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Global gas players continue to downplay LNG role in Europe

LNG will continue to struggle to make a significant breakthrough on the European gas market in the coming years -- despite an expected global LNG supply glut -- because of competition for LNG from more premium markets elsewhere and the abundance of low-cost pipeline gas from Russia and Norway, senior industry officials said Monday.

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Speaking at a conference in Milan, Italy, officials from Germany's RWE, France's Total and Engie, Norway's Statoil and trader Petronas Energy said the wave of LNG that had been forecast first for 2016 and then for this year had failed to materialize.

"This won't change much in the coming years," Philippe Vedrenne, gas supply director at Engie, said.

Asian demand for LNG has been much stronger than expected -- particularly in China -- and Europe has been able to meet its slightly higher demand from Russia and Norway.



Fasluddeen Hadi, CEO of Petronas Energy Trading, said he was doubtful that more LNG would flow to Europe as a result.

"Maybe not in the near future," Hadi said.

Hadi said the UK would not be expected to import more LNG this winter given that it still has the cushion gas from the Rough storage facility to be produced.

"We won't see much change this year," Hadi said.

"But that could change when Rough is totally out of the equation," he said, referring to when Rough is permanently closed and all the cushion gas produced.


LNG COMPETITION


Statoil senior vice president Tor Martin Anfinnsen added that there had not been the expected volumes of LNG into Europe -- and especially not from the US.

But, he said, we do see this "looming volume potential" coming Europe's way.

Anfinnsen said Statoil welcomed increased competition for gas on the European market, not least because it felt it was at a major competitive advantage given its existing pipeline system and its proximity to the European market.

"We can compete with anyone," he said. "When it comes to competition, bring it on."

Andree Stracke, chief commercial officer at RWE Supply & Trading, also made the point that Europe is not the preferred market for LNG from global producers who can get a better price from more premium markets elsewhere -- currently markets such as China and Bangladesh.

Stracke said there had been a significant increase in demand for gas in power generation in Germany, and with the uncertainty surrounding nuclear availability in France, there could be incremental gas demand in neighboring countries too.

"It's not massive, but at least it is additional demand," he said.

Anfinnsen said too that he was buoyed by the increased gas demand in Europe, which has come despite relatively mild winters and the fall-out from the reduction of gas output from the giant Groningen field in the Netherlands and the closure of the UK Rough gas storage facility.


CONTRACT LENGTH


Stracke, meanwhile, said any European gas user needed to make the most of the continued liquid gas markets in Europe to optimize their portfolio.

He said that LNG term contracts were still useful tools -- up to 10-12 years.

"Beyond that it would not be possible -- for us at least," he said.

But, he stressed, 10-year LNG supply deals were commercially realistic and RWE was "working on" developing the 10-year contract model -- a hybrid of medium- and long-term arrangements.

"We feel comfortable with a 10-year horizon," Stracke said, adding however that the main stumbling block remained price indexation and how to optimize portfolios.

"It is very hard to buy properly indexed LNG," he said, referring to a price indexed to a European hub such as TTF, NBP or NCG.

He rejected LNG indexed to oil or the US Henry Hub price.

He said, for example, that US LNG sellers are reluctant to index their supply contracts to European hubs.

Jean-Pierre Mateille -- vice president of trading at Total Gas & Power -- said that the benchmark for LNG deliveries into Europe should be the UK NBP or Dutch TTF hubs, and that there was no need to use oil as a benchmark for LNG pricing.

For buyers, liquid markets are also needed to be able to risk manage their portfolios for the coming five years, Stracke said.

He also expressed concern at the impact of falling European gas production -- from Groningen in the Netherlands and in Germany -- and how that could impact on the liquidity of northwest European hubs.

--Stuart Elliott, stuart.elliott@spglobal.com
--Edited by Maurice Geller, maurice.geller@spglobal.com