LONDON (ICIS)--LNG delivering into Europe from North America has rocketed in 2019 which has increased the volume of US LNG that is sold into a European-indexed market. This is a trend which could climb in 2020.
The trend will represent a shift from more traditional contract structures which are usually tied partly to oil derivatives, but Asian producers will likely keep the link to Brent.
The use of more European hub indexation will reflect the fact that greater volumes are being produced and consumed in the Atlantic basin.
EUROPE’S GLOBAL DOMINANCE
As a global consumer of LNG, European imports have shattered records in 2019 with Qatari and North American exports surging.
In terms of LNG supply into Europe for the year, volumes surpassed 82 billion cubic metres by the end of November - far higher than previous years, LNG Edge data showed.
Adding to this has been soft Asian demand forcing spot prices to tumble to new lows.
With both the Atlantic and Asian basins oversupplied, gas prices have crumbled and have been trading significantly lower year on year.
• Dutch TTF month +1: 63% lower
• British NBP: 60% lower
• East Asia (EAX): 81% lower
• US Henry Hub: 87% lower
This has created different opportunities for prospective buyers and sellers who are trying to recover the greatest margins when delivering into a market.
North American export capability will approach 4.1m tonnes (mt) per month during the first quarter of 2020, 1.71mt more year on year.
For producers in the US and lifters in Europe, contracts linked to liquid hubs such as the TTF provide greater risk management and flexibility.
“The beauty of TTF is it considers both pipeline gas and also LNG, this triggers more volatility and is good for traders,” an LNG procurement manager told ICIS.
Indexing to the TTF would drive down the price risk for European buyers, many of which are already active on the Dutch hub.
The depth of the TTF curve also allows for hedging across a longer period.
When comparing a contract structure which is indexed to the TTF against a crude linked product then margins favour hub indexation in Europe.
But if bearish European prices prevail into 2020 which is likely then US margins will be pressured greatly which could lead to plant shut-ins.
In Asia however, many long-term contracts remain linked to oil and risk shedding value when compared to gas delivered on the spot market.
The ICIS Brent month +2 has averaged $10.50/bbl since 1 October whereas as the equivalent EAX contract has averaged $6.40/bbl.
This means that Asian buyers are locked into paying higher prices for LNG delivered into Asia when compared to the spot price.
Despite this, when compared to the amount of volumes traded on a spot basis against longer term deals then oil-linkage makes sense in Asia as producers’ eye forward visibility on future pricing which Brent allows.
Hybrid contracts are becoming more attractive as players diversify their portfolios to capture greater margins.
State-owned company China National Offshore Oil (CNOOC) indicated it would use part Brent and TTF indexation in its 13-year 1.5mtpa deal from Mozambique, a source told ICIS in November.