GIF Inside Story: Asian price spikes to challenge Europe’s ability to attract LNG in 2021

LONDON (ICIS)–European LNG imports totalled 71.6m tonnes in 2020 – the second-highest volume ever after 2019’s 75.7m tonnes.

Following the year-on-year drop, deliveries in 2021 will heavily depend upon Asian spot prices, which continued to break records in January as cold weather across key demand centres Japan and China pushed cargo prices closes to $40.00/MMBtu (€112.21/MWh).

For much of the year, Europe was on course to beat that 2019 record but rising Asian spot prices pulled in much more US LNG than in the previous year, with other flexible volumes heading to Asia and away from Europe.

In December 2020, LNG deliveries to Europe dropped to just 15% of overall supply. For the first five months of 2020, LNG sendout was at an all-time high and made up more than a quarter of overall European supply.

LNG deliveries to Europe slumped from June 2020 on the back of low demand and prices and were kept low through the second half of the year by a combination of unfavourable price spreads to Asia and issues with global production. A surge in Asian prices in November and December raised concerns that supply would fall further in the first quarter of 2021, and in January so far those concerns have 
been realised.

Within the first twelve days of January last year, Britain had received seven laden vessels, while four had berthed in the Netherlands, according to LNG Edge data. So far in January this year just three vessels have delivered to Britain and none to the Netherlands.

Less than five ships are potentially on the way to the two European hubs for the remainder of January, with ship and port data failing to confirm most of them.

A reload and a ship-to-ship transfer have taken place at the Dutch Gate terminal in January, showing that arbitrage is sufficient for LNG shippers to buy gas in Europe and sell in other markets.

Another ballast vessel is due to call at Gate before the end of the month, likely for a reload or ship-to-ship transfer.

There is some capacity for the gap created by falling LNG supply to be met by pipeline gas, particularly from Russia, but high storage withdrawals will also be needed in the coming weeks.

An increase in LNG deliveries to Europe from Qatar and the US could come in the spring if spot Asian prices fall closer to European hub prices.

Pipeline ramp-up

LNG has only embedded its position as a significant source of European supply in the last two years, following increases in global production capacity. Large quantities of LNG arriving in Europe over this period have often contributed to oversupply in the region and resulted in reduced piped gas deliveries.

In December, piped gas flows from Russia and Norway both ramped up to meet high demand. There is now limited room for Norwegian deliveries to move higher based on historic data, but Russian flows could ramp up further in January and February to fill the gap left by lower LNG supply.

Withdrawals from storage sites have also increased significantly in recent weeks in an attempt to plug the gap, with facilities dropping from around 86% full at the start of December to less than 63% full on 11 January, according to data collated by ICIS.

Although volumes in store are currently around level with the same date in 2019, further withdrawals are likely to support summer-delivery prices at European hubs as traders factor in higher injection demand to replenish stocks.

Global demand

2020 brought a major shift in demand and trade flows.

China’s LNG demand recovered rapidly from the Q1 impact of COVID-19, ending the year up by 7.5m tonnes to 69m tonnes.

Japan held on to the title of largest global importer, at 74.8m tonnes but this was still a fall of 2.3m tonnes.

China will take top importer position globally in 2021 as coal-to-gas switching continues while Japan’s falling gas demand remains a concern, even with some slow down in the restart of nuclear power plants.

China’s growth narrative is well known but India also showed strong growth of 15%, or a rise of 3.4m tonnes to 27.2m tonnes with more to come in 2021.

The other most notable import decline after Europe in 2020 was from Mexico, where demand fell by 61% to 1.76m tonnes as US pipeline gas took a larger share of domestic supply.

More positive for sellers was the 18% rise in Thailand’s imports to 5.73m tonnes in what is a fundamental growth market.

Turkish LNG imports rose by 17% to 10.5m tonnes with low prices triggering short-term demand for cargoes.

Global production

After years of substantial increases, LNG production growth slowed sharply in 2020 amid large swings in demand.

US production rose, but not as much as expected, with China again the stand-out importer

Global LNG production was 361.4m tonnes in 2020, up by less than 6m tonnes from 2019, according to LNG Edge.

After several years of sharp production increases, the market stagnated in 2020, in large part due to record-low spot prices and the wild demand swings caused by the impact of COVID-19.

US LNG production hit 47.2m tonnes in 2020, up by 35% from 2019 and by far the most significant change in volume terms across the global market.

But collapsing gas and LNG prices in Europe and Asia triggered widespread US cargo cancellations over the summer which meant volumes produced were well below rising nameplate capacity.

The US could produce over 70m tonnes of LNG in 2021 if market pricing remains at economically-viable levels.

The US held a 13% share of global LNG supply in 2020, up from 10% in 2019.

Qatar remained the largest producer, at 78.3m tonnes, with a 22% share of the global market.

Production issues in Australia, notably at Gorgon, kept it in second place at 76.9m tonnes. The mix of unplanned outages and market-driven curtailments meant global LNG production fell further below capacity in 2020.

In volume terms, Norway was one of the largest fallers, saw one of the largest drops by 1.6m tonnes in 2020 with the 4.3mtpa Hammerfest plant offline from late September after a fire broke out.

The plant will be out until October 2021, according to operator Equinor in October.

One of the regular buyers from Hammerfest, Lithuania’s Ignitis, instead received cargoes from a range of US LNG plants which will likely continue in 2021.

Global production is forecast to rise to 387.1m tonnes in 2021, according to LNG Edge.

Additional reporting by Julie Fisher