019, again closing in on its total for the whole of 2018. The United Arab Emirates, which both imports and exports LNG, took three cargoes in January-June, compared to just once across 2018.

Over the period from February 2016, when US exports began, until mid-2019, Mena countries have been destinations for 10pc of American LNG. Kuwait, Israel and Egypt (which is no longer an importer) also received US LNG across this period, but only Kuwait took a 2019 cargo up to June.

Attractive price

US Department of Energy figures show that in June this year the average price of US LNG was $4.39/mnBtu, down from $5.66/mnBtu at the start of the year.

Appetite for LNG from the US “is driven by a number of factors”, says East Med gas analyst Charles Ellinas. “But the key reason is low prices and [for Turkey] Gazprom’s refusal to reduce its price. As a result of lower demand in Asia, US LNG is being diverted to Europe, Turkey and the Mena region at very low prices, at uneconomic netbacks.”

The desire of both Turkey and Jordan to diversify sources of supply is another factor, as is the flexibility of spot LNG as the countries seek back-up for increased variable renewable power generation.

Source: US Department of Energy

But while the current prices make US LNG attractive, Ellinas cautions that its allure may not last. With the 31.5bn m³/yr Turkstream pipeline under the Black Sea from Russia to Turkey coming online and “LNG prices edging upwards next year, the situation may change”. “The appetite for US gas will remain only as long as the price remains low,” says Ellinas. “It is unsustainable in the longer term.”

There is also a limit to how much Turkey, and indeed other Mena countries with pipeline imports, can simply turn down these volumes to replace them with cheap spot LNG. Long-term contracts underpin the vast majority of these deliverieswhile buyers have been renegotiating deals to try to increase both price and volume flexibility in recent years, often they have prioritised the former, sometimes even to the detriment of existing terms for the latter.

Source: US Department of Energy

At some point, Turkey’s ability to turn down and postpone its contracted Russian gas deliveries will rub up against the barriers of its take-or-pay obligations.  

Turkey also significantly boosted its Algerian LNG imports in the first half of the year—up by almost 0.8bn m³, or 37pc, to just shy of 2.95bn m³ while reducing its Qatari take—down by more than 0.65bn m³ to under 1.3bn m³. Reducing the latter, given it is most likely oil-linked contract supply, looks like a logical move, while the increase in the former could suggest some deliveries via contract, but topped up by active spot buying from a very proximate buyer who may have been offering competitive pricing.

The country also imported smaller volumes of LNG from Nigeria, Norway and Trinidad, again most likely on a spot and keenly priced basis. Turkey gas has two onshore LNG regasification units (one at Marmara Ereglisi on the Marmara coast, the other at Aliaga on the Aegean) and two offshore units (at Aliaga and at Dortyol on the Mediterranean). Their combined receiving capacity is more than 20bn m³/yr.

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