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Softening demand raises questions around Europe's LNG terminal expansion drive | EU LNG chart deck: 27 Oct - 10 Nov 2023
European gas prices have fallen down a couple of rungs of the ladder since the last EU LNG chart deck two weeks ago, but remain closer to the clouds than the ground. Inelasticity means volatility is the norm, but the noise of exaggerated price movements should not distract from the broader signal of waning demand for natural gas. This secular decline casts Europe’s ongoing drive to expand LNG import capacity in a dubious light.
Month-ahead Dutch TTF, the EU benchmark that now drives global gas price dynamics, is bouncing around erratically. Prompt JKM, the North Asian LNG benchmark, almost resembles the moving average — tracking TTF within a narrow range, with delayed and muted responses.
High-rollers with short positions in the TTF casino are having a wild time. Prompt TTF fell 12% shortly after Energy Flux published the Gas Bubble post and then rallied 5% in Friday’s trading session. Over the fortnight, TTF is down 12% and last closed at the equivalent of $14.60/MMBtu — less than half of where it was this time last year, but still ~40% higher than the 2017-2021 average for delivery in December. The recent correction was felt pretty evenly along the forward curve.
JKM, by contrast, is partially resisting the downward pressure in the front month (Dec-23) but has mirrored TTF further out along the curve. The Dec-23 contract moved no more than 1% per session in either direction, while the Mar-24 contract is down 11% over the fortnight that saw daily swings as large as +8% and -5%.
This divergence between the prompt contract and the rest of the ‘strip’ gives a misleading impression of the overarching market signal for global spot LNG trade. If looking solely at the month-ahead, it would seem that Asia offers the best netbacks for destination-flexible cargoes leaving the US Gulf Coast.
However, this is not the case over the subsequent months. Europe is still firmly outbidding Asia for LNG for delivery from Jan-24, and the margin is at its widest from Mar-24 onwards.
Market sentiment is still caught between two narratives: the physical reality of the present (brimming storage levels, mild weather and moribund European demand) and the fear factor of the near future (an unexpected cold snap, plant outage, strike or sudden resurgence of demand in China / South Asia / Latin America etc.)
This divergence could almost be read as Europe’s insurance policy: pushing away LNG now while paying up for New Year cargoes just in case there’s a nasty surprise around the corner. There’s enough uncertainty to warrant a cautious approach. The balance of probabilities seems to weigh in favour of further softness, although the inelasticity of both demand and supply means even the mildest hint of disruption will trigger more exaggerated TTF price volatility.
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Stampede of white elephants
It is a precarious time to be building an LNG terminal in Europe. Utilisation of existing import facilities spiked in winter 2022, prompting a wave of rapid capacity expansion. But send-out rates fell off markedly since summer 2023, as lower prices meant fewer cargoes unloading at European ports.
Data compiled by IEEFA for its updated European LNG Tracker show utilisation (send-out as a % of capacity) varies greatly by terminal, reflecting localised pinch-points (higher %) and overcapacity (lower %). The Eems Energy terminal in the Netherlands exported above nameplate between May and August, and the Krk (Croatia) and Rovigo (Italy) terminals have averaged >90% utilisation over the first nine months of 2023.
Others are practically mothballed, including noteworthy additions to the fleet: Piombino (Italy) and Ostsee Lubmin (Germany) have barely been used since coming into service over the summer. Some major terminals in north-west Europe (Zeebrugge, Fos Cavaou) have seen utilisation fall off a cliff.
The current expansion wave is still gathering pace. The annual import capacity of European LNG terminals is set to reach 406 Bcm by 2030 as new terminals come online, while the continent’s total gas demand is expected to fall to around 400 Bcm over the same period, according to IEEFA.
TTF might be in a period of structural volatility, but this should not distract from the broad downward trajectory of European gas consumption. The EU is buying more LNG than ever on the back of an unprecedented and irreversible crash in total gas demand.
Europe still imports more than half of its gas by pipeline. So unless all the remaining pipes bringing gas into Europe are destroyed by audacious subsea explosions or suspicious anchor trawling, this aggressive rollout of LNG regas facilities implies an equally aggressive drop in infrastructure utilisation. Europe is in the midst of a major misallocation of capital. If terminals are subsidised, the losses will be borne by taxpayers.
Ana Maria Jaller-Makarewicz, an IEEFA energy analyst, said:
“The decline in gas demand is challenging the narrative that Europe needs more LNG infrastructure to reach its energy security goals. The data is showing that we don’t. Despite significant progress towards reducing gas consumption, countries in Europe risk trading a reliance on Russian pipelines for a redundant LNG system that further exposes the continent to volatile prices.”
But perhaps the best case scenario for LNG terminal owners is the worst case scenario for Europe: the more they are needed, the more consumers pay. IEEFA says the European Union alone spent €41 billion on LNG imports between January and July 2023, with the United States (€17.2bn), Russia (€5.5bn) and Qatar (€5.4bn) the largest beneficiaries. Europe as a whole burned through more than a trillion dollars’ worth of natural gas between 2021 and mid-2023, according to a rough calculation by Energy Flux.
LNG is an expensive and nerve-racking way to ensure Europe’s energy security. For consumers, there must be a better way.
Seb Kennedy | Energy Flux | 13th November 2023
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