European natural gas prices have been falling during the past year, largely due to the drop in global oil prices. Most natural gas contracts in Europe have their delivered price tied to indices that reflect the level of and changes in crude oil prices. January’s delivered gas price has declined 5.9% from December’s $9.83 per million British thermal units (Btus). Versus a year ago, the delivered gas price has fallen by 20.2% to the January price of $9.25/mmBtus from $11.59/mmBtus. In response to the arrival of more LNG supplies into Europe, Gazprom has reduced its price demands slightly while also improving the financing and delivery terms.

The fact that Statoil and Lithuania have been negotiating the recently announced LNG contract for 4-6 months signifies that the huge competitive advantage U.S. LNG exporters anticipated when they started filing for permits to build the new export terminals has slowly dissipated. Lower crude oil prices have dragged down oil-linked LNG pricing terms in Asia and Europe, even as U.S. natural gas prices remain entrenched in a trading range below $3 per thousand cubic feet (Mcf). U.S. LNG exporters fully anticipate that domestic gas prices will remain below $4/Mcf giving them a significant cost advantage when delivering LNG into the Asian and European markets, but that was when Asian and European LNG prices were in the double digits, and in some cases the high double digits. Continued weak economic activity in these regions is further contributing to the narrowing of the gas price gap between delivered LNG prices in those markets and U.S. natural gas prices.

The arrival of additional supply, especially from the four new Australian export facilities just beginning to ship gas, is compounding the downward pressure on global LNG prices. As U.S. export terminals begin to near service, the pressure to secure markets for surplus U.S. natural gas will force shippers to seek the best deals available. As noted in the Statoil/Lithuania LNG deal, the contract terms are non-binding, suggesting that Lithuania will be looking for even better terms in future contracts. As reported, Lithuania has already signed an additional 16 non-binding agreements with companies that currently supply about half the world’s LNG. Does this suggest Europe will become a highly competitive LNG market with buyers playing one supplier against another? If so, it could mean the owners of the new North American LNG export terminals may regret their decisions to build them.

Eoin Treacy's view

Here is a link to the full report.

Europe has a laundry list of issues that have retarded growth not least public policy and labour inflexibility. The cost of energy is another that has been a major headwind but the changing landscape of the market is removing that as an obstacle. Europe has a well- developed natural gas pipeline structure and has the capacity to receive shipments from just about anywhere. The changing energy environment is not particularly good news for companies that have invested heavily in US export potential but the existence of this infrastructure represents a bonus for the global economy because supply will be plentiful. A great deal of LNG capacity will reach the global market in the next year or two. This couldn’t be better news for the global economy since it will reduce some of the demand for oil. 

The weakness of the Euro means that the European oil price, and by extension the natural gas price, has not fallen as much as the US price but has halved nonetheless. Some are worried about the deflationary implications of this move but it is also worth considering that the medium-term benefits outweigh the short-term challenge and the impact of the oil price decline will wash through the economic statistics in the next few quarters.