When it comes to LNG, Europe is an old territory. The very rst commercial cargo transported over water was in fact brought to Canvey Island in the UK which makes Europe the pioneer LNG market. Those with more recent expertise in LNG will have experienced Europe as some sort of oddball, a bit dusty and sleepy and in no way exciting.
This is about to change as vast new volumes will nd no other way to go to in the very immediate future. Europe will become some sort of “Final Destination” or “End of the Line” for many cargos. This will give Europe a bellwether position as it will be able to do things no one else can. There will be innovation on the trading side like we have never even dared to dream in the sti Asian markets.
Oh, if you like it or not. LNG from the US and even Qatar will have to joust with pipeline gas in Europe as surplus LNG can only and must only be dumped into Europe as the world’s only performing sink market. This means that it’s going to get ugly with Russia which – right now – expands into Europe as much as it can.
For Russia, it’s a ght for survival and it simply has no means to reroute gas somewhere else. The only thing they can do is not producing it which will, in turn, wreak havoc on the national budget. And for LNG producers, the investments are sunk and it makes simply no sense to switch o the trains. Even the much vaunted US exi-trains.
Back to LNG and let’s take a closer look at the expressions “End of the line” and “Final Destination”.
Historically, LNG always was a pretty simple and in exible business: It’s conceived as the simulation of a oating pipeline where liquefaction, regasi cation and the vessels in between are supposed to work like clockwork in order to ensure optimal operations. This carefully orchestrated dance of liquefaction, tanks, cargos on water, tanks again and nally, regasi cation was called a “milk run”. This is like a nely tuned milk supply chain where any disruptions can easily spoil the milk.
Modern, more exible business models require a “Final Destination”, willing and able to absorb LNG any time – a so-called “Sink Market”. It works like the level drain on a kitchen sink. In LNG this would be a market that always accepts whatever volume is delivered to it. By doing so, it allows the LNG market to purge spillover LNG from vessels and tanks so they are ready for the next turn of the wheel. The “Sink market” is some sort of calculable Worst Case Scenario for the LNG trader, allowing him to reliably evaluate his trading options knowing that potentially putting LNG up for salvage is the worst possible thing that might happen to him – but no worse.
A signi cant proportion of the LNG produced over the last 10 years has shed those shackles and has hence become portfolio LNG. This means that contrary to classical business models this LNG was produced free from destination constraints. This means also that each single cargo is intentionally produced to go to the place with the highest price.
However, when any such cargo would not nd a vanilla buyer, it must evacuate in extremis into a market that is willing and capable of taking it at scrap value as this super cold fuel boils away at a rapid clip. This would be a buyer in a “Sink Market”. Europe is the only such market and hence the “Final Destination” – the “End of the line”.
Most of today’s LNG receiving terminals were built to serve a narrowly de ned customer. Very little inbuilt exibility for dealing with extraordinary situations usually exists in them.
Very few terminals have the capability to sink a cargo (or many) on short notice. For doing so, the terminal must be capable of liberating enough tank space quasi-instantly in order to take the cargo. This means that it needs su cient installed regasi cation capacity to bring big volumes of gas into the grid very fast. To make things even more di cult, the grid must also be strong enough to sustain large volumes of gas entering into it without collapsing technically while doing so. This means that it needs to be very large and interconnected to other pipelines in order to siphon o the additional gas very quickly. It helps if there is ample underground storage capacity in order to help to alleviate grid pressure.
Only a handful of terminals in North Western Europe, bringing about 80 bcm of regasi cation capacity to the market, respond to all the criteria above.
Those terminals are able to sink LNG almost at will, limited only by its regasi cation vaporizer capacity and their capabilities to turn over ships. This also means that any free LNG cargo that does not nd a vanilla destination worldwide only has those terminals as a destination of last resort. And in times of oversupply, there will be plenty of those cargos without a home. They will all come to Europe as they have nowhere else to go.
With an LNG wave lurking on the horizon, Europe and its LNG traders have the opportunity to be the rst quasi Market Maker for LNG. This opens up totally new possibilities for the entire marketplace. What does this mean?
If the strict nancial markets de nition of a Market Maker is transferred to LNG, we would get an LNG trader capable of buying and selling without notice, willing and capable of bu ering LNG and who o ers a range of services to other LNG players, enabling them to go into deals that would otherwise not be possible. This, of course, shall be done for the pro t of all those involved and without the market maker, those pro ts would not have been possible.
However, the market liquidity required to perform those tasks reliably does not exist yet in LNG which is also the reason why there is no real Market Maker yet. This is going to change as the LNG glut will hit the deep storage capacity and the LNG terminal capacities in North Western Europe.
Many new LNG consumers serve tiny markets with a lot of seasonal demand. Their terminals are small too and their end customers may have very erratic consumption pro les. They cannot sustain year-long stable in ow of LNG as their facilities and/or markets cannot modulate the volumes in order to adapt send- out to market needs. They will have to buy exibility services and the Market Maker is going to provide them.
Europe’s deep, integrated markets plus its large scale LNG terminals will provide and sell such services for a price. Europe hence becomes the de facto Market Maker for global LNG and will spawn the rst real LNG price index. A number of Asian players have attempted this for many years now – without ever getting there. This is a huge economic opportunity for Europe, as there are many of those in exible terminals and players at the Atlantic Rim alone.
Let’s round o the situation of Europe in this LNG market development with one more remark:
The international LNG market and its enormous overcapacity put Europe into a very special position over the coming years. Still, all this LNG is not economically vital for the continent. In other words: If LNG does not come, Europe can always revert to pipeline gas and balance out any potential lack of LNG this way. On the other side, US terminals will have to switch o if they cannot sink their volumes on the European market. Three years ago, things looked very di erent indeed.
US Producers depend for their survival on European terminals, not the other way round.
The new LNG situation creates a quandary between geopolitics and economic issues, between regulated diversi cation and a free EU energy market for the European Commission!