Focus: Spain’s LNG reload market takes root
The number of commercial reload operations at Spain's LNG terminals has increased markedly this year, with 13 having been carried out between the start of January and the end of April, compared with just two in 2011, according to ICIS analysis based on data compiled from Spanish grid operator Enagás and customs data.
Spain's natural gas participants, and in particular incumbent Gas Natural Fenosa, have argued that reloads are the only way they can deal with a contraction of the country's gas sector - brought about by a perfect storm of energy policy and the effect of recessionary pressures on Spanish energy demand.
To put demand fall in context, Spain's electricity generation sector consumed under 7TWh (651 million cubic metres) in March 2012, less than half the 14TWh consumed in March 2008.
Spanish natural gas shippers argue that reloads are a vital tool for shedding length from the long-term take-or-pay supply contracts they signed up to in earlier years, but which are now too large for the diminishing gas market in Spain.
Reloads were born partly out of shipping constraints and partly out of a pragmatic circumnavigation of contractual destination obligations imposed by some suppliers, meaning that although some vessels can be diverted to other markets to alleviate portfolio length, many cannot.
But the recent success of Spain's LNG re-export sector indicates this explanation underplays the motives for carrying out reloads. Despite prohibitive third-party access costs, the number of reloads being carried out in Spain has never been higher.
There is clearly money to be made. A glance at the balance sheets of Spain's main utilities shows they have fared far better in recent years than their German counterparts.
A competitive and profitable option
Reloading from Spanish terminal favours companies with both an existing foothold in the country's regasification terminals and with contractual supply into the county, with Gas Natural Fenosa having a clear competitive advantage over other participants.
According to ICIS analysis, Gas Natural Fenosa (by itself or through its Stream joint venture with Repsol) has accounted for 22 of the 30 commercial reloads from Spanish terminals since the start of 2011 (see Table 1).
Of that amount, the Spanish incumbent has taken 13 smaller cargoes on the 35,000 cubic metre (m³) Annabella from the Cartagena terminal to Italy's Panigaglia terminal as a portfolio optimisation exercise for its position in Italy.
Moreover, the company's access to three vessels, with a capacity of 70,000−90,000m³ through the Stream joint venture, has in the past allowed it to deliver seven cargoes to Argentine incumbent ENARSA meeting its requirements for vessels small enough to navigate the shallow draft up the Parana River where the Escobar terminal is located.
Unlike the majority of other capacity holders who would have to carry out multiple swaps in tank to acquire sufficient LNG for a reload, Gas Natural Fenosa will generally have access to its own volumes, which in turn means that it will only pay around $0.70/MMBtu to reload a smaller cargo.
The situation, however, is different for newer entrants, such as German utility E.ON. In October 2011, E.ON put together a reload aboard the 126,400m³ LNG Leo, which was understood to have been sold to Japanese utility Tokyo Electric Power (TEPCO) at a delivered price of $18.62/MMBtu.
Sources with knowledge of the deal say the process was an arduous one for E.ON that nearly did not happen. There was not enough LNG in the tanks of the Huelva terminal for the company to carry out a reload so it had to build the reload by purchasing in-tank from other counterparties.
Nevertheless, the deal was clearly profitable for the German utility, which lifted the cargo at $9.56/MMBtu, according to Spanish customs data.
And the maturing Spanish reload market continues to be an attractive one for participants in Spain in the current market.
If a capacity holder at one of the three terminals that currently offer a reload service does not have enough LNG in tank, then it would need to procure some from another counterparty on an in-tank basis. This is usually done by way of a time or location swap, but if the deal is done as a cash transaction.
As an illustration of the costs, the AOC (gas traded within the network) front-month gas for June delivery was this week valued at around €29.80/MWh ($11.08/MMBtu).
AOC prices are typically valued at a premium of around €0.50/MWh over the price of gas in tank to account for the cost of getting the LNG regasified and into the Spanish grid, putting in-tank gas at around €29.30/MWh. However, sellers of in-tank LNG usually demand a premium when a reload is being put together, once it is clear that the gas is destined for the lucrative export market.
The cost of reloading out of Huelva - the most liquid terminal - then adds around €1.70/MWh ($0.66/MMBtu) based on new third party access (TPA) figures released last week, putting the cost of a 60,000 tonne reload at $12.02/MMBtu, based on current figures.
But despite these high TPA costs, the netbacks achieved from delivering the cargo to South America or East Asia still is strong enough to drive the market, as underlined by data from last month, which saw two reload cargoes arrive in South America and two bound for east Asia.
However, aligning the reload trade and securing the LNG in, as well as the vessel for the operation, is a complex process with many components that can be easily derailed.
"At the end of the day, the whole [reload operation] can be cancelled because the system operator deems they need the gas in the tanks," one trader explained. "It's happened before... there's no guarantee [a reload] will go through, especially if it is one-arm loading, which takes forever," he went on.
The paradox is that the import terminal must be under-used enough to have the ability to use the reloading infrastructure for a period lasting up to three or four days, yet also have enough LNG in the tanks to facilitate the transaction.
In Spain, reloads are a secondary concern for terminal operators, and are only allowed to proceed if the business of unloading LNG has already been taken care of.
Nearing full capacity?
For this reason, some sources now consider that Spain's ability to carry out reloads may have reached a ceiling in its current capabilities. After all, Spain's six LNG import terminals - including the three able to offer reloads Huelva, Cartagena and Ferrol - are heavily under-used; the latest figures for March from Enagás showed that usage was respectively at 29% at Barcelona, 35% at Huelva, 25% at Cartagena, 48% at Bilbao, 38% at Sagunto and 41% at Ferrol.
Clearly, the capacity for reloads is not infinite, as how much can be reloaded depends upon how much LNG is actually being brought into a terminal in the first place. Yet average tank levels have been low since the lack of gas demand in Spain has encouraged more diversions. It was this chronic under-usage of infrastructure that helped persuade the Spanish government to shelve the long-planned El Musel LNG terminal that was supposed to enter operation at the start of 2013.
To grow the trade commercially, participants believe that the market must evolve. For example, the number of LNG terminals offering reloads could increase from the current three plants.
According to one trader, there is no reason why this should not happen, since reloads will offer a new revenue stream within a regulated charging regime that has been badly mauled by falling demand.
One such possibility is the Saggas terminal at Sagunto that was built at around the same time as the one at Ferrol. "It's Reganosa's [Ferrol's] sister plant, I am sure it could easily do reloads," the trader added. Saggas said last year it was looking into the possibility, but that the service was not yet available.
Another avenue is that the Spanish government could approve legislation being lobbied for by the sector seeking to cut the regulated cost of reloading. ICIS calculates that the third-party access charges associated with unloading a 60,000 tonne LNG vessel at Huelva, one of the three most expensive plants) will cost €92,000. However reloading a vessel of the same size at the same terminal will cost €1.53m.
The difficulties facing those seeking to amass enough gas for a single reload at a given terminal highlights the need for a transparent secondary capacity market, where capacity could be bought and sold freely.
However, arguably the biggest threat to Spain's nascent reload business is a change in the demand profile of customers not in Spain, but in Asia and South America.
It is for this reason that Spain's reloaders are now watching nuclear maintenance schedules in Japan more closely than developments than in their own country.
It imbues Argentina's decision to forcibly nationalise YPF from owner Spain's Repsol with an immediate importance, since there are indications that the Spanish oil major - a major shareholder in Gas Natural Fenosa - may stop supplying the country with LNG.
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