Monday, August 23, 2021

https://www.natlawreview.com/article/lng-europe-2021-current-trends-european-lng-landscape-and-country-focus

This report provides an overview of current trends in the European LNG market, describes the status of the European LNG landscape in 2021, and looks at current activities in individual LNG-importing countries in Europe.

Current Trends in the European LNG Market

Bouncing Back?

In our LNG in Europe Report 2020 (published in October 2020), we commented on the significant impact that the COVID-19 pandemic had on the LNG sector in Europe (and worldwide). In the early months of the pandemic Europe actually imported more LNG than normal as it absorbed cargos which were diverted from Asian markets in lock-down, but by June 2020 European imports had slowed down significantly – European gas prices hit record lows of Euros 1/MMBtu and LNG demand in Europe crumbled. At the time we were confident that LNG would have a resurgence in Europe, but we didn’t know when or at what pace.

Asian demand for LNG began to recover in August 2020 as the major Asian importing countries - China, Japan and South Korea - emerged from lock-down. This renewed demand triggered an increase in LNG prices for sales to Asia and a widening price spread between Asian spot LNG (JKM) and European hub prices (TTF/NBP) which in turn led to LNG cargoes being diverted from Europe to Asia. In January 2021, Asian spot prices hit a record high of USD 30/MMBtu.

Europe’s LNG market had a slower road to recovery. Although?European gas consumption rose by over 5% year-on-year between 1 October 2020 and 30 April 2021,?LNG imports to Europe fell by almost 30% (or 20 bcm) during the same period. Northwest Europe’s LNG imports declined the most in this period, falling by 37% (year-on-year), while southern and eastern European LNG markets fell by 20% (year-on-year). In January 2021, European LNG imports fell by almost 50% year-on-year and to their lowest level since September 2018, and stayed depressed in February 2021. During this period Europe’s increased gas demand was met by pipeline deliveries as global LNG supply was unloaded in higher-priced Asian markets. Unlike most of Asia, Europe has access to huge volumes of pipeline gas as well as higher levels of gas storage capacity than other parts of the world. In fact, the flexibility in European gas supply sources helped balance the global LNG market on its road to recovery. By March 2021, Europe’s LNG imports were returning to more normal levels, which continued in Q2 2021. The European LNG picture during the summer of 2021 to date (mid-August 2021) is mixed. Despite TTF and NBP prices reaching all-time highs of nearly USD 14/MMBtu (potentially reasserting Europe as a viable end market), send-out from European regasification terminals in July 2021 fell by 70% against May 2021 levels as LNG cargoes continue to be directed to Asia where prices currently sit at around USD 16/MMBtu.

Looking Back and Ahead

In 2020, all of Europe’s LNG importing countries saw a fall in LNG imports compared to 2019 with the exception of Turkey, Poland, Sweden (small-scale) and Greece. From smallest to largest (in terms of reduction) Malta, the UK, Spain, the Netherlands, Italy, Belgium and France all witnessed a reduction in LNG imports in 2020. However, 2020 was an exceptional year and LNG imports into Europe are expected to grow in the short and medium term. Europe’s need to import gas is driven by the continued and rapid decline in European domestic production, combined with a near term 3% year-on-year increase in gas demand. LNG is expected to be the fastest growing source of natural gas in Europe to meet this supply-demand gap. By 2025, Europe is projected to account for nearly 15% of global LNG demand.

The role of LNG in Europe in the longer-term (i.e. to 2040) will also be influenced by the course of the energy transition both in Europe and worldwide (in addition to the supply-demand gap). The outlook for gas demand in Europe by 2040 is still somewhat uncertain. Shell anticipates a 1% drop in European gas demand in 2040 against present levels, and the International Energy Association has consistently downgraded its European gas demand outlook over the past few years. LNG’s ability to function as a secure and reliable partner to renewable energy supplies over the long term will be key to its place in Europe’s energy mix in 2040 and beyond.

Greener LNG

On 24 June 2021, the European Parliament approved a landmark ‘Climate Law’ which imposes legally binding commitments on the 27 EU Member States to reduce net EU emissions by 55% by 2030 from 1990 levels (“Fit for 55”), and to achieve net-zero greenhouse gas emissions by 2050. The EC published the “Fit for 55” package of legislation on 14 July 2021. As part of this new ‘European Green Deal’, the EU has also published its Methane Strategy, which aims to reduce methane emissions in the EU, both in the energy sector but also from agriculture and waste. Operators in the energy sector – including in the LNG space – can expect increased scrutiny of their methane emissions going forwards.

Gas and LNG have a key role to play in a decarbonising world. Natural Gas (including regasified LNG) and LNG have a much smaller carbon footprint than heavier fossil fuels. Across Europe, LNG is already proving its potential to replace coal and oil in power-generation, and heavy fuel oil and diesel in freight transport and shipping. LNG is also seen as a natural partner to renewable energy.

However, the strong ESG movement amongst civil society, investors and lenders in Europe has questioned whether LNG is “green-enough” to fuel the energy transition. This comes at a time in which the roll-out of renewable energy is increasing at great pace. In response to this challenge, the LNG industry has demonstrated the dynamism typical of the sector through a number of creative measures. One of them is the rise of a new product, “Green LNG”– LNG cargoes where associated GHG emissions are offset through the purchase and cancellation of carbon certificates. These can either be in respect of Scope 1 emissions: the emissions directly emitted from the market participant’s own assets, Scope 2 emissions: the indirect emissions associated with the market participant’s own assets, and Scope 3 emissions: externally owned indirect emissions. A number of key players in the LNG industry – majors such as Shell, Total and BP, as well as trader Vitol – are now selling Green LNG cargos on this basis, with varying levels of offsets. This is primarily in the LNG spot market, although it appears that there is expansion into medium term contracts.

US exporters have also been keen to stress their green credentials, with Next Decade, Sempra and Freeport among a number of exporters offering Green LNG or integrating carbon capture and storage into their projects in a bid to differentiate their cargoes from the competition.

The cost of offsetting the GHG emissions of an LNG cargo will vary on the extent of the offset and the type of certificate purchased, with investment in reforestation projects being the most expensive form of offset. GIIGNL estimates a cost of USD 2.5 million for an average cargo size emitting 250,000 tCO2e, equivalent to USD 0.60/MMBtu –although we have seen prices as low as USD 0.39/MMBtu quoted by one LNG-seller. With relatively high LNG prices at the time of writing, the additional premium risks making LNG less competitive as a fuel. If prices fall back to those seen in 2019/2020, then the absolute cost of a Green LNG cargo may be comparatively more economical to other fuels – but the “green premium” will be a higher component cost proportionate to the overall price of the cargo.

Most Green LNG cargoes have been delivered into Asia so far. However, in March 2021 Gazprom delivered its, and Europe’s, first carbon-neutral cargo at the Dragon LNG terminal in the UK. The offset is in respect of “nature-based carbon credits” and for the full Scope 1, 2 and 3 emissions associated with the cargo. With only a handful of Green LNG cargoes delivered to date, the allocation of the cost of purchasing carbon certificates as between producers, shippers and purchasers is still unclear. We expect that buyers may be willing to tolerate paying for certificates as part of the cargo price if these costs can be passed-through to end-consumers, although this will depend on the regulatory regime in the relevant jurisdiction.

Bunkering and other Small-Scale Services

Most LNG that is unloaded at Europe’s LNG import terminals is still regasified at the import terminal and sent into a natural gas pipeline network in gaseous form. “Small–scale LNG” is a generic name to cover activities where LNG that is unloaded at an import terminal leaves the terminal still in its liquefied form. These activities are:

• Bunkering:?smaller quantities of LNG are reloaded onto LNG-fuelled ships. As stringent environmental regulations are imposed on the maritime sector – notably the 0.5% sulphur cap adopted by the International Maritime Organization (IMO) – an increasing number of ships are using LNG as a fuel. Bunkering LNG vessels are smaller than traditional large-scale LNG vessels and are sometimes able to access inland waterways to expand the geographic availability of small-scale LNG onshore.

• Truck transportation:?LNG is transported by trucks from LNG terminals with truck loading bays. LNG is trucked (i) for use by industrial consumers who are not connected to a natural gas network, (ii) for power generation in isolated areas, (ii) as a supply source to a satellite regasification plant that injects gas into a local network; and (iv) to supply LNG fuelling stations. LNG has potential to replace heavy fuel oil and diesel in heavy duty vehicles.

• Rail transportation:?transportation of LNG by rail car is still in its infancy in Europe. Like trucks, transportation of LNG by railcars offers a means to expand the availability of LNG geographically. Rail loading services commenced at the Zeebrugge import terminal in Belgium in September 2020.

The small-scale LNG market in Europe has grown by approximately 5% per year over the last ten years, and is predicted to grow by a further 17% between 2020 and 2015 – driven by price competitiveness compared to oil, incremental small-scale infrastructure and environmental advantages. LNG truck loading is the fastest growing of the small-scale LNG segments. The number of LNG trucks in Europe has increased from approximately 1,500 in 2016 to approximately 15,000 in 2020, and there are now about 300 LNG fuelling stations in operation in Europe. As of July 2021, 16 European LNG terminals offer truck loading services, and truck loading infrastructure is under development in a number of other terminals in Europe.

Small-scale LNG service contracts remain diversified with different participants offering different contractual structures. However, we are beginning to see some harmonisation across small-scale LNG service contracts as the sector grows. Truck loading services can be contracted on a short-term or long-term basis. In May 2021, GIIGNL published the first edition of Safety Measures for Truck Loading, Unloading and Road Transport of LNG – another step towards harmonisation of the LNG truck loading sector.

Coal to Gas Switching

In our 2020 Report we noted how some European countries (such as Poland and Germany) are phasing out coal fired power generation due to coal’s high carbon intensity. Since then the economics of coal-to-gas switching have further boosted the trend to switch to gas-fired power generation – including from regasified LNG. between November 2020 and June 2021 carbon and coal prices have increased by 33% and 26% respectively, making gas more competitive financially and extending the move to gas-fired power generation. The increase in coal prices has in turn boosted European gas prices, making Europe an attractive market for LNG suppliers.

Competition with Pipeline Gas

LNG deliveries into Europe have always had to compete with the abundant supply of pipeline gas to the continent – largely from Russia but also from Norway, Algeria and Azerbaijan. That competition is set to continue.

The Nord Stream 2 pipeline – which will transport Russian gas to Germany (and thereby into North Western Europe’s gas markets) – is expected to be commissioned during the winter of 2021/2022, and to be operational in the first quarter of 2022. The influx of additional pipeline gas into Europe may affect European gas prices, and consequently the supply/demand profile for bringing LNG cargoes into Europe.

2020 marked the completion of the TAP (Trans Adriatic Pipeline) – the last section of the Southern Gas Corridor. The route allows gas from the Shah Deniz gas field in Azerbaijan’s sector of the Caspian Sea to flow into Turkey, Bulgaria, Greece and finally Italy. TAP runs from Greece to Italy via Albania and the Adriatic Sea. The influx of gas into these countries via the TAP pipeline has caused a decline in demand for LNG in Southeast Europe.

US LNG in Europe

The US was Europe’s top supplier of LNG in Q1 2021, beating Qatar and Russia into second and third place, respectively. US global exports have surged by 42% in H1 2021 in comparison to 2020, according to the US Energy Information Administration (EIA), with Europe accounting for 37% of exports in the period. Continued outages amongst key LNG producers mean that the US is likely to retain its market share in Europe in the short-term. This will be driven by sufficiently high TTF spot prices in the period to give US exporters an acceptable margin.

The medium and long-term picture for US exports into Europe is less clear. A key challenge for US LNG exporters in the coming years will be the increased supply from Qatar to Europe following its FID on the North Field Expansion project. The USD 28 billion project will increase Qatar Petroleum’s (QP) production capacity from 77 MTPA to 110 MTPA, with an increase to its LNG exporting capacity of approximately 43%. The project poses a particular threat to US exporters who export spot cargoes to Europe and Asia due to the level of uncontracted volumes from the project (as well as the potential to drive down prices generally due to increased supply). QP is currently running a tender process for IOCs to take equity in the project, with its eventual partners lifting some “equity volumes”, and is running a similar process with key Asian buyers to secure long-term off-takers. However, on completion of the project QP is expected to have approximately 70% of its capacity uncontracted. Whilst many of the cargoes will be sold into the Asian spot market, a large number will be sold into Europe, posing a challenge to US exporters.

US LNG exporters, however, remain bullish on the prospects of US LNG imports globally and in Europe. The coronavirus pandemic caused the developers of the second wave of US LNG projects to put FIDs on hold. Most have now set a revised target date in either 2021 or 2022 to take an FID on their projects and a number have signed long-term LNG SPAs with a variety of counterparties. Interestingly, some of these contracts are for a ten year term, shorter than the term of the project financing that will be used to develop these projects and exposing the lenders to market risk. Developers will need to contribute additional equity to address this. It remains to be seen how many US LNG export developers will take a positive FID and whether the projects will be of the same scale as initially envisaged, with Tellurian and Next Decade both reducing the capacity of their projects, but we expect a number of positive FIDs in the coming years. There will continue to be demand for LNG in Europe and elsewhere. US exporters clearly intend to supply it.

Current European LNG Landscape

Europe’s Existing regasification Capacity

The vast majority of Europe’s LNG terminals are import facilities, with the only exceptions being in (non-EU) Norway and Russia which export LNG. There are currently 29 large-scale LNG import terminals in Europe. Of these, 21 are in EU countries (and therefore subject to EU regulation), three are in the UK (which left the EU on 31 January 2020), four are in (non-EU) Turkey and one is in Russia, 23 are land-based import terminals, five are FSRUs, and the one import facility in Malta comprises a floating storage unit (FSU) and onshore regasification facilities. Six of Europe’s LNG terminals – South Hook, Dragon, Isle of Grain (all in the United Kingdom), Gate (in the Netherlands), Rovigo (in Italy) and Dunkerque (in France) – have been granted exemptions from EU rules on regulated third party access. All terminals in the EU must publish the terms of access to the terminal (including tariffs), with the exception of these six “exempt terminals”.

The current large-scale LNG receiving countries in Europe are Belgium (one terminal), France (four terminals), Greece (one terminal), Italy (three terminals), Lithuania (one terminal), Malta (one terminal), the Netherlands (one terminal), Poland (one terminal), Portugal (one terminal), Spain (seven terminals – six operational), Turkey (four terminals) and the UK (three terminals). Collectively, their overall LNG capacity is 237 billion cubic metres (of gas) (bcm), which is sufficient to cover approximately 40% of Europe’s gas demand. Russia also has an LNG regasification terminal which is supplied entirely by Russian gas.

In addition to these large-scale LNG terminals, there are small LNG regasification facilities in Finland, Gibraltar, Norway, and Sweden.

Planned LNG Terminals in Europe

There are currently in the region of 20 large-scale LNG import terminals being considered or planned in Europe, all of which would be located within the EU, except the planned terminals in Ukraine (Odessa FSRU LNG), Albania (Eagle LNG) and Turkey (FSRU Iskenderun and FSRU Gulf of Saros). Small-scale LNG import projects are also being considered across the continent, including in Latvia. About half of these terminals would be “first of kind” in the importing country. By the same measure about half of the planned terminals are FSRUs.

Country Focus 2021

In this section we look at some of the recent and current activities in individual European LNG importing countries.