UK set to be centre of the LNG world

With the start of LNG reloading services, the UK is positioning itself to be the centre of the LNG world. And there are several reasons why the UK can succeed where others have failed.

The Argus LNG Daily and European Natural Gas teams went to visit the UK’s 15mn t/yr Isle of Grain LNG import facility this week to look at the terminal and talk to the operator National Grid. 

We were told that the Isle of Grain has started offering reload services. This means its existing customers — BP, the UK’s Centrica, Algeria’s state-owned Sonatrach, Germany’s Eon, Spain’s Iberdrola and French energy firm Engie, formerly GDF Suez — can re-export LNG to wherever they want.

At the terminal, Grain LNG terminal manager Simon Culkin told us that enquires for reloading have shot up. He said the UK NBP gas hub would be a good place to hedge LNG because of the depth and liquidity of the market, and this was already happening before Grain offered reload services. But with reload services, an example trade could be a US export LNG cargo first going to at Grain, and either being re-exported if Asian LNG prices were high enough, or regassed into the NBP. Because of the liquid nature of the NBP gas hub, the importer could hedge the cargo first.

Also, Culkin said National Grid is ready to take a final investment decision on expanding the Isle of Grain, which would increase import capacity by 6mn t/yr, add an additional 190,000m³ of storage and enable the simultaneous unloading of two LNG tankers, or unloading and reloading using both jetties at the terminal. It already has around 1mn m³ of storage.

The terminal’s first full-size reload was on the 160,000m³ Asia Vision and left on 2 April and was delivered to Brazil on 20 April. But is it too little too late? Reloading LNG is already well established in other countries. The largest LNG re-exporter has been Spain.

But narrowing spreads between the Atlantic basin fob and northeast Asia des prices has crushed the Spanish reload market. In the first quarter of 2015, it re-exported three cargoes compared with 12 a year earlier. If you look at the average price spread between the Argus northeast Asia (Anea) spot des price and the Argus Atlantic basin fob index, it was $0.874/mn Btu in the first quarter of 2015 compared with $3.186/mn Btu in the same period of 2014.

And Spanish reloads for the second quarter 2015 are also looking sparse. So what makes the UK different? The answer is the NBP. While Spain has the AOC gas hub, it is not possible to hedge or sell a whole LNG cargo into it, market participants say. It is also easier to access UK LNG infrastructure and the NBP gas market compared with Spain.

The UK’s closest rival is the Netherlands 8.7mn t/yr Gate LNG terminal with around 540,000m³ of storage. Gate already offers reloads and is connected to the liquid TTF gas hub. It has already re-exported at least 15 cargoes since 2011. This year, it has been reloading roughly as much as Spain.

But the UK has more LNG import and storage capacity than the Netherlands, with the 15.6mn t/y South Hook and 4mn t/yr Dragon facilities in south Wales. South Hook has 775,000m³ of storage while Dragon as 320,000m³, but neither facility can reload yet. The UK has higher domestic gas consumption than the Netherlands too. And when exchange trade is taken into account, the NBP is still far deeper and more liquid than the TTF. Moreover, the Interconnector gas pipeline linking the UK to Belgium means it is easy to move regasified LNG to the continent — as was done in 2010-11, when rising Qatari liquefaction capacity translated into a surge in LNG deliveries to the UK.

With up to 48.2mn t/yr of additional LNG export capacity to come online in this year alone, and more in the subsequent years up to 2020, the LNG market will roughly double in size. There will be a lot of cargoes searching for homes, to either stay or pass through. The UK could provide such destination.

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