Changing EU Gas Market Dynamics Benefit mini-LNG: Academic

Current dynamics in gas markets in Europe increasingly benefit small-scale LNG in the North Sea and Baltic Sea, a senior researcher on political economy of energy at the University of Eastern Finland, Dr Andrei Belyi told NGE in an interview July 12. “LNG is seen as an interesting alternative to pipeline gas, and LNG storage could also compete with underground storage.”

He says that the transaction costs for pipeline gas are greater and less predictable than the operational costs of LNG, free from the rules of the network codes. “There are greater administrative and regulatory costs for pipeline gas. So some companies prefer LNG over pipelines,” he said. These include difficulties shippers face when planning their capacity for transportation, owing to a fragmented market, and the summer-winter spread is very low, reflecting the oversupply of even peak-day gas. In recent years, at least prior to 2015, overall gas demand in Europe declined, while it has grown for small LNG.

Even liquefying pipeline gas – once a staple element of the UK peak-shaving market – is now also catching on. For that purpose, for example, a company called Skangas has opened two liquefaction plants, one in Norway and the other in Finland. The former is about 100,000 metric tons/year at Risavika in Norway, using Norwegian gas; and the other one is the much smaller Porvoo plant in Finland, of 20,000 mt/yr. That is for liquefying gas from the Finnish grid, which is Russian gas and hence cheap. “It means that part of the pipeline gas surplus is liquefied. It becomes a competitive alternative, the output being for the bunkering market,” Belyi said.

Finland's only liquefaction terminal at Porvoo (Credit: Skangas)

Belyi said this showed a change in approach. “A few years ago, most experts agreed that LNG would not displace pipeline gas in the region, but now we can see that in small volumes gas is being liquefied. This is not because it is cheaper but because of the flexibility it offers. It might cost more in $/mn Btu terms but it yields higher profits because of the optionality and greater simplicity in terms of trade.”

Skangas is also opening Finland's first LNG import terminal and plans to open another in 2018.

Still, Russia’s Gazprom plans for a large-scale liquefaction in Ust Luga on the Baltic coast remains uncertain, he believes. There is no reason for importing companies who want to buy LNG to buy it from Gazprom as their motive for buying LNG consists in diversification from Gazprom. For that and other reasons he does not see the 10mn mt/yr Baltic LNG terminal working. Originally conceived as a means of delivering Shtokman gas to the US and the Iberian Peninsula, it cannot be easily repurposed for deliveries to the north European market.

A possible indication of its limited prospects was the recent decision of Group East to drop their plans to build a chemicals plant in Ust Luga for urea production. Its output would have supplied the LNG terminal and the renouncement of the chemical business rather unveils uncertain prospects of the liquefaction project in Ust Luga.

However, a liquefaction plant would still make sense, especially if Russians plan to supply gas to the Kaliningrad enclave on the Baltic.

Gas trade and Brexit

The Brexit vote has exposed a greater amount of uncertainty in the world than many had foreseen. That, and the oil price, could provoke more change in the gas market, Belyi says. First it could quicken the growth of the Dutch Title Transfer Facility (TTF) over the UK NBP. Traders already preferred dealing in euros and now this trend will be reinforced, he says, if the UK is seen as a bit-part player in the energy market. Affected by Brexit, the stronger dollar relative to the pound sterling and the euro will keep the lid on prices. “The rising dollar or a falling price mean less investment upstream, meaning more expensive oil further down the line,” he said.

“Most of the forecasts show that prices will be back to $70/barrel by 2017-18,” he says. “It is impossible to be precise but the glut appears to be over, or coming to an end.”

Meanwhile, the current situation makes life tough for investors especially for service companies. With less demand for their services generally while the banks’ demands for repayment continue, costs have been forced down. Contractors have also squeezed margins, sometimes until they vanish altogether.

And contractors without the safety net of a downstream refining or petrochemicals business, are desperate for revenues and increasing production to repay lenders. Because of high level of debt, most service companies' share prices did not follow proportionally the oil price that has doubled from January to May 2016.

By contrast, large vertically integrated companies rather see an opportunity to invest in the context of the lower price and hence lower service costs. New investments at Tengiz Chevroil project in Kazakhstan and the BP expansion of the Tangguh LNG plant in Indonesia show confidence that prices will only grow from now on, with a knock-on effect on costs.

The gas supply surplus may take longer to soak away and it may take longer for gas prices to recover their pre-2014 heights than oil prices. Still it creates a good opportunity for gas demand to grow, he says.

William Powell