Bloomberg: Europe bailed out by cheap LNG

In the Netherlands, once Europe’s largest natural gas supplier, one of the big questions is how to deal with declining production and increasing reliance on imports.

For hundreds of energy traders, utility executives and analysts gathering in Amsterdam this week for the Flame Conference, the Netherlands epitomizes the European energy security situation. Whether through pipelines from Russia or northern Africa or by ship from Qatar or the U.S., more and more imported gas will be needed to feed the region’s power plants, companies and homes.

Increasing Gas Gap

The Netherlands turns into a net importer of natural gas as its output falls

“The Netherlands is set to become a definitive net importer of natural gas,” said Carlos Torres, vice president of gas and renewables markets at Rystad Energy, a Norwegian energy research company. Across Europe, nations are “now taking advantage of low LNG prices.”

The source of gas is a politically charged issue, with Russia supplying around 40% of the European Union’s fuel and building a controversial new pipeline directly into the region. The U.S. says that dependency is dangerous and is urging the EU to build more terminals to ship in gas from its shale boom to bolster the bloc’s efforts at diversification.

LNG is playing a bigger role in Europe after new production plants caused global supply to outstrip demand, with the surplus boosting imports into the region’s liquid markets to record levels. The Gate LNG terminal in Rotterdam has seen renewed interest and could hit full capacity by the end of the year after years of being underused, Torres said.

European LNG imports more than doubled in the first quarter despite a warmer-than-usual winter, demonstrating a “genuine underlying demand,” according to Alastair Maxwell, chief financial officer of LNG tanker owner GasLog Ltd. While buyers took advantage of the lower prices to bring in more cargoes, declines in the region’s production were also behind the increases, he said.

Shut Down

The Groningen field, once Europe’s largest, is being phased out and will be closed completely by 2030 as the Dutch government seeks to limit earthquakes provoked by gas exploration. Its production is forecast to fall to less than half the nation’s requirements in the year through October, and will be just a third of peak output in 2013, according to BloombergNEF.

That output decline comes as the European Union needs more gas to compensate for the retirement of coal and nuclear plants. The International Energy Agency estimatesthe 28-nation bloc will have to seek additional imports equal to one-third of anticipated consumption by 2025.

More Supply

Europe to need additional gas supply as domestic production contracts.

Mild Winter

The flood of LNG to Europe has put further pressure on natural gas prices already weakened by reduced demand and mild weather. In the U.K., temperatures topped 20 degrees Celsius (68 degrees Fahrenheit) for the first time during the winter, meaning less need for the fuel for heating.

Europe Getting Warmer

Temperatures have risen around 1.4 degrees celsius since pre-industrial times. The benchmark next-month gas contract in the Netherlands, also Europe’s biggest traded market, has fallen 37% this year. Storage levels in Europe are also well above their five-year average, damping appetite for fuel to inject this summer.

“Europe has the flexibility now to import LNG at a good price, but we expect that in 2022 prices will start to rise as demand in Asia is set to resume growth,” said Torres. “As Europe is increasing its import dependence, that could result in higher electricity prices in the region.”

Source: Bloomberg

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