Why does Japanese contango warn us to be more skeptical about an expected growth of European LNG market?
It is expected that liquefied natural gas (LNG) supplies will grow as a major potential energy source taking on one of basic roles in diversification of gas supplies to the EU. Let me remind you that in response to the political crisis in Ukraine and the threat of destabilizing energy supplies to the EU in May the European Commission adopted the European Energy Security Strategy. There is a number of LNG projects in this important energy policy paper listed among key security of supply infrastructure projects to be implemented in period up to 2020.
According to this strategy it is planned to build the following LNG facilities: LNG vessel in Lithuania, LNG terminal in Swinoujscie in Poland, Baltic LNG terminal with location to be decided, LNG terminal in Krk island in Croatia as well as two terminals in Greece - in Alexandroupolis and LNG floating terminal at Bay of Kavala. Along with that, the construction of the LNG terminal in Klaipeda in Lithuania is nearing completion at the end of this year but this project was not included into the Strategy covering medium term prospects.
LNG development is definitely one of the most important achievements in energy industry in the XXI century, and assimilation of these technologies is very essential.
But at the same time there are important questions.
Firstly, what are the prospects of filling our European LNG market with this source of energy to ensure all these projects are put into full capacity with an expected profitability?
Secondly, diversification involves maintaining a stable mixture of energy resources, and in our case, it is LNG and pipeline gas. Then why is it better not to rearrange further the historically achieved EC gas balance with high volumes of pipeline gas including those coming from Russia? In other words, why not reconsider the radical attempts to find at the long run a complete replacement of Russian gas supplies by LNG?
However, opponents, especially our politicians, argue that "gas pipe binds us up with a sole supplier that causes a loss of energy independence", etc. But excuse me for such a trivial argument that any pipe has two ends and gas suppliers also remain dependent upon us that means - upon our European gas distribution markets. This is not to mention more about the technologies used in gas production, where sharp fluctuations in volumes of gas field output are contraindicated. Virtually, on the one hand, there is a mutual dependence of consumers and suppliers in case of a pipeline gas, and, on the other hand, it is also a matter of common interest. After all, figuratively speaking, nobody of them is able to turn an existing pipeline in other direction.
It's another matter how to redirect LNG carriers. By different reasons all over the world, sometimes circumstances of insuperable force can alter LNG routes significantly.
So it happened, when in Japan a nuclear disaster at the Fukushima I Nuclear Power Plant on 11 March 2011 resulted in a meltdown of three of the plant's six nuclear reactors. Eventually it led to the closure of all 54 nuclear reactors in this country and the transition towards more sustainable use of LNG energy resources. As a result LNG flows were largely redirected to Asia and the nuclear disaster in Japan gave an unprecedented boost to LNG prices growth to 55%, which, in turn, made the European LNG market much less attractive.
Now let me remind you, that we are talking about the plans for the development of the LNG infrastructure in the EU countries. But at the moment even before the implementation of these plans, according to experts, the existing infrastructure of our LNG market is utilized only by 20%. It occurred primarily due to a high demand, and thus more attractive prices at Asian LNG market.
And the situation is still non reassuring. Prices of spot LNG for November delivery to Asia increased 12.4% month over month to average $14.426 per MMBtu, according to the latest Platts Japan/Korea Marker for month-ahead delivery.
The general manager of the trading department of a leading Japanese company Marubeni has been recently quoted by Reuters as saying that the Japanese LNG market continues to stay in a contango condition when prices with delayed delivery of LNG are significantly higher than prices for these energy resources on terms of immediate delivery.
Thus, we see that the Japanese contango has a real impact on competition in the global LNG market and it is not for the benefit of European consumers. Moreover an upcoming winter season most probably only will strengthen this market trend.
Therefore, it is worth repeating in the address of our esteemed politicians who are dealing with the future energy balance of Europe, analysts' estimates published in «oilprice.com» September 29 that “currently there is not enough LNG on the global markets to replace Russian imports… Any attempt to fully replace Russian gas with LNG in the short-term would force a 127 percent hike in Europe’s natural gas prices”.
Thus, favorable conditions to develop European LNG market is restrained by price competition with Asian markets of these energy resources. Along with that, now there is a competition between a pipeline gas and LNG continuing at the global gas market, in which the first traditional gas resource is not going to give up its positions. In this regard, for example, according to the Gazprom CEO Alexey Miller, LNG share on the global gas market will not surpass the 30% mark.
As known, Gazprom continues extending the gas pipeline infrastructure, fulfilling the largest to date in the world gas pipeline projects South Stream and the Power of Siberia. Besides this Russian company is performing big plans for increasing its LNG capacities. There are the Vladivostok LNG and the Baltic LNG projects in Gazprom plans, as well as the project for expanding the existing LNG plant on Sakhalin. It is expected that once these projects are launched, Gazprom’s share in the global LNG market will rise from the current 5 to 15 per cent.
This means that the EU refusal of Russian pipeline gas imports in favor of increasing LNG supplies may turn round Europe again back to Russian LNG from the Baltic or the Arctic region, where the Yamal LNG is being built as well, or from the Far East.
In this case it appears that from what we in Europe are trying to get away, that's the same what we'll come back to again!
Then what for will be such "a run in circles"?
Here is again economic feasibility suffers that will affect adversely our out-of-pocket expenses.
Meanwhile we can see that both current and future changes in the Asian part of the world energy market insufficiently is taken into consideration in the European Energy Security Strategy.
Perhaps someone with a sense of humor would joke that Far East market is too far, so this Japanese contango is just out of view of our energy strategy makers.
But if we talk seriously, inevitably the question occurs why our economic well-being, including provision of comfortable temperature for essential living conditions, depends on the policy makers, whose personal experience often has never been directly linked to energy sector and who are offering strategic solutions based on myopic expectations leaving such factors as Japanese contango behind the horizon?