Endesa sets sights on Spanish gas [NGW Magazine]
Spanish utility Endesa wants to grow its share of the country's growing gas market, and sees LNG as a way to get there. In 2014, the company inked a 20-year deal with US LNG company Cheniere to begin sourcing LNG directly from the US once the first train of Cheniere's Corpus Christi liquefaction plant enters operation in summer. Under the terms of that deal, Endesa will buy 2bn m3/year, with the first shipments due to start in July this year.
This is a departure for the company, which until now has been buying LNG on a CIF-delivered basis to ports in Spain. It will now be chartering its own vessels under long-term contracts to source directly from the US, on a FOB basis, which would allow it to divert to other markets if the price is advantageous. It also underscores Endesa and its Italian parent Enel's desire to move further up the value chain.
“This change to contracting at origin and direct chartering of tankers... allows us to meet our gas supply needs for the next 20 years with much more flexible and competitive options,” Endesa CEO Jose Bogas said on March 21.
LNG Tanker Deals
In early 2018 Endesa placed a $185mn order for a 180,000 m3 tanker, the Adriano Knutsen from Norway's Knutsen OAS. In March, Endesa said construction at the Ulsan shipyard in South Korea was now near completion with final sea trials and cargo tests due in April. The tanker will then be ready to launch for its maiden voyage in the summer, probably to the US for the first Corpus Christi LNG shipments. The $25mn/year charter agreement runs for an initial seven years, with two optional extensions: first for seven years and then for six, or 20 years at most.
Once in operation, it will be able to make 12 sailings to Corpus Christi and back per year, or six sailings to Asia and back. It will be the biggest LNG tanker sailing under the Spanish flag, and will offer flexibility to deliver LNG to both Endesa and its majority shareholder, Italian energy group Enel.
An identical vessel, the Traiano Knutsen, is also being built alongside it at Ulsan, for delivery to Enel in 2020. Enel has an additional 20-year deal with Cheniere to buy a further 1mn mt/year for the Italian market.
And in March, Endesa said it had struck a second deal with Monoco-based LNG shipper GasLog to charter an additional LNG tanker for eight years from May 2021, with a possible extension to 20 years. The vessel, GasLog Warsaw, is being built by Samsung Heavy Industries in Ulsan, and will also have capacity of 180,000 m3, which Endesa says is equivalent of Spanish daily gas demand.
Bogas said that "contracting the GasLog Warsaw on long-term charter represents another important step in delivering a flexible and competitive LNG carrier solution to service our contracted LNG volumes over the next 20 years. We are pleased to partner with GasLog and look forward to developing this relationship further.”
The GasLog Warsaw is scheduled to deliver to Endesa in May 2021 for a fixed eight-year term, with two optional periods of six years each. The rate of hire for the charter is in line with mid-cycle rates.
Gaslog CEO Paul Wogan said he was delighed to charter the vessel to "a leading European utility and very high-quality counterparty. This charter expands our customer base and we look forward to further developing our relationship with Endesa."
Number two in the market
The need for LNG in Iberia is driven by overall growth in the gas market, and a need to supplement supplies by pipeline from Algeria. This is especially acute now that long-touted plans to increase connectivity with the wider European market via France have foundered after the latest plans for new pipelines were rejected by regulators.
Spain has no meaningful gas deposits of its own so companies like Endesa need to source gas abroad. And much of the gas that flows through two pipelines from North Africa is already contracted to up to 2030, under a long term contract signed in 2018.
But over 40% of Spain's gas supply is met from LNG imports and the role of LNG is set to rise.
Endesa is already Spain's second biggest gas supplier after Naturgy, the company formed from the merger of dominant gas utility Gas Natural and Endesa's old rival in the power market, Union Fenosa. In 2018, Endesa sold 103 TWh of gas in Spain, up 3% year-on-year – see chart. That was despite lower sales to power generators who had used a lot more gas in 2017 owing to a prolonged drought hitting hydropower production. This gave it a market share of 16.8% in the liberalised gas market, some way behind Naturgy's 40%. It also grew its customer base to 1.6mn, up 3% on 2017.
Endesa's strategic plan 2018-2021 projects it will grow its customer base to 1.9mn in 2021 despite lower projected sales volumes to industrial end-users and power generators. It also projects the gas business will become more profitable, with gross margins rising to €3/MWh ($3.37/MWh) in 2021, from around €2/MWh in 2018. The strategic plan targets improved margins from efficiencies, including a focus on improved customer acquisition and retention (lower churn) in the residential segment, and developing new business in the industrial segment.
Longer term, it sees big potential for gas as Spain moves to decarbonise its economy. Gas will increasingly displace coal and fuel oil in power generation and provide the flexible generation capacity needed to back up the growing amount of intermittent renewable generation from wind, solar and hydropower.
But Endesa is still a long way behind Naturgy both in terms of market share and its LNG activities. Naturgy has a fleet of 11 LNG tankers that are already bringing gas into Spain from around the world, as well as it’s deals with Algerian producers for pipeline gas.
All about Endesa
Endesa is the largest electricity company in Spain, with over 10mn customers. Formed in 1944, it grew through a series of mergers and acquisitions to become the biggest of the country's incumbent power utilities before market liberalisation.
It had a monopoly position in large areas of the country, particularly in the northeast, northwest, far south and the Balearic and Canary Islands. Other incumbents –, Iberdrola and Union Fenosa (now Naturgy) – had monopolies in other regions. With the gradual roll-out of competition from the late 1990s, Endesa began selling power to eligible customers across Spain, and to move into gas while expanding internationally, notably in neighbouring France and Portugal. In 2005-7 Endesa was the target of a long takeover battle between Naturgy predecessor Gas Natural, Germany's E.ON and Italy's Enel. Gas Natural launched a hostile bid which E.ON countered with a friendly bid, only to be frustrated by Acciona, a Spanish renewables group, which built up a strong ownership position in Endesa to block E.ON.
Acciona ultimately partnered with Enel to take control of the company. Enel now owns around 70% of Endesa, which continues to operate autonomously within the Enel group.