Europe to become the hub of the global LNG market
- Written by Laurentiu Rosoiu
Demand for natural gas in Europe has registered significant decreases from one year to another recently. Developments in 2014 on the natural gas global market indicate a possible halt in decline and a very probable revival of liquefied natural gas. Important in this context being the signals showing that Europe can become a global hub and a very important player on this market sector... even if some big question marks still exist!
The European natural gas consumption and demand have declined significantly during recent years, which induced a similar trend to imports of liquefied natural gas (LNG). The latest data on the 2014 developments show that the relevant global market is going through a process of profound change, while the role of LNG in global gas supply in general, and in Europe in particular, is being brought to the fore.
According to a Eurogas report released by the end of April (Eurogas is a non-profit organization representing the interests of European gas industry, comprising 43 members from all relevant sectors, from producers and distributors to national or international associations) the natural gas demand in 2014 in the 28 European Union member states was of 409 bcm (billion cubic meters), equivalent to 342 mtoe NCV (million tonnes of oil equivalent net caloric value), by 11.2% lower than in 2013.
The Eurogas report reads that the main reason for the fall in demand was given by high temperatures, above the average, recorded in 2014 throughout Europe (e.g. for Germany and the Netherlands last year was the warmest year in history, and in the Czech Republic the warmest year in 50 years), which reduced gas consumption demand; it should be noted, however, that the dynamic was intensified by the fact that 2013 - taken as a benchmark for calculating the percentage change - was colder than the historical average.
Over the influences caused by the warm weather overlaid the negative impact of still weak developments in the European economy and, on the other hand, the effect of decreasing coal prices and the increase of energy supply from renewable sources, all made natural gas less competitive.
TRENDS FOR CHANGE
The picture of the downward path of the natural gas market is enhanced by a series of extremely interesting nuances, if the figures are viewed in quarterly dynamics. Such a perspective reveals the first signs of a possible halt in the downward trend of the European gas demand. At least this is one of the conclusions that can be drawn based on the ‘Quarterly Report on European Gas Markets’ published by the European Commission late in 2014. According to that report, the largest decrease in gas demand in Europe was recorded in the first half of the year (a 18% decrease); in the third quarter of the year the consumption had decreased by only 1% against the same period last year (some states have even registered significant increases in demand - Austria 9%, Belgium 10%, Luxembourg 12%, The Netherlands 4%, UK 11%) and the consumption in the fourth quarter registered a decline of only 2% as compared to the same period of 2013.
Hence, the data from the last two quarters reveal firstly a tendency to halt the general downward trend of gas demand/consumption at EU28 level; the same figures also reveal another dynamic – a more interesting one – in the Liquefied Natural Gas segment: thereby, following the 2012 and 2013 decreases of LNG imports in Europe by 27% and 24% (as a result of the spectacular growth in demand in Asia and Latin America – demand that dislodged part of the available LNG for the European market), the fall in LNG imports for the UE28 member states was of only 3% in 2014. Moreover, according to the same report, in the last quarter the LNG imports have registered a robust growth of over 10% as compared to the same period of the previous year.
On the other hand, more interesting than the figures that show the dynamics of this market as a whole, are the figures that reveal fundamental changes in the structure of imports; not just because it shows that imports from Russia were on a downward trend, but especially because they emphasize a number of changes within the LNG market segment. Thus, in 2012 and 2013, the EU28 member states LNG imports’ fall was offset by an increase in imports via pipelines (+ 3% in 2012, + 7% in 2013); a large proportion was of Russian origin gas (so that imports from Russia saw a further 28% increase in 2013, for example). In 2014, however, the trend stopped as imports via pipelines decreased by 4% and gas imports from Russia via pipelines decreased overall by 11%, despite the fact that the decrease of imports through the pipeline crossing Ukraine was offset by the increase of imports carried out through the Nord Stream pipeline (connecting Russia and Germany). Specifically, Russian gas deliveries through the pipeline crossing Ukraine and Slovakia fell by 41% during 2014 (we notice that in the second half of the year the decline was of 64% against the same period of the previous year). This decrease was partially offset by the 49% higher deliveries via Nord Stream... but, against this background, the LNG imports recovered in 2014 to the second position as the largest source of gas supply to Europe (behind the imports by pipeline from Norway) (see the chart ‘European gas imports according to the supply route’).
These figures and trends are not necessarily spectacular, nor sufficiently relevant if analyzed only in relation to themselves; viewed in conjunction with the changes and movements taking place on the global market, the figures pointing to the comeback trend of the UE28 interest in LNG acquire a different relevance.
The year 2014 could be a real turning point for the liquefied natural gas international market. A first structural modification that changes the current status is given by the unexpected decrease in demand for gas in Asia. According to the ‘Medium-Term Gas Market Report’ published on June 4, 2015 the by the IEA (International Energy Agency, the Vienna based organization), as a first and significant effect the growth rate of global demand for gas will decrease in the next five years to 2% - against 2.3% previously forecasted. The decrease, as extensive as it was unexpected - as can be understood from the statements made by the IEA officials - radically changes the gas market prospects: “... one of the major changes - unexpected - in 2014 was the
declining demand in Asia,” said Maria van der Hoeven, IEA Executive Director, according to the report, adding that “... the premise that Asia will absorb large amounts of gas, whatever the price, is not topical anymore.” The Chinese economy’s slowdown, the fall of global coal prices and the declining costs of renewable energy are some of the most important elements that will lead to the amplification of this trend in this part of the world, according to the statements of the IEA official.
A second structural change is given by the fact that, while global production and supply of liquefied natural gas remained almost constant - that is around the level of 240 mtpa (million tonnes per annum) - the volumes of liquefied natural gas transported from one part of the world to another has increased; this shows that the LNG has turned into a commodity that can be sold and resold quickly, even several times, and the destination can be changed easier, depending on the evolution of demand and on the market prices. The data are eloquent: on the one hand we have the BG Group statistics, showing that the demand for LNG has not changed radically in 2014 against 2013 (see the chart ‘The evolution of LNG supply from 2005 to 2014’); on the other hand we have the BP statistics (included in the report ‘BP Statistical Review of World Energy June 2015’) reading that in 2014 the world flows of liquefied natural gas totalled about 333 bcm (billion cubic meters), by 8 bcm (or 2.4%) higher than in 2013. This happened in the context in which decrease was noticed in gas volumes transported through pipelines by 6.2% (about 43 bcm, from 707.5 bcm to 663.9 bcm) (see the chart ‘Natural gas trade in 2013 and 2014’).
By correlating these data it results that LNG, as commodity, starts to be more liquid and easier tradable, which radically changes the way the games on this market will be done in the future. Thus, if until recently the market players were usually the prisoners of contracts stipulating quite rigid terms in regard to quantities, prices, delivery terms (including even a series of exclusives), this game on the market has become increasingly dynamic; the participants act on the basis of more flexible contractual relations, being increasingly more active on the spot market (where transactions are concluded on the spot, price conditions are set based on supply and demand at the time). In other words, so far, in order to ensure that the design of a liquefaction terminal and/or gasification stands the chance to economically survive, the project developer had to block large amounts of liquefied natural gas by concluding long-term contracts; such contracts made the parties block quantities, prices and especially destinations. Recent data, however, show that the market has evolved and a trader can quickly change not only the prices and destinations of the commodity, but also the quantities, having the ability to buy, store and resell the available LNG, depending on the market evolution.
The great changes of trend in 2012-2013 could be considered as a first indication that the market has gained a lot in terms of the operators’ ability to refocus and redirect the commodity depending on supply and demand. Subsequently, the trends in H2 2014 (when demand dropped in Asia and the LNG flows began returning to Europe) confirmed the trend, as from one year to another the trade with such a commodity has got more and more the dynamics of a spot market (the market where goods are sold according to supply and demand conditions, the prices and quantities being negotiated directly on the market and not necessarily on the basis of existing contracts).
In support of this view we have data showing a significant increase of transaction volumes and in the number of participants carrying out purchase/sale and/or resale operations under conditions other than those stated (contrary to how it was until now) through long-term contracts. We’re talking about the spectacular development of a ‘non long-term’ market which, during the past decade, has taken over a growing share of the LNG trade.
Thus, before 2000, the ‘non long-term’ transactions were rather marginal, accounting for less than 5% of all LNG transactions. Until 2005 the share of this type of market in total transactions had reached about 8%. Between 2007 and 2010 the ‘non long-term’ LNG transactions have come to represent between 17% and 20% of the total LNG market, so that currently they’ve reached more than a third of the total (see the chart ‘The ‘non long-term’ deliveries evolution in the total LNG market’).
HOW HAVE THE CHANGES TAKEN PLACE
Numerous and complex issues have led to this dramatic change of the global market for liquefied natural gas in the last 10-15 years; among them there are some technological issues (such as the shale gas revolution in the US) or the spectacular development of the renewable energy sector as well as certain political-military events (such as the escalation of conflicts in the Middle East and/or Europe) or economic (as the economic growth rates weakening in some areas of the world and/or the recovery of other economies), or even some social events - such as those related to mentality and changes of values regarding environmental protection. Simultaneously with the above mentioned events (or even as their result!), a number of changes and developments that influenced and further influence, in a significant way, the development of liquefied natural gas market have taken place. A first example is therefore the increasing number of contracts with flexible delivery conditions; in turn, this change was accompanied and boosted by the increasing number of exporters and importers on this market (LNG). This move has resulted in increased market complexity, in a greater number of permutations and possible interconnections between sellers, traders (or markets) and buyers. This process overlapped events such as Fukushima (Japan), which has boosted it. The market was re-directed towards the area of ‘non long-term’ transactions by some buyers’ exclusive reliance on LNG, such as Japan, Korea and Taiwan (which are forced to rely overwhelmingly on the LNG ‘non long-term’ market to offset the possible contingency that would endanger their energy security), as it provided stimulation for market players to expand and develop the necessary capacities to carry out rapid operations and interconnections.
In this context, despite a mild slowing down over the past about three years, new liquefaction and gasification capacities have developed on one side and another of the three major economic areas (America, Asia and Europe); the availability and flexibility of increasingly higher gas volumes (caused, among other things, by replacing US imports of LNG with gas from local shale oil exploitations) have increased proportionally this commodity’s availability and the interest in it in other parts of the world.
On the other hand, the variations and differences in prices between one period and another, or between a geographical area (or market) and another, have attracted more players and money in the trading and arbitrage area. That made the LNG ‘non long-term’ market an attractive area for institutional financial players, which brought more flexibility and resources (financial, human and credibility alike) to the LNG market in general - and to the ‘non long-term’ market specifically. In this rolling snowball, which really gives fine image of the LNG market development (and of the spot market and/or of the ‘non long-term’ in particular) a significant influence had the growth of the fleet - the growth in number of LNG transport vessels, as well as the actual transport capacity and the development of new storage capacities (which allowed the spot market to adequately and effectively manage production, long-term contracts and gas transportation, according to trends registered in demand and prices).
Last but not least, it should be noted that the same effect, i.e. boosting the market’s dynamics and increasing the number of ‘non long-term’ transactions, had the reduced LNG price competitiveness as compared to coal (in Europe) and/or shale gas (in North America). In this way huge quantities of LNG were released on the market, which has been forced to find other buyers; the increased demand for gas (LNG respectively) in previous years, in Asia and South America, has also brought its contribution to the process of changing the market, in the sense making it more dynamic and increasing the share of ‘non long-term’ transactions to the detriment of classical transactions/contracts.
In addition to the previous data, information and figures, the change of paradigm by which we see on the one hand that LNG has an increasing share in the total global natural gas market, and on the other hand, that the ‘non long-term’ market segment has a growing share on the LNG market, detrimental to the classic contracts... figures regarding the evolution of the number and of the total capacity of natural gas liquefaction terminals and the positioning of players like Qatar, the US and Australia on this market acquire special relevance.
Thus, after several years when the construction of new LNG capacities evolved very slowly, starting from 2014 seems to have begun the second wave of investments in the field, with Australia in the leading position. According to the report ‘Global LNG Market Trend and European Position’, conducted by one of IEA analysts in early 2015, if last year a liquefaction capacity totalling about 25 bcm entered into operation, for 2015 the global liquefaction capacity to become operational will increase by about 55 bcm - mostly in Australia. “17 new LNG projects, totalling about 175 bcm, are currently carried out, Australia and the US represent about 80% of the total,” the report conducted by IEA reads, which states that Australia will overtake Qatar as regards the LNG production capacity by 2020 (see the chart ‘Who will be the largest LNG producers on the global market in 2020’). Meanwhile, in Europe - the same trend, just after a period of relative stagnation of projects in the field - building gasification terminals and storage capacities process appear to enter in an upper stage. This is revealed first of all by the repositioning of the European institutions against the issue of EU energy security; on February 25, 2015 the European Commission finalized the long-awaited European Energy Strategy - one of the main priorities claimed by Jean-Claude Junker - which states that one of the future directions is the development of EU’s interconnection capacity with the natural gas world market by LNG hubs.
On the other hand, the already available figures lead to the conclusion that the European Union is already set on this way: thus, although the UE28 member states have totalled a gasification capacity of 200 bcm, which is actually significantly higher than the LNG imports carried out (which means that imports can be increased substantially without new expenditures), not less than 13 gasification terminals were under construction in the first half of 2015; according to existing plans, by 2025 capacities totalling approximately 150 bcm could become operational (see the chart ‘Gasification capacity of the UE28’). Concomitantly, the LNG storage capacity of the UE28 member states is undergoing the same evolution, hence the LNG storage capacity by 2019 could reach 9.6 million cubic meters; by 2025, other capacities totalling about 6.6 million cubic meters are expected to be finalized (see the chart ‘LNG storage capacity of the UE28’).
On the one hand, the figures so far picture the extent of an infrastructure that is becoming increasingly attractive to potential LNG sellers (more and more numerous!), and on the other hand is itself one of the stimuli of rendering the process more flexible, dynamic and market interconnecting... which means that LNG is heading fast towards the status of Europe’s ‘interconnector’ to the global natural gas market and towards becoming a ‘stabilizer’ of the European market. The significant increase of the market’s responsiveness to the new realities (highlighted on the one hand by factors such as the increase of spot trading volumes against long-term contracts and, on the other hand, by the prices’ response speed to changes in market conditions) is a strong indication that things are going in this direction.
One can thus say that the second quarter of 2014 is the period that marked the beginning of a new phase for the natural gas market - in terms of price developments. Thus, a first anticipative signal was given by gas price developments in Asia during the first half of the year, when it dropped by half in a few months, from USD 20/mmbtu (million British thermal units) to the USD 10/mmbtu threshold (according to statistics provided by Reuters, processed and published in February this year by Timera Energy, the consulting firm in the field); subsequently, in anticipation of winter, in the fourth quarter of 2014 a return attempt was registered, but the market prices in Asia turned downwards again, decisively below USD 10/mmbtu, in line with the European market prices (see the chart ‘LNG prices in Asia have aligned to the prices in Europe’).
Concluding, if over the past few years the LNG market trend was obvious (liquefied natural gas producers aiming mainly the Asian and Latin American markets), there is already a number of serious signals indicating new trends. The prerequisites for the trend’s continuity are given, on the one hand, by the prospects of China’s economic growth slowdown and, on the other hand, by the prices in the area lining up to the ones in other parts of the world; over these overlaps the increase in number of liquefaction terminals in Australia, the US and the Arab states, and of the gasification terminals in Europe.
These are the data giving the picture on the prospects of LNG return in Europe as an important component of energy security. But a number of uncertainties hover on this image! The most important issues in this approach are given by time and price - because the LNG could compete with gas that will enter the European market from UK and/or Azerbaijan - especially since the demand growth prospects are not necessarily the most positive.
In addition, a deal between the West and Iran regarding Iran’s nuclear program also questions the liquefied natural gas prices, as most contracts set the LNG prices by reference to the oil price; as Iran’s return on the oil market will put additional pressure on prices, the prices for natural gas will follow the same trend, which could make the LNG export unprofitable.
Europe certainly plays an important role on the liquefied natural gas market, already under pressure from oversupply, and the development of new gasification and storage facilities is an important component of the European security strategy. Overlaying on these data the prospects for economic recovery, (increasingly more evident in European statistics!), despite the current question marks, the European Union meet most of the required conditions to at least remain a determinant player on this market in the coming years.