Second Shipment of U.S. LNG Reaches Europe as Producers Seek New Markets

Hopes that the beleaguered U.S. shale gas industry can find new markets have come to fruition as the second shipment of liquefied natural gas (LNG) was unloaded at a European port on July 22, with the promise of more to come.

After being loaded at the Cheniere-owned Sabine Pass Terminal in Louisiana (Figure) on July 4, the tanker Sestao Knutsen, carrying 138,000 cubic meters (m³) of LNG, docked at the Reganosa terminal at Ferrol in northwest Spain after waiting several days off the coast. The tanker is the second to land in Europe after the Creole Spirit docked at Portugese port of Sines on April 26.

Cheniere's Sabine Pass LNG export terminal has now loaded 15 shipments of LNG for overseas ports, mostly in South American and Asia. Courtesy: Golden Pass

These first European shipments come after a February federal ruling allowing export sales. According to Platts, 15 LNG vessels have now left Port Sabine for various other worldwide LNG terminals, mostly in South America and Asia. However, the two landings in Europe may signal a major shift on the continent.

Exports Growing but Markets Uncertain

Cheniere bullishly estimates that the U.S. will become the third-largest LNG exporter by 2020, with a production capacity of 60 million metric tons/yr. A supporting statement from Reganosa predicts that Spain will become a leading U.S. LNG importerbecause it has more regasification terminals than any other European country and because its own terminal is the ideal place to receive such flows. That Spain and Portugal are the first landing spots makes additional sense not only because of their closer proximity to North America but also because, as Platts suggests, the region is "an island market with poor interconnection to the rest of Europe."

However, Platts also warns that these two shipments should not be taken "as a sign that U.S. LNG will take hold in the wider European market," since neither Russia nor Norway directly supply the Iberian market with gas. "So they are unlikely to be concerned about U.S. LNG headed to southwestern Europe." Algeria is currently the major supplier to the region-more than half of that nation's 27 Bcm of exported gas ended up in Spain and Portugal, according to Platt's research. Algeria's response to the threat of U.S. imports has been to flood the market further, doubling gas flows there.

U.S. producers are very much hoping to break into the relatively over-supplied European gas markets and find their own pricing niche. Many European buyers also want to increase their supply options away from Russia and pipelines that transit through areas of rising instability, such as Ukraine and now Turkey. With relatively fixed costs, U.S. suppliers hope to land an increasing amount of LNG cargos on the spot market and take advantage of pricing fluctuations.

Going forward, Cheniere, the nation's first large-scale exporter, stated that as much as 50% of its LNG will end up in Europe. In a statement made at a Geneva conference last year, the company forecasted that by 2020 the U.S. would be able to export as much as 100 billon m³ of LNG annually, roughly equivalent to one quarter of the current EU market.

Finding a Niche for U.S. LNG

Speaking at a Washington conference days after the arrival of Cheniere's first LNG cargo to Europe, Vice President for Strategy Andrew Walker addressed how LNG producers can make money in an oversupplied marketplace. "Abundance on its own doesn't change things; you need cost-competitive supply." Nimble sellers can better lock in destination-free prices. Indeed, when the Creole Spirit docked in Portugal, it was carrying a cargo that had been bought on the spot market.

However, as the Wall Street Journal reported in April, "at current prices, U.S. LNG delivered to Europe would cost around $4.30 per million Btu, according to price reporting agency Argus Media. Russia sells its gas to Europe for $5.80, on average." That said, if the U.S. becomes a serious competitor, "analysts say that Russia could drastically lower prices in a price war, to below $3."

But with U.S. producers struggling, is exporting LNG their best hope? Not really, said Stuart Elliot, an analyst at Platt's-owned SPGlobal in an exclusive interview with POWER. Already many "are going bust because prices are so low. Less production means higher prices, which again makes U.S. LNG less competitive." Though in the short term, the addition of US LNG as a supply source for Europe will add to the competition-especially for the traditional suppliers like Norway, Russia, and Algeria, it may also lead to something of a pricing Catch-22.

"With increased competition should come lower prices. U.S. LNG is expected to be competitive with European gas hub prices despite the extra logistical costs. This is because U.S. gas is very cheap thanks to the U.S. shale gas boom. But as with all supply/demand dynamics, the more U.S. gas that is turned into LNG and exported, the less gas there is for the domestic market, which makes prices rise. In turn, this makes U.S. LNG less competitive versus Norwegian or Russian gas."

-Lee Buchsbaum (www.lmbphotography.com), a former editor and contributor to Coal Age, Mining, and EnergyBiz, has covered coal and other industrial subjects for nearly 20 years and is a seasoned industrial photographer currently living in Germany.

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