The growth of global liquefied natural gas trade because of soaring gas prices in the United States last winter is tightening the linkage between U.S. and European gas markets, according to a new study by DRI-WEFA Inc., a subsidiary of Global Insight Inc. The study “European Gas Supply and Demand: The Outlook to 2025” indicates that European and U.S. gas prices now will be more closely tied together because of the burgeoning global commodity.

“The various players in the LNG market have been talking for a number of years about the opportunity for large scale gas trades between the continents of Europe and North America, but until recently the opportunity has been shunned,” noted Graham Freedman, the manager of DRI-WEFA’s European Gas Services. “The main reason given for this attitude was that although extra profits could be made from Trans-Atlantic gas trade, they may have been made at the expense of the long-term relationships between traditional buyers and sellers in the European market. The opening up of the European gas market through the Gas Directive, plus the very large trading opportunity that presented itself last winter, finally broke down the resistance to temptation for the main market players.

“Now that large scale trading of LNG between the continents is becoming the norm, rather than the exception, it is likely that more sales will be made during the coming years,” he added. “This will be the case, particularly during the winter months, when seasonal pricing plays a bigger role and spot prices become more volatile. There will also be more infrastructure available in the form of export terminals, shipping and reception terminals to cater to this type of trading, allowing more new players to enter the market if they should so wish.”

Atlantic basin LNG, delivered to U.S. instead of European markets last winter, was a key feature of the changing gas supply mix to a number of European destinations, most notably Belgium, France and Spain, according to the study. The high prices gave an unprecedented opportunity to profit by diverting gas that was originally meant for the European market to the U.S. market. DRI-WEFA estimates that as much as 7 billion cubic meters (Bcm) of gas (about 240 Bcf) originally contracted to the European market, was delivered to the U.S. East Coast in the 12 months to June 2001.

“Seven Bcm in a 400 Bcm+ European market may not seem to be very much, but it was enough to alter trading patterns sufficiently in the first quarter of this year, when deliveries of Algerian LNG to Belgium were diverted to the U.S. East Coast,” DRI-WEFA said. “This resulted in Belgian buyers buying more ‘spot gas’ on the U.K. market, which in turn pushed up U.K. prices that led to forward flow in the U.K.-Belgium interconnector when it was least expected.”

The study noted that the price differential that built up between the world’s two leading spot price indicators for gas, namely the U.S. Henry Hub and the UK’s N.B.P., grew to around $2.80/MMBtu by last December.

“It is now well recognized by all of the major players in the market that these opportunities created by imbalances between supply and demand can lead to trading opportunities for gas around the Atlantic basin. As a result, companies such as Shell, BP, BG and El Paso now have a number of new LNG vessels on order to take advantage of these trading opportunities.

“Secondly, with two other mothballed LNG terminals on the U.S. East Coast currently being reactivated following years of inactivity, the scope for further shipments of LNG will greatly increase to the U.S.,” the study notes. “It is estimated that in 2002, if the price differential is still attractive, the U.S. could import up to 20 Bcm of ‘European gas,’ representing about 5% of the European gas market. If this were to happen, then the entire supply/demand position of the European gas market could quickly move into a closely balanced position, from one of current surplus.”

Thirdly, DRI-WEFA said, the development of a major trading capability for gas between Europe and the U.S. effectively sets “floors and ceilings” for future gas spot prices in the two major markets. “For the U.K. spot price, this means that it will not only be driven by oil indexed prices which are prevalent on mainland Europe, but that from time to time it will also be influenced by the U.S. Henry Hub spot price.”

DRI-WEFA’s study concludes that within 5 years LNG will become an internationally traded commodity, much as the fuels that it competes with, namely oil and coal, are traded today.

Specific details on the study can be found under “Special Studies” on DRI-WEFA’s home page: www.dri-wefa.com

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