The conundrum for buyers sourcing competitive gas

THE EDGE – SIMON FLOWERS

Global gas and LN
NL
G markets were significantly disrupted by the war in Ukraine. A glorious opportunity has been presented to available LNG suppliers who can fill the void left by Russia’s diminishing role and take advantage of high prices.

But in the current feverish environment, how do the buyers who serve the European market – utilities and traders – make the critical decisions to secure gas at competitive prices in the medium term? Massimo Di-Odoardo, Head of Gas Analytics, Wood Mackenzie, and Giles Farrer, Head of LNG Assets, shared their thoughts.

First, the number of players capable of producing LNG on a large scale is decreasing. Qatar is one. The North Field East expansion project, currently in development and sanctioned before the crisis, will consolidate its position as a world leader.

TotalEnergies will be Qatar Energy’s first partner in the project; a handful of other high-profile CIOs will be invited to join at short notice.

North Field East is a giant. The largest LNG project in the industry’s 60-year history will deliver 32 mmtpa in four years and cost US$30 billion. All-in unit costs, however, will be among the lowest in the market, as will carbon intensity – the use of solar and CCS are part of the project specifications.

These LNG cargoes will be competitive in terms of cost and green credentials for the next 30 years. Basically, a lot of LNG hasn’t been sold yet.

But changing investor appetite means North Field East (and its yet-to-be-developed sister North Field South) could be among the last of its kind. The economy of the project is exceptional. By contrast, most capital-intensive conventional LNG developments, many of which have provided modest returns through the cycle in the past and have long paybacks, simply don’t make it for Big Oil anymore.

The wider industry is moving towards a more incremental modular investment approach (including smaller-scale modular FLNGs) that puts less capital at risk. US developers, able to exploit the vast shale resource without committing to upstream investment, are in pole position to benefit.

As a result, Qatar and the United States are poised to dominate future LNG supply. There is currently a Big 3 – Australia, the United States and Qatar – but the large-scale competition is collapsing. Australia is struggling to maintain production, let alone growth.

Russia’s aspiration to be part of the ‘Big 4’ has turned to dust with the war, while Mozambique’s hopes of being a major force are suspended indefinitely after the ongoing terrorist insurgency since 2019.

The combined global market share of Qatar and the United States will be 50% by 2030, up from 39% today. Qatar and the United States aim to supply 127 mmtpa of additional LNG by the end of the decade, capturing 71% of the growth in demand. New buyers should be concerned about such control in the hands of so few and should consider how best to support the development of other options.

Second, securing gas at an appropriate price over the medium term is a priority for LNG buyers, but a conundrum in today’s market. Changes in EU regulations over the past decade have required prices in domestic consumer markets to be valued on the basis of spot indices.

This forced European buyers to renegotiate old oil-related contracts into spot contracts (TTFs). It worked well to reduce the risk of their wholesale business. Abundant supply, including Russian piped gas, kept spot prices low and below Henry hub and oil contract prices.

The war shattered regulated construction. Spot prices are now the highest of the three – the current spot TTF is US$30/mmbtu, nearly four times the 10-year average (and equals US$175/bbl Brent). Shoppers will now weigh in on cheaper alternatives.

Cargoes related to the US Henry Hub could be delivered to Europe for around $14/mmbtu, well below the TTF price even at the current high Henry Hub price ($8/mmbtu). The problem is that LNG capacity in the United States is already exhausted and contracts at the Henry Hub price are only available for pre-FID projects.

Most additional US volumes from recently sanctioned or soon-to-be-sanctioned projects will not be available to buyers until 2025/26, and to access these volumes, buyers will need to enter contracts for at least 15 years. .

In this seller’s market, oil-related LNG contracts are becoming more expensive every day. The going rate for a contract starting this year is around US$20/mmbtu at the current Brent price of US$120/bbl. This reflects a 17% indexation to Brent, 50% more than the 11% quoted in contracts signed a year ago.

German utilities looking to buy volumes in Qatar may have to bite the bullet and strike 10-year contracts at prices more than 50% higher than last year before the oil price hike even hits. be taken into account. Needs must.

Third, if the era of cheap gas is over, how can buyers take risks for the future? With energy policy in Europe moving away from gas in the medium term, governments may need to step in to support the longer contracts demanded by sellers.

If European players are not ready to build a global position in LNG to create new outlets for their volumes, the alternative is to let portfolio players take the risk.

The super high prices won’t last forever. Our view is that LNG spot prices decline as new supplies come on stream in 2026/27. Uncertainties include Russia’s behavior and timing. The longer high prices persist, the greater the chance of an LNG bubble with too many new supplies being released at once.

A crash in spot prices would knock Henry Hub and oil-related contracts out of the money. Ultimately, this is what buyers are worried about – turning away from expensive spot exposure today and getting whipped when the market reverses.

Buyers need to build a low-risk, price-competitive portfolio. This is a tough question in a world where prices are high and where there is a wide divergence between Henry Hub, oil-related contracts and the spot.

When it comes to pricing, companies’ outsourcing strategies need to go back to basics. Utilities and traders will return to balanced portfolios between Henry Hub and oil-related contracts and with less room. When there is no clear winner, a diversified portfolio is the safest bet.

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