LNG: An “Insurance Policy” for Europe
In his remarks in a roundtable discussion on US gas in the European market in the European Parliament, Mr. John Roberts, Director of Strategy, Natural Gas Europe, pointed out that gas must be delivered on an uninterruptible basis to run power stations or household appliances, a fact which made for contracts that are uninterruptible, or that offer flexible delivery, but which mandate backup storage. Natural gas must be produced, distributed and must have back up storage, he added.
“Insurance policies play a major role,” he quipped, offering that LNG is becoming an insurance policy for Europe. “Part of that policy is managing to create the infrastructure that can ensure diversification.”
The ability of the US with its newly found export capacity mostly based on shale gas development provides gas into the global market, he explained, for which the European market can benefit as long as the prices in Europe are attractive to a US producer.
Of Lithuania's position in this context, Mr. Roberts said: “It costs money to build liquefaction, regasification facilities, whether you have a fixed unit onshore, or a floating unit offshore you've got to put out an amount of capital. There are those who will say 'Why are we doing this? It costs money.'
“True,” he answered. “But you do it because it's an insurance policy. And sometimes that insurance policy pays for itself much faster than you would ever have dreamed.”
It had paid off for Lithuania, he opined.
He explained, “Lithuania found that as soon as it was going to have quite definitely a floating regasification and storage unit facility, that Gazprom would cut prices by more than 20%.” That price, he recalled, had been around $450/TCM. “So a 20% cut back on that is $90/TCM. With Lithuania importing around 2.6 BCM of gas/year, good grief that's saving the country $234 million a year,” he remarked.
The cost for that insurance, according to Mr. Roberts, is estimated at around EUR 101 million, or even less. Hiring costs, he added, can run around EUR 55 million/year. By adding those costs, he said, one came up with more or less the same amount as the savings.
He noted, “You get your money back in 2 years. Or, if it's not quite that rosey, then you'll get your money back in 3 years. That's an incredibly quick time for an insurance policy to pay off.”
As for who pays for the insurance policy, Mr. Roberts said the private sector would not, as it's the consumer that benefits, meaning that public sector expenditure makes things happen. While such a cash outlay from taxation is required, he said it is worth it to finance such infrastructure.
Meanwhile, he observed that US LNG doesn't even have to land in Europe, but exerts a similar impact on the European market.
“Do we mind if Gazprom provides 100% of supplies to some markets? Do we mind if it's the lowest cost supplier? No, so long as there are alternatives available that can cover in the event we might be aware of a cutoff,” he answered.
As a result of many factors, Mr. Roberts explained, Russia is deciding to reduce prices generally across the board in Europe because it wants to preserve market share in the face of potential intrusions from the US. “That is to be welcomed, because it means Russia is responding to commercial pressures,” he explained.
Indeed, said Mr. Mantas Bartuska, CEO, SC Klaipedos Nafta, the LNG terminal in Klaipeda, Lithuania has "paid off" and been a game changer for the entire Baltic region. The operator of that terminal, he reported, “So far, we have been operating for over a year and have received six LNG cargoes from Norway, safely and smoothly regasifying them for the Baltics.”
This, he explained, has been a great enabler for the market, having witnessed the first gas flows from Lithuania to Estonia at the beginning of 2015.
“We see further developments regarding opening the market in Latvia, which is currently not yet open,” he remarked, saying he expected that to happen in the near future. “What is key for the whole region is that we should focus and work on the whole region as one gas market. We are pretty small and taking into consideration the gas consumption, which is pretty significant in this market, the market is shrinking.”
Mr. Bartuska recalled that the Lithuanian market consumed around 3 BCM/annum when the project was started, while today it's around 2.3 BCM and could fall below two; a previous forecast for Latvia's consumption was around 2 BCM/annum, but is now around 1 BCM/year, he reported, while Estonia's consumption comprises 0.5 BCM/annum.
To confront the challenge of shrinking demand, he suggested that Lithuania, Latvia and Estonia work together as a unit to open the market.
He offered: “It's worth mentioning that the LNG terminal works on 3rd party access rules, which is very unique. We work on very transparent, published rules, and for the world traders it is really clear what the procedures are if they want to come and book capacities and then regasify to the whole region.”
According to him, the Lithuanian LNG terminal offers great potential to LNG suppliers like Cheniere Energy, Inc. Once the Baltic gas market altogether works as a unite, opined Mr. Bartuska, it will offer great potential for LNG supplies, and suppliers using the terminal is a hoped for prospect, but the more enticing possibility is for small-scale LNG.
“Our facility is already ready to reload to small LNG bunkers,” he reported, “and to distribute to the whole Baltics, which will create a market for LNG distribution and could be used for marine fuel or as an energy for the off-grid industry, where pipelines are not well developed.”
Small-scale terminals in the Baltics, he added, could be supplied from the Klaipeda LNG terminal.
-Drew Leifheit