August 18, 2011 / 11:07 AM / 8 years ago

Pain for Europe utilities as Asia absorbs LNG

LONDON (Reuters) - A spike in Asian demand for natural gas in the coming years will be painful for European utilities and leave new European import terminals idle as producers ship gas cargoes east to fetch higher prices.

Utilities such as RWE (RWEG.DE) or E.ON (EONGn.DE), which already suffer from heavy trading losses, will have to face even tougher pricing negotiations with pipeline suppliers, such as Russia and Norway, as liquefied natural gas becomes more expensive.

South Korea on Wednesday announced an $84 billion (51 billion pounds) long-term deal to buy LNG, or gas cooled to liquid for shipping, from Shell (RDSa.L) and Total (TOTF.PA) from 2013, much of which will come from the Atlantic Basin before new Australian production comes online later this decade.

The deal is part of a wider rush by Asian importers to secure most of the supply from new production projects over the long term, which could sideline expensive import terminals built in Europe on the anticipation of greater imports.

More shipments from Nigeria, Norway and Egypt to Asia will mean less surplus supply for European markets.

“Asian demand could easily take virtually all the LNG in the market, leaving little over for liquid markets like the UK and the Netherlands,” said independent LNG analyst Andy Flower.

Energy-hungry Japan and South Korea are the world’s top importers, but increased demand in China and other smaller Asian nations willing to pay oil-linked prices is set to tighten the market as production struggles to keep up with supply.

New projects, especially in Australia, have sold off nearly all their supply from plants not expected online for six or seven years.

The shift away from European terminals is already underway. An earthquake and tsunami in Japan in March, which knocked out a large chunk of nuclear power supply, has led to large increases in LNG demand to meet the shortfall.

Suppliers across the globe have sent their gas east as spot prices rocketed from $10 to $15 per million British thermal units from March to August. British gas futures are now around $8 per mmBtu.

“This looks to be a scenario where northwest Europe could find itself short of LNG, which will force prices up to attract what LNG is available and/or bring in more pipeline gas from Russia,” Flower said.

Graphic on Asia LNG premium: here


LNG flows from the Atlantic Basin to Asia have shot up this year.

Japan’s LNG imports hit a record high above 7 million tonnes in July, up from 5.9 million in July 2010, according to Waterborne Energy analysts, which monitors global LNG flows.

For all Asian importers, Nigerian supply to Asia jumped by more than 10 times to 819,000 in July this year from 73,000 in July 2010, according to Waterborne.

Trinidad & Tobago’s supply to Asia in July rose to 360,000 tonnes from 61,000 a year earlier.

With a limited amount of new supply on the horizon, Europe will struggle to attract cargoes that are cheap enough to compete with pipeline supply.

The price of LNG into northwest Europe, which has in recent years been cheaper than oil-indexed pipeline gas from Norway and Russia, has risen along with Asian prices.

The UK and Belgium have already locked in long-term LNG supply from Qatar, the world’s biggest supplier, although not enough to cover all of their demand. Spain has locked in sufficient supplies, mainly from Algeria.

Less LNG could help push prices higher next winter in big, heavily traded markets such as the UK, analysts say, adding that their prices have the potential to reach parity with oil-indexed pipeline gas coming from Russia and Norway.

Europe’s newest LNG terminal, the Gate terminal in the Netherlands, last week paid $2 above British prices for its inaugural cargo, draining its price advantage over pipeline gas, which could hamper imports in future.

“Asia spot prices have been going up, and that would explain the higher price paid for the Gate cargo, given the great pull of cargoes to Japan and Asia,” said Charles Martin, an analyst at Waterborne in Houston. “It could very well sit idle; that would be likely.”

Gate customers are already looking to sell off their import rights as they worry about lack of supply.

“RWE has been trying to sell all its capacity at Gate, and it was only able to release 1 billion cubic meters. They still have 2 bcm to fill,” one trading source told Reuters. “EON was also willing to release part of its capacity.”

Both RWE and EON declined to comment.

Reporting by Edward McAllister and Oleg Vukmanovic, editing by Jane Baird

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