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LNG displaces Atlantic basin pipe gas, but meets resistance in Asia

Liquefied natural gas (LNG) cargoes have displaced pipeline natural gas volumes in the Atlantic Basin throughout 2019, due to historically low spot prices of the shipped fuel.

Higher LNG spot market activity has helped unleash some of the commodity’s inherent flexibility. It is inherent because a spot cargo that can move to any importing nation is more flexible than a pipeline whose destinations are fixed.

Cargo pricing can therefore regularly have a significant influence on pipeline pricing – this is seen in oil markets, where it is seaborne benchmark prices that are used as the basis of pipeline flows in most geographies.

Even though Asia accounts for most of the world’s LNG imports, and, until 2019, has been LNG’s demand growth engine, the disruption of piped gas by LNG has not been a noticeable trend in Asia, in  part because there is less pipeline gas to disrupt.

Asia’s utilities are yet to see the full cost benefit of historically cheap and plentiful spot LNG supplies due to contractual inflexibility (destination restrictions, for instance) and pricing decisions such as linking long-term contracts to higher crude oil prices.

Go deeper – Read S&P Global Platts’ special report on the future of LNG markets

To achieve significant demand growth in Asia, LNG will need to consistently challenge coal and displace the fuel in power generation, especially in China and India. To do that, competitive spot market and long-term contract pricing will be necessary.

In the Atlantic markets LNG-on-gas and LNG-on-coal competition is more prevalent, and it is consequently no surprise these markets have been at the forefront of this year’s global 3% reduction in coal use for electricity generation. Here are a few cases where piped gas has been affected by LNG cargo imports.

Europe: Algeria’s oil-indexed gas hit hardest by LNG

The summer season (April-September) saw Europe’s natural gas imports grow 8.2% on-year to 191.7 billion cubic meters, according to government trade data. This increase was mainly due to higher LNG regasification, up 117.5% on-year to 47.17 bcm.

Algeria pipeline flows to Spain and Italy for January-September 2019 dropped 43% on-year, or 3.87 bcm, suffering the most as Algeria’s oil-indexed contracts were out of the money compared to LNG prices.

However, Norwegian piped gas exports to Europe dropped more than 10% on-year during the summer to 46.83 Bcm. Even piped flows from Russia dropped slightly in the same period. Norway has been open about its commercial optimization of piped flows, regularly reducing exports to Northwest Europe due to low day-ahead hub pricing compared to seasons further out on the forward curve.

“In 2020 oil-indexed contracts will still be out of the money, constraining Algeria pipeline exports to Europe, while LNG flows to South Europe will remain strong,” Samer Mosis, Senior LNG Analyst for Platts Analytics said. “The biggest question is Russian pipeline gas, which has shown responsiveness when hub prices test Gazprom’s short-run marginal costs. [Platts Analytics] expects this to come into full focus in Summer 2020, when hub pricing in North Europe will test Gazprom’s marginal costs once again, pitting LNG against pipeline gas.”

Elsewhere in Europe, Greece has shifted to 53% of its gas supply coming from LNG in 2019, versus 21% in 2018. The country’s pipeline gas receipts from Bulgaria are down 44% to 1.51 bcm (up to end-October), while Greece’s import terminal, Revithoussa LNG, has regasified 2.42 bcm in 2019 compared to 977 mcm last year.

The trend is clear: flexible, competitively-priced LNG dislodged piped gas in a period of strong consumption. It is notable that this occurred in Europe, a continent with the most advanced piped gas hubs of any major net importing region. Therefore, LNG has competed very effectively with piped gas on price. The chart below shows the steep discounts against natural gas hub prices of imported LNG cargoes into Europe.

LNG spot price vs hub price Europe

Latin America: Brazil takes advantage of low LNG prices

Brazil has seen increases both in domestic gas production and LNG imports as imported piped gas has dropped this year.

Average daily LNG regasification from January – August hit 9.2 mcm/d, increasing 33% compared to 2018 and reaching the highest since 2015. Brazil’s domestic gas production has increased 6.4% in January-September 2019 on-year to 32.3 bcm, according to government data.

Brazil’s imported piped gas volumes from Bolivia slid 30% in January – August 2019 to 15.3 mcm/d. Bolivia’s exports to Brazil are linked to petroleum product prices such as fuel oil. Brazil’s average LNG import price was just $4.1/MMBtu on an FOB basis in August, demonstrating the country has been taking advantage of historically low market-based prices.

LNG spot price vs long-term contract

Overall, though, Latin America LNG demand has disappointed in 2019 against expectations. LNG is forecast to play a minor role as a support to hydropower, but also second fiddle to stronger local natural gas production in the coming years, with Argentina’s Vaca Muerta shale play and Brazil’s subsalt expansion plans .

Asian power generation: next frontier for LNG

With LNG supply likely to continue to outpace demand in 2020, there could be more extreme pipeline gas disruption in the Atlantic. In Asia, LNG consumption is linked more broadly to the energy transition rather than pipelines: LNG on a legacy oil-linked contract basis is nowhere near competitive versus cheaper seaborne or domestic coal, either today or in most price forecast scenarios.

Therefore, the LNG industry faces a stick-or-twist moment in its largest potential growth region. Many production projects commissioned in recent years are difficult to sustain financially at today’s spot prices. But in order to incentivize major new demand growth, LNG will likely need to properly break into power generation in Asia’s biggest consuming nations (China and India) by getting close to competing with coal on price.

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