Turning to Asia
Published in Izvestia
(Russia) on 16 November 2020
by Alexander Frolov (link to original)
(Russia) on 16 November 2020
by Alexander Frolov (link to original)
Translated from
by Iana Shchetinskaia.
Edited by Gillian Palmer.
Analyst Alexander Frolov discusses the prospects of American gas in the European energy market in 2020.
In October 2020, U.S. liquefied natural gas exports increased by 46.9% compared to September. That has been the highest percentage of monthly export growth. However, if we look at these numbers in absolute terms, this dynamic only means returning to April’s numbers. At the same time, LNG suppliers from the United States prefer the Asian market to the European one.
American LNG has been the bogeyman for the Russian gas industry. In the mid-2010s, most analysts predicted a rapid increase in U.S. gas imports to Europe and the beginning of a price war in the market that would end in Russia’s defeat. Moderate scenarios showed that by 2020, the United States would export 70 to 80 million cubic meters of gas. The U.S. Department of Energy had an even more optimistic forecast — U.S. exports were expected to grow up to 100 million cubic meters.
For some reason, a lot of analysts made a logical fallacy by confusing liquefaction efficiency and supply rate. Maybe they were relying on the EIA (the U.S. Energy Information Administration) forecast, which said that the LNG utilization rate would be at 96%. Additionally, analysts were overwhelmed by the number of applications for constructing new LNG plants. Their total capacity was projected to be more than 140 billion cubic meters per year.
In reality, U.S. export growth levels turned out to be much lower. According to BP, last year the United States exported 47.5 million cubic meters of LNG. According to EIA data, the projection was 51.5 billion cubic meters. On the other hand, in 2019, LNG suppliers rapidly increased their exports to Europe fivefold, up to 18.3 million cubic meters. For reference, Russia exported between 18 and 20.5 million cubic meters of LNG to Europe. These overwhelming volumes of export from the United States could have been the first red flag warning us about the looming price war.
In 2019, when no one could have predicted the COVID-19 pandemic and the subsequent crash in energy markets, the LNG industry had already been going through challenging times. Prices started slipping as a result of excess supply. In the United States alone, the liquefaction capacities amounted to 22 billion cubic meters. At the same time, the difference between prices in Asia and Europe decreased. The Asian market has traditionally been more attractive for suppliers because of higher prices. In 2018, Asia imported 76% of all LNG; in 2019, this number dropped to 69%.
In addition to the unfavorable pricing environment, American suppliers had to face another problem — the rapidly growing Chinese gas market pulled back on its imports from the United States. However, luckily for the U.S. at that time, Europe was worried about the potential failure of the Russia-Ukraine gas transit agreement and started accumulating its gas supplies. Falling prices played an important role here. The U.S. LNG exports to the EU almost doubled — from 60 billion cubic meters in 2018 to 108 billion in 2019.
However, the EU signed the transit deal and had to sell the excess LNG supply. As a result, prices dropped again. In January, according to data from the main stock funds — the British NBP and the Dutch TTF — prices fell below $150 per 1,000 cubic meters; in February, they were at $100. By the time COVID-19 hit energy markets, gas prices in Europe were below the break-even point for most players in the market. The break-even price for the U.S. LNG suppliers is at least $200-$250 per 1,000 cubic meters.
In other words, even if there had been no pandemic and the demand for energy products had not fallen, Europe would have cut its LNG imports anyway. The companies that had signed contracts with the U.S. plants would have had to look for new markets or sell their gas at a loss. Amid declining prices and demand, more than 100 companies refused to import American LNG, and the supplies dropped by 200%. LNG production hit rock bottom in June at 2.7 billion cubic meters.
At the end of the summer, demand started rising and prices followed suit, especially in Asia, which led to the recovery of LNG supplies. In September, according to the EIA, the average daily export levels reached 138.8 million cubic meters and in October, they rose by 46.9%, up to 203.9 million cubic meters, reaching April levels. In January 2020, the daily export levels were record-breaking — 226.5 million cubic meters (8 billion cubic feet).
It is important to note that the U.S. LNG export levels are recovering because its suppliers have turned to Asia — Japan, China and South Korea in particular. In Asia, gas prices are much higher than in Europe, and the LNG producers have no interest in oversupplying the EU market for less money.
Europe does not need as much of the U.S.' LNG as it did last year. In November, Uniper, one of the biggest EU companies, announced it would halt construction of its LNG terminal in Germany due to the reduced demand. This case is a brilliant illustration of the slipping demand for LNG in Europe as well as the sluggish investment activity in the fuel and energy sector.
Last year has proved that the U.S. LNG export can grow only under perfect conditions, with a growing market and prices. However, if there is going to be no new unexpected crisis, the cumulative volume of LNG export from the U.S. can exceed 60 billion cubic meters. Yet, in 2021, the demand for gas might grow in the United States due to the dropping levels of production. This will lead to an increase in prices that, in turn, might affect the already struggling export.
In October 2020, U.S. liquefied natural gas exports increased by 46.9% compared to September. That has been the highest percentage of monthly export growth. However, if we look at these numbers in absolute terms, this dynamic only means returning to April’s numbers. At the same time, LNG suppliers from the United States prefer the Asian market to the European one.
American LNG has been the bogeyman for the Russian gas industry. In the mid-2010s, most analysts predicted a rapid increase in U.S. gas imports to Europe and the beginning of a price war in the market that would end in Russia’s defeat. Moderate scenarios showed that by 2020, the United States would export 70 to 80 million cubic meters of gas. The U.S. Department of Energy had an even more optimistic forecast — U.S. exports were expected to grow up to 100 million cubic meters.
For some reason, a lot of analysts made a logical fallacy by confusing liquefaction efficiency and supply rate. Maybe they were relying on the EIA (the U.S. Energy Information Administration) forecast, which said that the LNG utilization rate would be at 96%. Additionally, analysts were overwhelmed by the number of applications for constructing new LNG plants. Their total capacity was projected to be more than 140 billion cubic meters per year.
In reality, U.S. export growth levels turned out to be much lower. According to BP, last year the United States exported 47.5 million cubic meters of LNG. According to EIA data, the projection was 51.5 billion cubic meters. On the other hand, in 2019, LNG suppliers rapidly increased their exports to Europe fivefold, up to 18.3 million cubic meters. For reference, Russia exported between 18 and 20.5 million cubic meters of LNG to Europe. These overwhelming volumes of export from the United States could have been the first red flag warning us about the looming price war.
In 2019, when no one could have predicted the COVID-19 pandemic and the subsequent crash in energy markets, the LNG industry had already been going through challenging times. Prices started slipping as a result of excess supply. In the United States alone, the liquefaction capacities amounted to 22 billion cubic meters. At the same time, the difference between prices in Asia and Europe decreased. The Asian market has traditionally been more attractive for suppliers because of higher prices. In 2018, Asia imported 76% of all LNG; in 2019, this number dropped to 69%.
In addition to the unfavorable pricing environment, American suppliers had to face another problem — the rapidly growing Chinese gas market pulled back on its imports from the United States. However, luckily for the U.S. at that time, Europe was worried about the potential failure of the Russia-Ukraine gas transit agreement and started accumulating its gas supplies. Falling prices played an important role here. The U.S. LNG exports to the EU almost doubled — from 60 billion cubic meters in 2018 to 108 billion in 2019.
However, the EU signed the transit deal and had to sell the excess LNG supply. As a result, prices dropped again. In January, according to data from the main stock funds — the British NBP and the Dutch TTF — prices fell below $150 per 1,000 cubic meters; in February, they were at $100. By the time COVID-19 hit energy markets, gas prices in Europe were below the break-even point for most players in the market. The break-even price for the U.S. LNG suppliers is at least $200-$250 per 1,000 cubic meters.
In other words, even if there had been no pandemic and the demand for energy products had not fallen, Europe would have cut its LNG imports anyway. The companies that had signed contracts with the U.S. plants would have had to look for new markets or sell their gas at a loss. Amid declining prices and demand, more than 100 companies refused to import American LNG, and the supplies dropped by 200%. LNG production hit rock bottom in June at 2.7 billion cubic meters.
At the end of the summer, demand started rising and prices followed suit, especially in Asia, which led to the recovery of LNG supplies. In September, according to the EIA, the average daily export levels reached 138.8 million cubic meters and in October, they rose by 46.9%, up to 203.9 million cubic meters, reaching April levels. In January 2020, the daily export levels were record-breaking — 226.5 million cubic meters (8 billion cubic feet).
It is important to note that the U.S. LNG export levels are recovering because its suppliers have turned to Asia — Japan, China and South Korea in particular. In Asia, gas prices are much higher than in Europe, and the LNG producers have no interest in oversupplying the EU market for less money.
Europe does not need as much of the U.S.' LNG as it did last year. In November, Uniper, one of the biggest EU companies, announced it would halt construction of its LNG terminal in Germany due to the reduced demand. This case is a brilliant illustration of the slipping demand for LNG in Europe as well as the sluggish investment activity in the fuel and energy sector.
Last year has proved that the U.S. LNG export can grow only under perfect conditions, with a growing market and prices. However, if there is going to be no new unexpected crisis, the cumulative volume of LNG export from the U.S. can exceed 60 billion cubic meters. Yet, in 2021, the demand for gas might grow in the United States due to the dropping levels of production. This will lead to an increase in prices that, in turn, might affect the already struggling export.
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