Europe, heart of the global gas market

Hosted by Spain’s leading energy stakeholders including Enagás, Repsol, Gas Natural Fenosa and Técnicas Reunidas, Gastech 2018 returns to Europe after three previous editions in Asia, and reflects the resurgence of gas & LNG in Europe.

The global gas market in 2021 is expected to have 55% more LNG than in 2015, with 140mmtpa more new capacity mostly from Australia and the US. The new wave of Australian LNG supply started with QC LNG in 2015, with first volumes from the US and Sabine Pass following in 2016.

There remains an expectation that all of this new LNG supply will cause an oversupply, pushing prices down. Low prices in the summer of 2016 suggested as much, but subsequent northern hemisphere winter prices through 2016/17 have remained at or above oil parity levels. The reality is the market has held up well so far.

New demand in emerging markets has been key to this. Between them the markets of Egypt, Jordan and Pakistan imported some 12Mt in 2016, compensating for a demand decline in more established markets. Also the uptick of demand in China and India is providing additional reasons for positivity amongst suppliers. China’s LNG imports boomed in 2016 and will be sustained by favourable environmental policy and competitively priced LNG.

More new LNG markets will emerge. These will be encouraged by greater supply availability and a willingness to develop quick-to-deploy infrastructure solutions, including Floating Storage and Regasification units (FSRUs).

Nevertheless the threats and opportunities associated with oversupply hangs over the industry. It appears likely that oversupply conditions through the medium term will be at their worst during northern hemisphere summers, when China LNG demand is at its lowest. And it also appears likely that Europe will be key to global price formation for the next 5 years.

Europe – the heart of the global gas market

Europe will need to absorb a large proportion of new LNG supply. Europe offers liquidity and has regasification capacity available, while other markets will take time to develop. Rising European imports will come from legacy suppliers in the Atlantic and Middle East, displaced from the Pacific by new more proximate supply. It will also come from new supply in the Atlantic, most notably the US.

The growth in Europe’s LNG import volumes however is uncertain, despite the rapid growth in available volumes. It is subject to the vagaries of the global market, the pace of supply growth and the development of new markets. It also depends on Russia’s pipe gas exports to Europe.

Should Russia withdraw gas from the European market, and avoid competition by making way for rising LNG imports, then prices will, to some extent, be protected. Russia did this in 2009-11 when Qatar grew its LNG export capacity. However, should Russia seek to protect its market share in Europe, then Russian pipe gas and rising LNG imports will compete and European prices will be lower. And if prices in Europe are sufficiently low, they may not cover the cost of exporting US LNG to Europe, forcing under utilisation of some US LNG capacity when alternative markets cannot be found.

This sets the scene for competition in Europe between Russian pipe gas and US LNG. The worry for US LNG suppliers is that Russia will be unwilling to cede its rising European market share. Russian gas exports to Europe were a record high in 2016, exceeding 170 bcm, equivalent to 35% of the European gas market. The tussle between Russian pipe gas and US LNG will likely be most intense in the northern hemisphere summer, when European demand is lower, coincident with low Asian LNG demand and high European LNG imports.

The result of the battle for market will have consequences for the global gas market. With Europe the backstop market at times, European prices will be important for markets throughout the Atlantic and Pacific basins. And lower US LNG exports will impact the US too, with lower offtake placing downward pressure on US gas prices.

Spain – a major buyer of US LNG

Spanish buyers have been amongst the most enthusiastic supporters of US LNG with numerous companies contracting offtake from US projects, including Sabine Pass and Corpus Christi. Spain was Europe’s largest LNG importer in 2016, with most volumes from Nigeria. But this could change.

By 2022, Spanish buyers have contracted 8.5 mmtpa of US LNG through primary and secondary agreements, over 10% of total US capacity that has been sanctioned.

This means US LNG could supply over 50% of Spain’s LNG needs in 2022 if all contracted volumes make it to the Spanish market. More likely, however, some of this LNG will be routed to alternative markets, elsewhere in Europe and around the world.

Like market dynamics in Europe, the dynamics in Spain will be increasingly important for global players to understand. By the fall of 2018 when the next Gastech is held in Barcelona, we’ll have seen how suppliers are responding to the new market environment. And we’ll have the opportunity to consider the implications.