20.06.22 “The existing volume can only be redistributed” Interview with Alex Froley • Reading time: 5 min.

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Summary

Alex Froley is an LNG market analyst at the commodity intelligence service company ICIS in London. He believes that a German ban on imports of Russian gas would have a huge impact on LNG prices.

The EU Commission plans to make Europe independent of Russian pipeline gas by 2030. Is that realistic? 

In theory, there is enough time by 2030 to launch all the new projects that will be needed. It normally takes three to four years to build a new LNG production plant or a large import terminal. Smaller projects can be completed slightly faster. But before the work can begin, the customers must sign long-term contracts with a term of 10 to 20 years, and I have not seen any evidence of that happening. In addition, the existing contracts are with multinational companies like BP and Shell, and they do not provide a guarantee that the LNG will be delivered to Europe. 

Is the overall supply of LNG on the world market increasing? 

In the first quarter, 99.3 million metric tons were exported and that is 4 percent more than in the previous year. The additional amount came primarily from the USA, which has increased its liquefying capacity. Several other countries, including Qatar, Algeria, and Nigeria, exported less. 

Why is that? 

Qatar gives the reason as being maintenance of one of its plants and in Algeria and Nigeria there was not enough gas to liquefy. Overall, there has been very little investment in LNG production capacity over the last two years. That is partly a result of the pandemic, because during this period, the gas price fell to 2 dollars per million BTU (British thermal units, a unit of measurement for energy), but investments in LNG plants only return a profit at a price of 10 dollars or more. 

Europe is currently only able to meet its demand for LNG because amounts ordered by customers in Asia have been diverted here. How long will that be able to continue? 

The production volume for this year cannot be increased. This means that the existing volume can only be redistributed. In the first quarter, Europe imported a massive 69 percent more LNG than in the previous year, which equates to 13 million metric tons. The increase was at the expense of deliveries to East Asia, which fell by 5 million metric tons. In addition, Europe has absorbed a large proportion of the new production capacity installed over the last year. In the short term, European customers will have to pay more to hold their own against Asia. If there is competition over LNG next winter, the most price-sensitive customers will be the first to leave the arena. This could include large industrial customers in Germany and Japan, because domestic users are given priority there. 

The demand for LNG in Asia is also growing. Will this make the gap between supply and demand even bigger? 

All the market players are taking measures to prepare for next winter. But Europe’s goal of reducing imports of Russian gas is a completely new factor. The prices on the spot markets have risen dramatically because of the ongoing uncertainty. At the beginning of March, they reached 70 US dollars per million BTU in Asia and in Europe, which corresponds to an oil price of 406 US dollars per barrel! Since then the prices have normalized slightly. However, gas prices were high even before the invasion of Ukraine. In January, for example, the demand for LNG in Europe increased so suddenly that some tankers turned around in mid-ocean and brought to Europe cargos that were intended for Asia. Another big unknown is the weather. Last winter there were no major cold spells, but these are always possible. In March 2018, for instance, the “Beast from the East” resulted in temperatures well below average over a period of weeks and the demand for gas skyrocketed. 

Assuming that Germany actually stops importing gas from Russia, what will the consequences be for LNG prices? Is there a precedent for this? 

If this were to happen, it would have a huge impact on the markets and the prices. The consequences would be similar to those of the reactor disaster in Fukushima in 2011. At the time, Japan shut down all its nuclear power plants and suddenly began importing much more LNG. Supplies from other regions had to be diverted and Japanese customers paid 40 percent more. German industrial customers would be well-advised to prepare themselves for major price fluctuations in the future. 

What will happen to the investments in new terminals if the war in Ukraine suddenly comes to an end, perhaps if a peace settlement is reached? 

Even before the war broke out, Germany was discussing new LNG import projects, although the progress was slow. It is likely that some of the projects will be continued, even if the situation in Ukraine improves. Germany is aiming for greater energy diversity and security of supply and the EU has also committed to opening up new sources of energy. 

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