Spain has this year been the main destination for Peruvian LNG volume, receiving almost two-thirds of the cargoes exported by the South American country. This is in spite of the fact that Peru’s Pampa Melchorita export plant is located on the Pacific coast and so is well placed to send cargoes to Asia, where prices have this year been higher than those in Spain. It suggests that, relative to prices in Asia, current Spanish hub prices represent an attractive market for sellers of LNG.
Of 54 cargoes that are on the water with known destinations, or have already been delivered, some 33 (61%) were sold into Spain, LNG Edge data shows.
This compares with just five to nearby Mexico and 11 to Asian countries, and suggests Anglo-Dutch portfolio player Shell, the sole offtaker of free-on-board (FOB) Peruvian volume, considers Spain a key market for volume over what it is contractually obliged to supply, in spite of the higher prices in the markets of Asia in recent months.
Lower Asian premium over Spanish prices
Analysis of pricing data from ICIS and vessel arrival data from LNG Edge confirms this, showing a correlation between vessels arriving in Spain rather than other destinations and the spread between Spanish LNG prices and prices paid for spot LNG in Asia. As the second graph shows, the higher rate of LNG vessels being delivered into Spain often occurs when the spread between the price of spot LNG in Spain and Asia is at its lowest.
Given that the price paid by Spanish buyers for LNG on a delivered ex-ship (DES) basis tends to hover at a discount of about $0.50-0.60/MMBtu (€1.50/MWh) to the price of the PVB front month product, Spain has been an attractive market this year.
Shell has at least two supply contracts with buyers in Spain, so it usually puts one or two cargoes a month into Spain. But this year’s tally is already more than in any previous full year since Peruvian exports started in 2011, and suggests Shell views Spain as a competitive market for volume it is not obliged to supply.
It is not clear whether the extra cargoes to Spain represent additional volume for contractual buyers or spot volume, but one LNG trader recently said he believed that at least some of these volumes were on a spot basis.
Mexican imports crash
As the first graph shows, the swing towards Spain has come at the expense of Central American buyer Mexico, where only six cargoes of Peruvian LNG have been delivered so far this year, a massive decline from an average of 39 cargoes a year in 2014, 2015 and 2016. This is the result of a contractual dispute between Shell, which has sole free on board (FOB) offtake from Peru, and Mexican state buyer CFE. Since late 2016, Shell has diverted cargoes to other, higher-priced destinations, rather than fulfil the terms of a long-term contract into the terminal in the Mexican port of Manzanillo that is indexed at a discount to the US Henry Hub gas benchmark, and so pays very little.