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Rebalancing Europe Seen Driving LNG Market Toward Another Volatile Year
(Editor’s Note: This story is one in a series providing expert forecasts for the global natural gas and oil markets in 2022. Look for NGI’s extensive coverage of what happened in 2021 and what can be expected in 2022 and beyond in terms of prices, the LNG export markets, ESG, Mexico’s production and project prospects, North American midstream infrastructure plans and exploration and production strategies.)
It promises to be another volatile year for the liquefied natural gas (LNG) trade as the market continues to rebalance with European storage inventories woefully short and much riding on the rest of this winter.
Weather in Europe is expected to trend colder than normal in the near term, creating more demand for natural gas on the continent. In Asia, where many nations rely entirely on LNG imports, warmer-than-normal weather could free up supplies and help level the scales.
“The main driver of global gas markets this year could be the rebalancing of the LNG market towards Europe” as suggested by the current Japan-Korea Marker (JKM)/Title Transfer Facility (TTF) spreads for the coming months, according to Julien Hoarau, head of EnergyScan, Engie SA’s energy market analysis platform.
“Low stock levels, tight Russian pipeline supply and steady gas demand, notably to compensate for weak nuclear power generation, could keep Europe at a premium to Asia and drag most flexible Atlantic cargoes towards European LNG import terminals,” Hoarau told NGI.
Last year was a roller coaster for the global gas trade. Freezing temperatures across the Northern Hemisphere last winter intensified competition for natural gas and left Asian buyers scrambling to secure cargoes.
JKM prices crept above $30/MMBtu in January 2021, siphoning off deliveries from Europe that left supplies short heading into the year. For most of 2021, Asia was the top destination for cargoes, where prices were assessed at a peak above $50 in October. But as European inventories sank to their lowest levels in years and colder weather set in, TTF skyrocketed last month to nearly $60, becoming the premium destination for LNG traders.
Prices have since declined and are now trading around $30 in both markets as competition has been reduced with high storage levels and warmer weather in Asia.
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“In general, the situation has improved already to some extent because the winter has turned out relatively mild,” said Rystad Energy’s Carlos Torres-Diaz, head of gas and power markets. “This has helped the balance, but it doesn’t mean the tough times are over completely because spot levels are low and we’re still seeing lower Russian supplies.” Torres-Diaz told NGI that Rystad expects 2022 to be “much tighter than previous years.”
The world’s LNG terminals are running near capacity and operational issues at some of them could find Asian buyers increasingly back in the spot market. Europe will have to continue competing for LNG cargoes with Asia as the narrow spread between JKM and TTF suggests.
“With limited additional liquefaction capacity, the level of Asian LNG demand is a key uncertainty as Northeast Asia sits on comfortable stock levels and some industrial consumers seem to suffer from high gas prices,” Hoarau said.
The Russian Wildcard
The other wildcard is pipeline imports from Russia, which have remained limited and compounded Europe’s supply woes. Storage stocks on the continent haven’t been this low in more than a decade. They’re on track to finish winter at record lows.
The Nord Stream 2 (NS2) pipeline, which is completed and ready for service to move 5.3 Bcf/d from Russia to Germany, is seen as key to restocking storage. But German regulators need to certify the Gazprom PJSC pipeline before it can start up, which isn’t expected until the second half of this year at the earliest. The threat of further sanctions on the system as tensions build between Russia and Ukraine have cast even more doubt on when exactly the system could begin operations.
Given forecasts, storage trajectories and delays surrounding NS2, European natural gas demand is bound to remain strong through the summer as the continent will need to continue importing natural gas to restock inventories, which would help to support prices throughout the year.
The current supply shortfall means the continent will also need more than just LNG imports.
“The solution to Europe’s storage problems and rebalancing the global market can’t just be the result of LNG shifting from place to place,” said Kristen Holmquist, forecasting manager at Poten & Partners. “There’s just not a lot of excess supply, and Northeast Asian demand is strong enough that they will continue to take the volumes they need, kind of leaving the leftovers to Europe.”
Holmquist said if NS2 starts-up at mid-year and output increases from the Groningen field in the Netherlands as the Dutch government has signaled, then European storage inventories would drastically improve and come closer in line to the five-year average.
Aside from mounting political tensions, German regulators said in December that they won’t certify NS2 until the second half of 2022 as they await further documentation on the project. NS2 needs to comply with European Union rules that require ownership of transmission assets and natural gas supplies to be separate. The rule has proved complicated for Gazprom’s integrated structure, and it is establishing a subsidiary to comply with them.
“I definitely believe NS2 will be delayed at this point,” said Anna Milkuska, a nonresident fellow in energy studies at Rice University’s Baker Institute.
“Whether it will start operation in the second part of 2022, that will depend on whether it can adhere to the Third Energy Package or not,” she told NGI, referring to the EU rules. “They definitely have time to arrange for the latter by then. I don’t think the delay is political. It’s just German bureaucracy and courts at work as they’re supposed to.”
Will LNG Demand Grow Across the World?
Across the rest of the world, gas demand is expected to grow at a slower pace this year because of higher prices and limited supplies, Holmquist said during a recent webinar.
China, which became the world’s largest LNG importer on strong economic growth last year, could be a variable in global consumption. The same is true for South America, where drought in places like Brazil pushed LNG imports to record highs last year.
“I think China is still a big question mark as we’re seeing slowing growth there. Nuclear production improving in Japan is also helping to weaken thermal power demand,” Kpler analyst Laura Page said. “India I’d expect to remain weak given higher domestic gas production and high spot prices. For South America, keep an eye on the rainfall season over the next few months.”
China is in the midst of installing even more regasification capacity that could see its imports soar further, but much would depend on growth in the nation’s economy and imports could slow. Nine new LNG receiving terminals and expansions at four other existing facilities are expected to be completed this year, adding 38.9 million metric tons of regasification capacity, according to Bloomberg New Energy Finance.
On the supply side, very little new LNG capacity is coming online this year. Other than Calcasieu Pass LNG and the sixth train at Sabine Pass LNG in Louisiana, just the Coral South floating LNG facility offshore Mozambique and a third train at Tangguh LNG in Indonesia are expected to come online, Page told NGI.
A gap will remain between supply and demand in the coming years given some of the liquefaction projects that were delayed by Covid-19. More projects are likely to be sanctioned this year, though.
Wood Mackenzie said it expects 79 million metric tons/year (mmty) of additional LNG capacity to take final investment decisions over the next two years, with the bulk of that, or 33 mmty, located in North America.
“There needs to be more activity in sanctioning projects in order to keep the market balanced,” Torres-Diaz said. “There were quite a few long-term contracts signed during 2021 because of the increase in gas prices, which has renewed the interest among buyers in long-term contracts. So this should help some of these projects that have been signing these contracts make FIDs.”
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