Weekly Overview: EU midstream and US LNG

The Flame Conference was on this week, drawing a big crowd from large sections of Europe’s gas industry despite the bleak outlook for many companies.

The monopolies have been unbundled, their pipelines regulated, their long-term gas purchases no longer needed by an out-competed heavy industrial sector, and ground lost to competitors trading at hubs; and a key assumption underpinning demand growth, gas-fired power generation, has been frustrated by the European Union’s carbon market.

Gas-fired generators are making common cause with the wind industry in order to secure an electricity ‘market’ that will be designed so that more CCGT output will find buyers. Presently it is the UK with its carbon floor price that has made coal uneconomic, cheering up RWE this week with its gas plants in Staythorpe and Pembroke making money in the first quarter of the year. But other countries have yet to implement an equivalent tax.

There is hope though that if the ageing French nuclear fleet cannot be replaced by new technology – a possibility raised by the unsatisfactory safety tests at Flamanville – then not only will the UK be able to walk away from the EDF Hinkley Point deal with a clear conscience, and possibly even seek compensation; but there could be a vacuum for CCGTs to fill in France, too.

US LNG: How much, and where will it go?

Among the novelties on the agenda were panels discussing US imports, which started for real in February. The consensus was that there are too many moving parts to say much more than that things are not looking as rosy as they were even a few years ago.

So far just one cargo has come to Europe so far, and not to the liquid and well-supplied hubs of northwest Europe where competition is fiercest. According to the International Gas Union, gas-to-gas competition last year set the price for 92% of the volumes traded there, compared with 32% in the Mediterranean and 15% in the Baltic States.

Further, the amount of LNG trade between the Atlantic and the Pacific basins is shrinking as the similarity of prices in the two hemispheres discourages long haul deliveries. Indeed, traders at the conference said that in this low-margin, low-volatility environment, optimising shipping capacity and shorter voyages would be one way of extracting some profit.

More US LNG will come though as the decade draws to an end: according to Federal Energy Regulatory Commission; as of May 6, there is already 10.36bn ft³/d of liquefaction capacity approved and under construction.

Plant shut-ins may occur, depending on the nature of the capacity-holder’s contract. In some cases, the arbitrage opportunity will be decided only on a cash-cost basis: at Sabine Pass, for example, is Henry Hub x 115% plus shipping below the NBP?

Defaults are a possibility as the economics of some projects now look so dire from the offtakers' viewpoint, but the sellers have a range of options to defend the contracts that convinced the banks it was safe to lend the money.

Opportunistic sales to the Middle East and to South America account for nearly all the Sabine Pass train 1 output which is moving into contractual deliveries. Train 2 is now commissioning, and that will add another 4.5mn metric tons/year to the market perhaps from August onwards.

One speaker hazarded that maybe 50bn m³/yr of US LNG could arrive in northwest Europe, assuming that none arrives at South Hook, which is operated by Qatar; and the rest operate at perhaps three quarters of capacity.

One country working hard to keep out this cheap gas is France: having banned hydraulic fracturing at home, its energy minister Segolene Royal is now seeking to extend that ban to gas imports that contain gas produced by that method, even if it is legal in the country of origin.

Russian gas at least is conventional, even if it does arrive in France with a large carbon footprint, and so it will not be turned away at the Germany-France border. If the Russian government removes the export duty in order to ensure Gazprom's market share does not lose ground to the new imports, then it would break even at around $3.80/mn Btu, according to a Russian analyst. This would be bad news for a lot of other producers, including Norway, for whom northwest Europe is the nearest market.

Cheniere appoints new CEO

Cheniere this week appointed a full-time CEO to replace the interim Neal Shear, himself a replacement for Charif Souki, who borrowed enough money to turn the nearly bankrupt LNG importer into a high-profile LNG exporter, but who lost the confidence of activist shareholder, Carl Icahn. He was forced out late last year, too soon to see the first train begin exports late in February.

As of May 12, the new CEO is Jack Fusco, who was until the day before the CEO of US power plant operator Calpine. Fusco was recruited to run Calpine in 2008, just as that company was emerging from bankruptcy. It says it is now the biggest gas-fired power generator in the US. Souki, meanwhile, is now working with Martin Houston – who took a similarly entrepreneurial attitude to the formerly rigid LNG business, when at BG – in a company called Tellurian Investments. It was set up this year to build midscale, modular LNG projects along the Gulf Coast.

There are more advanced projects, too, such as NextDecade’s 27mn mt/yr Rio Grande project, in Texas. It has non-binding heads of agreement for 26mn mt/yr and on May 5 it applied to Ferc to build a plant and the associated Rio Bravo pipeline, a 137-mile system that will provide the facility with its feed gas.

Its CEO Kathleen Eisbrenner – who worked formerly at Shell and before that founded Excelerate with its pioneering onboard regasification vessels – told Flame that there would be more and more gas available at low rates. She said that supply would keep up with demand at even under $2/mn Btu Henry Hub, provided oil was above $45/barrel – to stimulate oil production – but not necessarily above $55/b. Within that range, she said, 100,000s of barrels, with associated gas, would be profitable.

William Powell