Focus on Atlantic basin LNG
The influence of US prices on rates paid for LNG in Europe has been seen more clearly this winter than ever before, according to executives at a recent conference in London.
“There have been times this winter when Henry Hub (US spot benchmark) set the price of acquiring spot gas for sale in Spain,” said an LNG buyer for Spain’s Union Fenosa. “Spanish shippers have been buying cargoes for Henry Hub less about $1/mmbtu for transport and nondelivery penalties. As Spanish prices are effectively capped by the regulated tariff rate of about $4/mmbtu this means they are losing money.”
An LNG buyer for French power group Electricite de France told a similar story. “It’s a sellers’ market. This winter LNG cargoes in the Mediterranean have been too expensive because the sellers want the equivalent of the US price,” he said. EDF, which set up a gas unit in December 2004 to enter the French market, has not bought any cargoes as a result.
The connection was confirmed by Simon Sydenham, head
“There have been times this winter when Henry Hub (US spot benchmark) set the price of acquiring spot gas for sale in Spain”
of LNG at Centrica, which has about 40% of the UK retail market. “It’s hard to see how LNG prices in the US and the UK can be dramatically different,” he said at SMI’s annual LNG conference. Arbitrage using LNG means that “prices in these markets cannot be fundamentally different. A larger role for LNG means more influence from and contact with the US market.”
The trend towards a link between US and European prices has become clearer as growing interconnections within Europe mean increasing pressure for prices to come into line across the region. “European energy prices will become increasingly linked to global gas prices,” he said. “North west Europe will have to compete with the US for new LNG supplies.”
Last year Centrica became the only UK retailer with a longterm LNG supply contract when it signed a 15-year deal 3 Gm3/ year deal with Petronas to be delivered through the proposed Dragon terminal at Milford Haven from 2007/08.
Overall the US and European markets both absorb about 500 billion cubic metres a year. Average LNG prices in the US in December were $6.72/mmbtu, according to the EIA, while national statistics show that in Spain they were just over $4 and in France $3.50.
Europe currently provides some of the lowest netbacks to producers, according to industry estimates. On the Libya to Spain route this is estimated at about $3.50/mmbtu and Oman to Spain $2.40, compared to almost $6 for Oman to Japan and an average global range between $3 to $4.50. Although the Atlantic Basin market is growing more rapidly, it accounted for only 30% of the 169 billion cubic metres of gas as LNG shipped in 2003, compared to 50% for Japan and 15% for South Korea.
In mid-February US spot prices on Nymex and Henry Hub were around $6/mmbtu while in the UK the NBP was at about $5.50. Allowing a dollar per mmbtu for transport and other costs, a simple comparison makes the NBP appear more attractive for cargoes that would otherwise have to cross the Atlantic. However, city gate prices in the north west US of around $10 (New England) or $11 (New York) may change the picture.
The US oil and gas producer Marathon underlined competition for supply between buyers in the US, UK and Mediterranean. “If the UK’s largest retailer Centrica sees an Atlantic price emerging then that really means something,” said vp Bill Hastings. “The dynamics of the market place are developing despite a surprising reluctance to accept the ‘Atlantic wide’ trend.”
There is a noticeable lack of signed sales/purchase agreements between producers aiming at the US and UK and buyers in those markets, he said. “The reason for this is that they are sorting out the terms and conditions of supply in the new Atlantic market,” said Hastings. “This covers diversion rights and sharing among many other things.”
“Qatar will set the tone of the coming wave of agreements,” he predicted. Centrica’s LNG deal covers a fraction of the LNG earmarked for the UK by Qatar, Egypt and other producers. Marathon expects the first LNG in 2007 from its project in Equatorial Guinea.
The US-Europe connection has been exposed more clearly because of tight supply this winter. There are eight LNG carriers moored off Gibraltar in the Mediterranean unable to find cargoes, Captain James MacHardy of the Society of International Gas Tanker & Terminal Operators (SIGGTO) told the conference.
This is a symptom of shipping oversupply that will take about five years to resolve, said Edward Walshe, a senior advisor at LNG consultants Poten. “Independent ship owners simply got it wrong. They piled in and some have burned their fingers,” he said. So far 177 LNG carriers are afloat and another 106 are being built.
The practicalities of arranging cargo diversion to take advantage of Atlantic arbitrage mean that short-term switching is rare, he said. “It is not that straightforward to move surpluses, the practical side is a big issue.”
“I find it hard to believe that QatarGas II will be supplying Milford Haven all year round,” he said. “The UK has a large seasonal variation and this introduces peaking problems. Diverting to the US is possible but shipping is very expensive.”
BG reinforced Poten’s message about the limitations of the spot market. “The spot/ long-term trade proportions are a red herring – it is the flexible term deals that will define the future of the industry,” said Stuart Fysh, vp and md for the Mediterranean Basin and Africa. “There are now upfront negotiations between buyers and sellers about diversions rights, shares of gains and how to deal with excess capacity. Destination changes are key not volume flexibility.”
“Contracts for the Atlantic Basin now often include guidelines on how to deal with diversions. The buyers and sellers are carving up this new territory,” said Fysh. “Flexibility within long-term deals is key. Recent contracts contain multiple prices and destinations. Now people almost assume this kind of flexibility.”
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