June 18, 2010 / 11:27 AM / 9 years ago

ANALYSIS - Britain: the pivot point for global LNG

LONDON/NEW YORK (Reuters) - Britain will continue to play a pivotal role in balancing the amply-supplied global liquefied natural gas market this year, using its big new LNG import terminals and export pipeline to refill European gas stocks drained over a long winter.

British gas exports to continental Europe via the Interconnector UK (IUK) pipeline have surged around 70 percent, year on year, since May 1, as European companies buy gas in Britain’s open market to stock up for next winter with cheaper fuel than they can get from long term supply deals.

That has allowed Britain to import much more LNG than its own modest gas storage facilities allow, gobbling up excess global supply and turning the typical summer price slide on Britain’s NBP market into a NBP surge far above U.S. Henry Hub price levels.

“We have watched the Interconnector pretty much deliver gas to the continent since the first part of April. The UK is pulling in cargoes that otherwise would have been dumped into the U.S. market,” said Scott Weeden, analyst at Bentek Energy in Denver, Colorado.

“There is potential for strong UK LNG imports to continue through the storage injection season.”

For a graphic showing the UK NBP price premium to the U.S. Henry Hub click here: here

For the growing U.S. discount to the UK front month price click here: here

For a graphic showing UK-Belgium gas flows in 2009-2010 click here:

here

From May 1-June 13, 2010 exports to the continent through the link to Belgium averaged 43.44 mcm/day, compared to 25.46 mcm/day in the same period of the previous year, according to IUK, while exports since April 1 are up 40 percent.

“IUK exports are much higher than the market expected and that is what is causing us to require LNG. If IUK (export demand) was down 20 mcm. We wouldn’t need LNG and prices would be a lot lower,” one UK gas market analyst said.

“So the key question is: when will IUK exports drop?”

That will take some time, and will depend largely on how much gas is brought into Europe by pipeline from Russia, Algeria and Norway.

SPRING DEMAND BOUNCE

Europe got through the last winter without suffering a repeat of the Russian gas row with Ukraine that slashed pipeline gas supplies to the continent in January 2009.

But bitter cold weather drove gas demand levels for heating up to record highs and disrupted pipeline gas supplies from Europe’s biggest producer Norway in early 2010.

The resulting drain on stocks in northern Europe in particular, accompanied by a rebound in industrial demand from recession-driven lows and new gas fired power plants has sparked a spring demand bounce.

As a result, overall European gas stocks were less than 57 percent full on June 14, according to data from Gas Storage Europe .

That left 30.12 billion cubic metres of storage space to be filled — equivalent to almost 330 tankers carrying an average load of 165,000 cubic metres of LNG — which is the average capacity of tankers that have delivered to Britain and Belgium over the last few weeks.

The global LNG market was expected to be over-supplied this year as new production in Qatar, Indonesia, Yemen and Russia comes online while demand for imported fuel in the United States has waned.

Maintenance shutdowns in Qatar and resurgent demand in Asia have helped tighten the market but industry analysts say there is still plenty of the super-cooled gas available and see Europe taking a big part of it.

“Continued cold in Europe through the spring, combined with finicky Norwegian supply, has kept European prices supported,” analysts at Barclays Capital said in their latest LNG market report.

“The continent appears ready to absorb the majority of LNG supply left after the satisfaction of the appetite of Asian, Latin American, and Middle Eastern consumers.”

Britain alone could take in 25 cargoes to fill its modest storage sites, compared to 67 such cargoes that could still fit into France’s stocks - fed through its own LNG terminals — and 79 loads that could be crammed into Germany - which has no terminals of its own but can get gas from Belgium and Britain.

Italy, which has new LNG terminals but is poorly connected to other parts of Europe, has enough storage space for about 60 such tankers.

Ultimately, Britain’s ability to meet demand for gas in northern Europe is limited by the capacity of the Interconnector, rather than its new LNG terminals South Hook and Dragon LNG - which have not been fully utilised yet.

The Interconnector has a maximum capacity just over 58 mcm, compared to an export high for the year so far of 55.7 mcm on May 21 and a maximum send out of Britain’s LNG terminals of nearly 120 mcm.

“The potential for importing is very large,” Niall Trimble, director of the Energy Contract Company in London said.

For a graphic on UK LNG import capacity use since the opening of new terminals last year click here: here

For a graphic showing UK gas supply, demand and spot prices over the last year click here:

here

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