SHAKING UP EUROPE ’ S GAS MARKETS
So far Europe has not benefited from the availability of US LNG to the extent expected , but when it does come , the effects will be beneficial for the market . The alternative – Russia extending its market share – might be detrimental for gas , as adverse politics become even more prominent . With only a few cargoes from the Sabine Pass terminal arriving in the European Union last year , and none coming to markets where they could dent the dominance of Russia – Turkey and the Iberian peninsula – Gazprom has reason to celebrate last year ’ s record sales . as more projects launch ( see feature ) it is likely that a lot more LNG will come to Europe as well as to Asia and Latin America and the industry has an opportunity to make something of it . One positive effect of all this supply would be the emergence of new pricing points and exchange-dominated indexation , as the sheer volume of trade will be so great , and much of it done by traders with sophisticated software who need transparent and reliable indexes to trade off , in northeast Asia and in the Middle East and India .
Delegates at the European Gas Conference in Vienna heard a lot from Gazprom about Russia ’ s ability to supply as much gas as Europe needs – enough for every household – while competing sources such as the US have proved disappointments so far . Two senior Gazprom executives spoke about January ’ s deliveries extending last year ’ s gains – despite prices being a little higher , too .
Financial institutions will also want to see a forward curve based on verifiable trades between creditworthy counterparties . They will co-operate to devise a methodology that works as the LNG market will otherwise be too complex logistically for the existing system of terminals , ships and consumers to continue efficiently at a time of over-supply . Opacity is fine for monopolies but it is the enemy of a free market . Optimisation will be key .
While this is welcome news in the short-term , especially with the day-time temperature in Austria below freezing in January and Europe ’ s indigenous supply falling for the foreseeable future , this also could be said to represent an unhealthy mutual reliance that can limit the attraction of gas , whose image is already suffering from the shorthand visual of Russian bears turning pipeline valves .
If the industry wants gas to not merely survive in Europe but to fulfill the expectations that motivated the massive investment in infrastructure this last decade – storage , pipelines , import terminals and gas-fired power-plants – then Gazprom is a minus sign in front of gas . Its gas needs to be mixed in weaker concentrations with other suppliers that are not encumbered with transit or political risk . But there are very few of those available now , beyond Norway .
Delegates also heard a fair bit about the failure of the gas industry to convince policy makers and the public with the standard claims for gas that it is affordable , reliable and sustainable . Is it on the way out , after 2030 , or will the Energiewende and its local equivalents ( see feature ) prove to be a political adventure that eventually runs out of good will , and a cash-strapped region returns to gas ?
One part of that is unanswerable as it depends on technology continuing to become cheaper , so that more electrons can be extracted from nature and batteries can extend their capacity .
But if there was an optimistic message at the conference , it was that 2017 could be the year that things begin to change fundamentally with millions more metric tons of US LNG all looking for a home and being sold by merchant companies not so interested in long-term relationships . Over the coming years
As well as the greater diversity of sellers that this surge implies is the export of US trading practices . Liquidity on the Nymex curve extends much further into the future than it does on the UK or Dutch gas hubs , so Henry Hub gas is tradeable for longer than the contracts that it may be hedged against . The European markets therefore could extend , to match . And this raises the possibility of spread trading and the birth of a European gas market that is not focused so much on the short-term ; and this in turn could mean longer term capacity trade . Presently traders book capacity only when they know they need it , and for as long as they need it . This is cheap but it does not foster long-term , market-based investments .
Other changes could come with the entry of newer traders , seeking a market for their commodity . Power-generation and waterborne , if not road , transport are two obvious areas that need to emit not only less carbon but – more pressingly – less particulates and oxides ; and there is plenty of opportunity given the amount of gas-fired plants dotted around Europe and the spare import and transport capacity to develop this demand .
Regulatory help will be needed to a limited extent : the UK carbon price floor makes gas cheaper relative to coal and France has a carbon tax ; elsewhere in Europe though the addiction to coal has been neglected .
Politically there could also be obstacles : most of eastern Europe , while rejecting gas imports from Russia in some but not all cases , has not accepted market principles either . And this is true of some of western European countries too . The market is only just now functioning , and the next five years , if the oversupply lasts that long , will be critical .
NGW