TTF prices have averaged $4.5/ MMBtu in 2019 but will need to drop below an average of $3.8/ MMBtu through 2020 to balance the market, according to Wood Mackenzie analysis.
“Our forecast touches back down to the low US$3/million Btu range during the summer. The risks to price remain heavily weighted to the downside,” said WoodMac’s director, European Gas, Murray Douglas.
Oversupply is building up on global gas market, with several LNG cargoes headed for Europe this week alone. According to shipping data, there are at least a dozen vessels heading for the UK terminals at Milford Haven in Wales and the Isle of Grain, located 45 miles southeast of London. A U.S. cargo will berth on January 23 at the Dragon import facility, followed by a Qatari cargo on January 25 into the South Hook terminal.
Prices at Britain’s NBP gas trading hub were last seen at the equivalent of $3.75/MMBtu, while the UK NBP Summer 2020 product price was as low as 3.70/MMBtu. However, analysts pointed out that Britain will not be able to absorb much more of the global gas glut than it already does.
Over the summer, the British and European LNG marketplace is expected to become “increasingly congested. Hence, some infrastructure constraints will likely surface and place further downward pressure on hub prices. “This will become particularly acute in the UK during summer where regas utilisation will be capped at 75%, assuming Norwegian pipeline deliveries follow historical trends,” Wood Mackenzie noted.
The UK’s lack of long-range storage; low summer demand - given that UK coal has already been displaced - and the available exit capacity into continental Europe and Ireland will place physical constraints on LNG send-out. Analysts anticipate that Norwegian pipeline deliveries to the UK will consequently come under serious pressure, saying “we will see significant volatility in NBP-TTF differentials through the summer.”
EU turns green, while Asian LNG players look for options in Europe
The EU has pledged to become climate-neutral by 2050. To bring this target into range, the Commission will outline a pathway to decrease the EU’s emissions in 2030 by at least 50% and towards 55% below 1990 levels (the current target is for 40%). Plans to introduce a ‘Carbon Border Adjustment Mechanism’ – to capture carbon costs associated with imports – features in the European Green Deal. Analysts warn this could have a significant impact for gas and LNG exporters.
“Price remains king. However, we will see a significant ramp-up in buyers and investors focused on the green credentials of companies operating along the gas supply chain,” Mr. Douglas commented. “How companies are positioned on carbon intensity and, especially, how they are measuring and tackling methane emissions will become a more central feature for gas supply in 2020.
Still, access to Europe’s liquid gas markets will “remain attractive for LNG portfolio players,” analysts stressed, as particularly “Asian utilities looking for optionality in the Atlantic basin.”
European utility players heading for LNG exits
Striving to adapt to EU policies for a low-carbon future, European utilities are investing in renewables and embrace power grids as stable, regulated infrastructure. Many are taking divergent approaches in how they position themselves across the gas value chain.
“Indeed, PGNiG will become the sole European utility with a material upstream position,” Douglas said, “given that Centrica and SSE have reaffirmed their intention to exit upstream E&P by the end of 2020.”
Shifts across the gas value chain have extended into LNG. Engie sold its business to Total in 2017 to focus on renewables and distributed energy solutions. And in June 2019, Iberdrola sold its LNG portfolio to Pavilion Energy to re-position itself towards low-carbon investments and regulated activities.
“The fundamentals provide compelling evidence for growth in European LNG imports – our latest long-term outlook forecasts more than a doubling by 2030 vs. 2018 levels,” he added. “But while we expect utilities such as Uniper and RWE to continue building their LNG exposure, some will struggle to manage long-term volume risk against the backdrop of decarbonisation. Consequently, we expect to see another European player exit the LNG business in 2020.