September 12, 2023 [S&P Global]- The European LNG market has quickly evolved as the Russia-Ukraine war and unprecedented price spikes have changed not only infrastructure and cargo flows but the very terms by which the commodity is traded.
One of the most prominent changes has been the buildout of new European import capacity.
Germany, Europe’s biggest gas consumer, notably had no LNG import capability at the start of the Russia-Ukraine war in February 2022, but brought online three floating storage regasification unit-based terminals in record time. The FSRU in Wilhelmshaven started LNG send-outs in December 2022, a unit in Lubmin started up in January and the Brunsbuettel terminal came online in March. The three sites combine for an import capacity of nearly 14 Bcm/year, and more capacity is expected by the end of 2023. Second FSRUs are planned for Wilhelmshaven and Lubmin, while Stade is also set to receive an FSRU.
These additions have made their way into bilateral offers into Europe, notably Wilhelmshaven. Platts, part of S&P Global Commodity Insights, published its first Atlantic Market on Close bid with basis discharge port Wilhelmshaven on July 20, for example. These new terminals quickly began to appear in spot contracts in Northwest Europe.
After a period of market feedback from June to August, Platts updated on Sept. 1 its standard terms to include Wilhelmshaven and Brunsbuettel as well as Eemshaven in The Netherlands — another FSRU-based terminal that was brought online at breakneck speed.
These additions to the Northwest Europe LNG standard terms add to the disport locations in North Spain, the Netherlands, the UK, Atlantic France and Belgium.
Europe moves away from Russian pipeline gas
Europe had historically been the sink for spot LNG cargoes — if you could not fetch a better price in Asia, you would sell to Europe. That dynamic got turned on its head in 2022, particularly post-war.
For example, Europe has already imported more LNG from January to September at 88.02 million mt, than it did in all of 2021 at 79.34 million mt. Europe significantly increased imports year-on-year in 2022 to 127.87 million mt.
This trend is transforming Europe’s energy landscape and making Europe’s inland gas markets respond to LNG dynamics as those cargoes increasingly make up supply. Europe’s LNG import capacity is set to expand by one-third, 6.8 Bcf/day, by the end of 2024 compared to 2022, according to the US Energy Information Administration.
As LNG imports make up a greater proportion of European gas demand, cargoes are increasingly becoming the base load for Europe’s market. This increasing commoditization of European LNG has accompanied shorter lead times between deal date and delivery date as well as nomination deadlines.
Platts standard terms shift
Platts on Sept. 1 narrowed the standards around nominating disport, loadport and notice for substituting a vessel to 15 days from 20. This followed observed changes in bids and offers and feedback from the industry.
Similarly, Platts now reflects a tighter declaration of delivery window with buyers declaring a three-day window 20 days in advance. This is down from a three-to-five-day delivery period declared at least 30 days in advance. Market sources have said this new standard is because more LNG is landing into Europe at a quicker pace.
European gas market dynamics also influence LNG standards. The volatility of gas hub pricing, and the practice of on-selling regasified LNG into downstream gas hubs, means that buyers are mindful of operational tolerance in the seller’s option, as the previous norm of plus/minus 5% could have a material impact on the volume of LNG delivered and therefore the number of derivative lots needed to be sold to manage the cargo’s risk.
Standard operational tolerance has narrowed to plus/minus 3% at the seller’s option, reflecting the concern from market participants around unknown volume exposure.
While the influx of US volumes to the European market is a factor in changes to market dynamics, the exit of Russia-origin LNG from spot transactions is another change. Russia LNG continues to arrive at European LNG regasification terminals in huge volumes but is rarely traded before it arrives.
As a result, the influence of standard trading terms for Russia-origin LNG, the tenders of which included 20-day clauses and 5% operational tolerance, has started to wane.
Changes in Platts MOC bids and offers
Changes in trading patterns have emerged in the bids and offers submitted to Platts.
During the period of extreme natural gas volatility, many European buyers moved to seeking pricing on a floating pricing basis versus NBP or TTF day-ahead contracts rather than month-ahead contracts.
For example, rather than pricing on the month-ahead dates for October in the calendar month of September, buyers have been increasingly seeking to price average against day-ahead dates in September for when the cargo delivers.
This reduces the buyer’s price risk as it means the cargo price is more likely to reflect the current market dynamic at the time of delivery rather than the average across the month. This pricing mechanism has also been used more frequently in operational tolerance pricing.
The market has been fairly polarized on this. Some companies say this is a new standard for a more price-sensitive Europe, others say this buyer-friendly floating pricing can be done, but buyers will have to pay above market value for using the language. However, some sellers say they will not transact on a day-ahead pricing basis. The first time Platts published an MOC bid with day-ahead pricing was August 2022 and in 2023 all Atlantic MOC bids have had a day-ahead pricing basis.
We can see other interesting trends in what companies have submitted into the MOC. For nominating an alternative discharge port in 2020, 67% of MOC offers stated 20 days, in 2021 this fell to 31% and in 2022 this fell to 14%. For nominating an alternative vessel, in 2021 70% of MOC offers stated 20 or 30 days. In 2022, 14% stated 20 or 30 days with 15 days or fewer accounting for 86%.
As a commodity that has seen its growth accelerate in the last decade, LNG cargoes do not share as much uniformity found in markets such as oil or refined products. However, we have seen trends toward commoditization in the global LNG market, particularly in Northeast Asia. This had led to a coalescence by market participants around agreed norms and the possibility for further standardization and efficiencies in the market.
While it is unclear how the European LNG market will evolve or if it will further standardize, its path will be different from oil.
The future of Rotterdam as a refining hub and the infrastructure logistics of trading small scale LNG leaves the industry with its own unique challenges to manage.
However, LNG has an increasingly important role in baseload supply to European gas markets. The import capacity buildout and rapid changes to trading patterns are proof that the industry is transforming.
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