Europe's LNG Battleground
November 2017
Western Europe remains the locus of LNG imports, with active terminals in Spain, Portugal, the Netherlands, UK, Italy and France. Further to the east, Europe has been pondering new LNG terminal projects due to emission-lowering regulations for bunker fuel. There has been a sense of vulnerability due to over-reliance on both Russian gas and trans-Mediterranean pipelines which has driven new LNG terminal projects for Italy and Turkey, amongst others.

European Gas Needs Being Strategically Met From All Sides 

Europe in 2016 and 2017 was served by around 171Mtpa of regasification capacity, with the highest capacity and utilisation on the Atlantic coast terminals. Despite proximity to North Sea, Russian and North-African gas pipelines; a combination of factors has favoured the development of either land-based or floating, storage-regasification terminals.  Despite the high capacity, the average 2016 throughput rate was around 22%, suggesting both strategic and forward-looking factors are in play. Growing demand in 2017 is expected to result in a higher utilisation rate. This is especially so in Spain, driven in part by falling LNG prices but also due to a shortfall in hydro-power over 2017. Estimates are that in Mediterranean ports for Turkey and Italy, utilisation in 2016 was more than 40%, but elsewhere, and notably in Spain and the UK, rates were less than half that, at just 20%, suggesting less seasonal demand variation in the Mediterranean. 

Western European markets, particularly in the Iberian Peninsula, have limited connectivity to East-European pipelines bringing in cheap Russian gas. Spain and Italy both enjoy direct pipeline access to Algerian natural gas. North-Western Europe also has access to substantial gas production from North Sea fields and also from the giant Groningen gas field in the Netherlands. But the non-competition related factors which drive the construction of LNG terminals to provide a gas source, especially for European markets are numerous.  

Firstly, a storage and regasification terminal provides an economic hub whose activities include the re-exportation of LNG by traders. Secondly the facilities underpin infrastructures which supply bunker markets in a rapidly evolving, low emissions region. In the future, it is also envisioned that the terminals will also be supporting the redistribution of natural gas in its liquefied form as a road and rail haulage fuel. Thirdly, they provide a rapid and lower investment gas supply solution as compared to much more capital intensive pipeline projects, especially for remote consumption centres. A fourth factor is a strategic guarantee for an alternative gas supply. This is currently playing out in the Mediterranean, where despite high connection to piped natural gas suppliers, Italy and Turkey are bolstering their LNG import capacity, and also correcting natural gas supply shortfalls with higher imports of LNG. 


The next battleground? 

Unlike most producing plants, low utilisation rates in import terminals can be managed at a relatively low cost. It is likely that while year round usage is low, that capacity is actually designed to be sufficient during seasonal demand spikes.  In terms of running costs, the vaporisers, which represent the highest energy cost, can be de-activated during periods of inactivity. The main cost and technical risk lies in preserving enough “heel” of liquefied natural gas to keep storage tanks and pipes ready at cryogenic temperatures. This is because the conditioning process for the facility generally requires a “commissioning” cargo, itself a major cost. Hence it can be expected that most facilities need to import at least a minimum throughput rate of several percent, in order to remain in operational status. But the key influence of utilisation on cost will escalate for low utilisation rates.  2016 import volumes show Spain, isolated from Russian pipeline gas, as the largest importer at an estimated 10.2Mtpa, followed by the UK (7.5Mtpa) and then France and Turkey at 5.6 and 5.5Mtpa, respectively.  

But the regasification terminals also represent the European battleground for LNG market share, between major suppliers Qatar, the US, Algeria, Nigeria, and once Yamal is operating – Russia. All are looking to increase deliveries into Europe where 2017 import volumes are already expected to reflect a 10% YoY increase. The 2016 Spanish LNG import volume was distributed mainly between Nigeria, Algeria and Qatar while the UK, the second largest importer, is overwhelmingly buying its LNG from Qatar; but shipments during 2016 also saw the first cargoes delivered to Natural Gas Fenosa at Spain’s Reganosa terminal while first US cargoes arrived at the UK’s Isle of Grain in July 2017. Sabine Pass operator Cheniere, who holds offtake commitments with a number of portfolio sellers and also with French power company EDF, is offering Henry Hub linked US shale gas, and appears to carry a US$2/Mbtu higher delivered cost over pipeline supplies. But lower cost Russian product will also make strong inroads into Iberian gas markets, with Spain’s Natural Gas Fenosa already committed to buying 2.5Mtpa from Novatek’s Yamal LNG.