Thursday, 31 August 2017

Why would it be too naïve to expect a mass arrival of LNG tankers labeled "America first" to the Baltics through Danish Channels?
Financial Times creatively described how during the 16-hour trip made by President Donald Trump on July 6 "he was cheered by the crowd to the rooftops" while welcoming US President’s pledge to raise US shale LNG exports in Europe. Two months earlier in the framework of the official visit of Polish delegation to Washington in April Poland’s state-owned PGNiG SA bought a spot LNG cargo from Cheniere Energy Inc.’s Sabine Pass plant. Then as a prelude to the President Donald Trump’s visit, the 162,000-cbm Clean Ocean arrived at the Lech Kaczyński LNG terminal in Świnoujście on June 8.

The total cost of the Poland's LNG terminal is 950 million euros (3.5billion zlotys). The European Energy Programme for Recovery (EEPR) funds supported the engineering, construction and implementation of two LNG storage tanks and the docking area for the LNG infrastructure in Świnoujście. The European Commission and Poland's political leaders believe that the terminal is necessary to foster EU energy security objectives in terms of diversification and to reduce dependence on Russian gas. The terminal's initial regasification capacity is 5 bcm per annum. The vessel with first ever delivery of LNG cargo arrived to the Polish LNG receiving terminal in Świnoujście from Qatar on 11 December 2015.

It was expected that the LNG terminal in Świnoujście would be operating at full capacity by 2018. To date, however, Poland has managed to utilize much less than half of the existing regasification capacity. It would be sufficient to take a look at the data in BP Statistical Review of World Energy 2017 to come to this conclusion. The consumption of natural gas in Poland in 2016 amounted to 17.3 bcm largely come from domestic production of 3.9 bcm and imports of 12.6 bcm including 10.2 bcm of gas supplies from Russia. As Figure below illustrates, the remaining part of natural gas consumed in the country in the volume of less than one bcm accounted for LNG imports.

Despite the fact that the terminal in Świnoujście has operated at less than 20% of its intended capacity, this year Polish gas transmission operator, Gaz-System has decided to upgrade it. With the construction of the third tank, its capacity can be expanded to reach 7.5 bcm per annum satisfying about 50% of Poland's annual gas demand. Such an increase in regasification capacity is expected to provide Poland with opportunities for playing an active role in the changing LNG market in Central and Eastern Europe. In seeking an execution of this plan, Warsaw puts special hopes on a possibility of signing a long-term sales and purchase agreement (SPA) for supplies of US LNG to Poland.

In that regard during the ceremony welcoming the US tanker on June 8, Poland’s Prime Minister Beata Szydlo said it was a historic moment that improves the region's energy security. A month later, the country’s President Andrzej Duda also expressed his enthusiasm after meeting US president Donald Trump in developing a LNG hub for US deliveries for the region. Thus, it would appear that everything is about ready in Poland to promote LNG from the U.S. to the European market. Moreover, the preparatory process has already moved from the political level to the sphere of business, since Polish Gas and Oil Company (PGNiG) opened a trading office for LNG in the Western London district of Mayfair, which is being run by PGNiG Supply and Trading GmbH, a Germany-based subsidiary of PGNiG.
In the meantime one cannot disregard the fact that Even the successful testing of transatlantic route for LNG supplies to Poland is not the only prerequisite for the full load of the LNG infrastructure enterprise in Świnoujście. The major concern is that US LNG has failed to be competitive with other natural gas supplies to Europe, in particular those which come from Russia by pipelines. This is far from saying, however, that current and most likely future underutilization of productive capacity in the Poland's LNG terminal is not the only eye-opener for Europeans regarding the problem with US LNG competitiveness.

In fact, the European gas market is already very familiar with US LNG competitiveness problem that has captured the attention each time when so-called test cargoes arrived from the only LNG exporting facility in the U.S. The geography of US LNG deliveries should be eventually predetermined by the peculiarities of the gas infrastructure in Europe, such as regional accessibility to LNG regasification terminals and gas pipeline networks. At the existing price ratio of LNG compared with pipeline gas it is much more likely that LNG from the U.S. can find and maintain its market niche, where there is an insufficient access in Europe to natural gas supplied by pipelines. This particularly concerns the western part of the continent, especially such European countries as Portugal and Spain.
Poland, of course, is not relevant to the group of countries mentioned above. As the figure indicates, in 2016 about three quarters of gas demand in Poland was met by pipeline imports from Russia and other countries like Germany and only by 5% due to imports of LNG from Norway and Qatar. It should be added that Poland gains benefits from the transit of Russian gas coming from the Belarusian and Ukrainian routes. A new profitable business for gas transport operators and traders appeared in Poland after Ukraine had stopped buying Russian gas in November 2015 opened up opportunities for gas re-exports to this country. According to Reuters, company PGNiG plans to double gas exports to Ukraine to 0.7-0.8 bcm in 2017.

All this may serve as strong economic arguments against attempting to take a sharp swing away from gas imports by pipelines in Poland. At the same time, original causes of such attempts should be sought essentially in the political domain. The reality is that by this way Poland's government demonstrates its special loyalty and devotion to its transatlantic ties with the U.S. What is more remarkable that this is occurring at a time when Europe is experiencing a cooling of relations between Brussels and Washington to such extent that it even led the EU's leadership to question publicly the factual strength of the Atlantic partnership. In a German radio interview broadcast on August 2 the European Commission president Jean-Claude Juncker noted, "I still assume that we are allies of the U.S."

In the meantime, Poland itself apparently does not attach a considerable importance to what the rest of Europe can think about this country, which is ready to deserve a political encouragement from Washington in the form of medium- or long-term SPA for the supplies of US LNG. The irony is that for many years Europeans have been used to hearing how Russia was using its energy resources as a tool to sort out political preferences in partner relationship. Now everyone has a chance to see that providing access to fossil energy has also become one of the central questions in the present political relations between Poland and the U.S.

Article entitled "UAE and Mexico favoured for US LNG while Poles pay much less for their cargo than Dutch", published in LNG Journal 18 July 2017, highlights a new episode in the use of energy as a political instrument. The point is that, according to the detailed data released by the US Department of Energy, the price of LNG dispatched to Poland on May 22 from the Sabine Pass terminal was 30% lower than the price of LNG that was sent to the Netherlands on the day before (May 21). The Dutch buyer paid 2 USD per MMBtu more for a cargo from Sabine Pass than Poland’s importer. Specifically, the Netherlands shipment to Gate LNG in Rotterdam by the "Arctic Discoverer" was priced at 6.10 USD per MMBtu while Poland’s shipment delivered to the Baltic port of Swinoujscie on the Clean Ocean cost 4.10 USD per MMBtu.

An essential distinction between the two prices is that the Polish price refers to a short-term contract for spot cargo delivery aiming at testing and promotion. It is highly unlikely that this price reflects current market conditions because everybody could see a political rather than a commercial motivation behind the agreement signed during the Polish secretary of state and chief of the cabinet of the president, Krzysztof Szczerski‘s visit to Washington on April 26 – 27.

In contrast, the Dutch price was determined under a typical long-term LNG SPA Contracts with a 20-year lifespan. It should be noted that in this case price formation is based on the model applied for all long-term LNG SPA of Cheniere Energy Inc. The Table above contains information on several LNG SPA concluded with European and Asian buyers. According to long-term LNG SPA Contracts, Cheniere Energy Inc. sales LNG on the FOB basis at the tailgate of the plant when the price includes two components: fixed fee of 2 – 3 USD per MMBtu plus 115% of NYMEX Henry Hub. The charge of 15% above Henry Hub mainly accounts for liquefaction and basis differential. It is particularly important than under the terms of long-term LNG SPA Contracts customers must take (or pay) annual contract quantity of LNG.

However, the practice has shown that Cheniere’s long-term LNG SPA Contracts are not always in line with the interests of customers. Such opinions are existing even in the key premium Asian market. For example, this year one of the main buyers of LNG in Asia - the state-owned Indian company GAIL attempts to renegotiate pricing with Cheniere under previously signed long-term LNG SPA Contract. As the Hindustan Times wrote, quoting an unnamed representative of the Indian site: "At current US prices, the landed cost of the LNG (in India) is not very attractive."

And in fact, it is obvious that the transportation of LNG across an ocean to distant European or Asian markets, regasification and storage operations, as well as technological losses of gas in transportation and during processing - all together add a significant value to the US export price FOB that ultimately makes the total landed cost of overseas LNG uncompetitive.

In this context, the S&P report entitled "Can The U.S. Shut Off Russia's Gas Supply to Europe?" has not gone unnoticed. As concluded in the report, "the main problem for US exporters is that European hub prices are currently well below those that would be attractive." the S&P analysts estimated that gas prices would need to increase by about 30% from the current level (of about 5.0 – 5.5 USD per MMBtu) to make exports profitable for US suppliers."

Washington's present policy is unfortunately aimed at imposing by any means on Europe supplies of US uncompetitive LNG although such practices ran counter to the basic market principles. With this in mind, the part of the leadership of the European Commission, Member States and European energy companies that correctly assesses the current situation deserves respect. Probably, many would agree to join the words of Klaus Schäfer, Chief Executive of German utility Uniper who said, "I’m very pleased that the German government and the European Commission have this firmly in view and have stated their position unequivocally. The United States is putting Europe’s supply security at risk for the sole purpose of pursuing its own economic interests and to protect domestic jobs."

As for Poland, truth be told, Europeans might be having doubts, some serious doubts about prospects of awarding a cost-effective medium- or long-term LNG SPA Contract at least while the President Donald Trump keeps his election promise. "’America first’ will be the major and overriding theme of my administration," the President Trump said.

Why would not Poland's leaders dreaming of new advantageous offers from US LNG suppliers prepare a simple projection for estimating a number of LNG carriers sufficient to meet an annual gas demand in domestic market without re-export to neighboring countries?
The result of this estimate would be like that: This question sounds theoretical, because, firstly, there is no terminal infrastructure in Poland, the capacity of which would allow regasifying the volume of gas equivalent to an annual consumption of this country. But, secondly, if even part of the regasification were performed by some other terminals, in this case it would require in total about 180 LNG carriers of the same capacity as the Clean Ocean for delivering 17.3 bcm of natural gas annually to Poland. This is about twice the total number of liquefied gas tankers, according to the US Department of Energy, carrying cargoes since the commissioning of Sabine Pass terminal.