US LNG: a long expected arrival for the European energy markets

In the last months, we have seen an important increase in the number of ships bringing US LNG to Europe.  8 ships unloaded US natural gas in Europe in the first two months, compared to 5 in the whole of 2016.

European energy markets have been eagerly awaiting the arrival of US LNG. In 2010 – 2012 the Henry Hub prices were pushed lower and lower towards 2 dollars per MMBTU. Seeing how they paid more than twice that amount for consuming gas in Europe, European energy consumers had a hard time grasping what was going on.

“Shale gas”, all of a sudden the magic word was pronounced in all corners. The perfection of the technology to produce gas from shale rock layers, the so-called hydraulic fracturing or fracking, caused US gas production to rise significantly. At first, Europe was hopeful that it could imitate that energy production miracle. Countries like Poland and UK started to explore the possibilities of producing shale gas from their soils. However, we haven’t seen much of European shale gas yet. Most projects faltered in a combination of geological and bureaucratic challenges.

And then the US started to talk about exporting gas as liquid gas, LNG. A strange turn of events, as a few years earlier, the US had started to construct terminals to import gas. Now, these projects were turned around and export terminals were planned, permitted and construction started. This sparked hopes in Europe that this US LNG could bring prices down to a level that is more in line with the US. Sabine Pass in Louisiana was the export project that made the most rapid progress.

As European energy companies signed contracts with US counterparts to import gas and the construction of Sabine Pass progressed smoothly, European forward gas prices turned euphoric. By the 7th of April 2016 the year ahead price on the benchmark TTF Hub dropped as low as 13,02 euro per MWh, their lowest level since December 2009. However, as of April, the bull trend seen in other energy markets hit the European gas markets as well, with a peak of 18,505 euro per MWh for year ahead TTF on the 30th of December.

What had happened? On the 24th of February, the first boat with LNG left Sabine Pass, to sail to Brazil rather than Europe. In hindsight, it makes geographical and economic sense for LNG ships leaving in Louisiana to sail to South-America rather than Europe. And so did most of them. Of the 45 cargoes that embarked from Sabine Pass in 2016, 26 had Latin-America as their destination, compared to only 5 for Europe (Source: Timera). The expected flood of shale gas hitting the European market didn’t materialize.

However, we see a remarkable reverse of this trend in 2017. In January & February, we already saw 8 ships with US gas. All in all we see an important increase in the total number of shipments, with a total of 30 in the first two months of the year. We clearly see the effect here of the fact that a second and third train are now available for exports. With 7 ships, Latin-American imports of US gas remain stable. The biggest winner of the larger amounts of gas in Sabine Pass is Asia with 12 cargoes coming their way.

The TTF forward price is dropping again, with 16,145 euro per MWh on the 21st of March. It’s always dangerous to pinpoint cause and effect in energy markets though. The gas market is dropping in line with other energy markets. However, it should be remarked that pricing in gas markets is made ‘on the margin’, a few boats of gas more or less can mean the difference between excess or shortage that has a heavy impact on the prices. It’s too early to call “Hurray”, but it definitely is a good thing that more US LNG is finding its way to Europe, if only from a diversification of supply point of view.

It should be remarked that further expansion of US LNG export capacity is planned, in Sabine Pass and other places. A total of 89 billion cubic meters (bcm) is due by 2021, compare that to the 4,2 bcm that the US exported in 2016. Will that drive prices in Europe lower? That’s obviously impossible to say. The LNG market has proven to be very versatile. Shippers easily adapt their routes when prices on another continent are more favorable.

And how about politics under the new Trump administration? It looks like Mr. Trump’s main economic policy goal is to restore the US trade balance. Producing large amounts of energy and exporting it, would be a great step towards that goal. His decisions regarding permits to produce seem to support that. However, how will protectionist Donald Trump react if increased exports towards the higher priced markets in Europe pushes up prices for US gas consumers?