Please provide an overview of the European social/cultural/economic/political climate and its impact on LNG activities as well as any new developments or trends for 2013 that will impact the European LNG markets.
JB: European gas markets are changing rapidly. In the past five years, European gas markets have absorbed the effects of market liberalization through the third package, the massive expansion of natural gas production in the United States (and corresponding effect on available LNG and cheap coal), the growth of LNG import capacity in a number of European countries and the negative effects of the European debt crises.
Also, as result of the Fukushima tragedy in Japan, a number of European countries have reconsidered their nuclear policies, but have tended to favor a switch to coal rather than gas. While Gazprom has attempted to maintain oil-linked prices that are higher than prices generally reflected on traded gas hub indices, gas customers in Europe are looking for cheaper alternatives during difficult economic times and have forced price reductions for those pipeline supplies. Prior to Fukushima, it appeared that LNG, which was in abundant supply, would provide a cheaper alternative to pipeline gas and would compete with coal effectively for replacing nuclear shutdowns and fulfilling demand. However, since Fukushima, Japan and other Asian countries have been purchasing LNG cargoes at much higher prices than in Europe. As a result, LNG is being re-directed from Europe to Asia and fewer LNG liquefaction projects in development are being targeted for Europe as a long-term baseload customer. This lack of committed long-term LNG supplies sows the seeds for future gas shortages when LNG is simply not available as demand picks up. 2013 looks to be much of the same, with gas companies in Europe showing little appetite for the high LNG prices needed to call cargoes away from Japan and Asia generally.
Please discuss the implications of strong LNG demand in Asia on Europe’s LNG supply.
JB: The effect of strong Asian LNG demand and higher pricing combined with weak European demand and lower pricing has resulted in the short-term migration of a substantial number of Atlantic-basin cargoes to Asia rather than Europe, including both long-, medium- and short-term diversions of cargoes and the re-loading of a number of LNG cargoes originally delivered to European LNG receiving terminals and shipment of those cargoes to Asia.
More important than the short-term effects of significantly reduced deliveries of LNG to Europe is the long-term problem being created by LNG liquefaction projects, including those in the Atlantic-basin, committing long-term supplies to Asia rather than Europe. Due to the long-term nature of LNG sales agreements and Asia’s willingness to accept a high degree of oil price linkage, Europe likely will face the prospect of having restricted access to LNG supplies in the future when demand recovers or when coal is no longer as viable an alternative for electricity generation. Additionally, due to the high cost of the development of LNG liquefaction projects, it is possible that a number of Atlantic-basin LNG liquefaction projects will be significantly delayed, as European prices will not support them, and such projects might struggle to be competitive with East African and Asian alternatives due to shipping costs.
What impact will new emissions regulations in Europe have on LNG demand?
JB: In theory, one would expect that tighter emissions regulations would have resulted in expanded gas demand in Europe and thus higher LNG demand, as coal becomes more expensive or simply not acceptable. However, the results of the European debt crisis, the availability of cheap U.S. coal and the collapse of the carbon trading market in Europe have conspired to limit the effect of tighter emissions controls on increasing overall gas demand. It is not clear when this situation might change, with 2013 being an unlikely candidate.
Also, due to higher Asian pricing, the effects of tighter emissions regulations might increase overall gas demand at the expense of coal and still might not result in gas prices that will call LNG cargoes from Asia to Europe. The gap between European LNG prices and Asian LNG prices is so large that it will take substantially higher prices in European to close that gap.
What do you think the LNG industry will look like 10 years from now?
JB: Over the last 10 years we have seen supply deficits and gluts, large changes in liquidity and un-expected market changes, with the U.S. exiting the LNG import market and entering the LNG export market. In the last 10 years, world LNG supply has doubled and regasification capacity has more than tripled, as has LNG shipping capacity. Change is the only constant and the results of rapid change make it difficult to predict what the next 10 years might look like.
Despite that view, the long-term nature of investments in LNG projects is such that I do not see massive changes in the European LNG market over the next ten years, except in a few areas. I would expect at least one Russian arctic LNG project to begin production in the next 10 years. I would also expect that the market for LNG as a fuel will blossom, increasing European LNG demand without significantly affecting the supply of natural gas. LNG break-bulk facilities currently being built and changes to truck and ship designs to allow them to run on LNG will change the LNG market tremendously over time. That being said, I do not expect to see a large number of new LNG import facilities in Europe, as existing capacity is sufficient to meet most demand scenarios for LNG and for regasified LNG.
Please provide any additional information pertinent to LNG in your region.
JB: The development of Mediterranean LNG projects could be a significant game-changer for Europe if the investments are made. These gas resources have significant cost advantages for delivery to premium Southern European markets when compared with other supply sources. The effect of such supplies would mitigate the long-term effect of Middle Eastern and African suppliers shifting cargoes to Asia.