BACK TO BASICS
Liquefied Natural Gas (LNG) has long been a part of the UK gas supply, however over the last year it has received much more focus in market reporting throughout the industry. In this insight we will look to explain the basics of LNG and why it has captivated UK audiences so much in recent times.
Gas flows into the UK and Europe in two ways, either as natural gas through pipelines or as a very low temperature (-161°C) liquid on specialised ships. When LNG reaches its destination, it is loaded into a terminal and regasified, which involves returning the gas to ambient temperatures, when injected into the grid. Exporters and importers go to this effort because LNG technology allows producers to move gas to wherever the price is highest without the need to build a pipeline.
In the past year we’ve seen the effect of several LNG-linked swings in supply and NBP pricing. At the beginning of 2019, UK prompt prices rose above that of Asian LNG offers due to particularly cold UK weather, warmer Chinese weather and a weakening Chinese economic picture. This is unusual as in the past, growing Asian demand was normally strong enough to keep the Japan Korea Marker (JKM) offer high enough to move cargoes away from Europe. The impact of this price reversal was a redirection of up to 14 LNG cargoes and a glut of supply in the UK and Europe, helping the Winter-19 NBP gas contract to fall c. 12% through the month of March. During this time, LNG took centre stage in market reporting and many were speculating on the future of the LNG market. Longer-term outlooks began to consider the effect of LNG supply on market linkage to produce a more global gas market, which has somewhat come to fruition. July 2019 saw the first LNG cargo aboard an icebreaking ship from Yamal reach the Asian markets, further positioning Russia as a dominant supplier to both the Asian and European markets. However, the gas giant will face serious competition from Australia as well as the US, which is expected to become the largest exporter of LNG by 2024, making it the major player in fossil fuel production.
What might all this mean for the future UK supply picture? The rise of intermittent renewable generation has certainly seen gas generation pick up the slack from more inflexible sources of supply, and we would expect this to continue especially with coal-to-gas switching and the still high cost of battery storage. Furthermore, UK and European gas fields face steady decline in production, and it seems somewhat inevitable that we will have to look further afield for gas, much of which could come from LNG imports. This could have positive and negative impacts for consumers through UK gas pricing volatility. A more global gas market could diversify the UK supply picture, reducing dependency on any single nation. However, it may also leave the UK more vulnerable to swings in global macroeconomic health, spikes in Asian LNG demand as well as geopolitical risk as seen in the oil markets with Gulf conflicts. Also, the nature of LNG supply is only semi-flexible. This means that while it may be a useful tool in helping to fill gas storage, it may not always help the UK to weather particularly high demand periods. Although if prices spike from high demand, cargoes may be rerouted. Still, the non-instantaneous supply may also lead to times of oversupply, reducing pressure on consumers especially those in flexible purchasing structures.
One thing is clear - LNG is expected to continue to play an important role in the UK, and global gas supply mix. It will also remain in the mind of any gas market analyst with several LNG cargoes reaching the UK throughout September.
For any further information or comments on this piece please get in touch with Sam on our Solutions Team on 020 787 04959.
ABOUT THIS SERIES
As a leading I&C supplier, we aim to help TPIs and end users to get a greater understanding of every part of their energy contract and the Back to Basics series is a part of this goal. It is designed to explain the fundamentals behind some of the foundations and emerging concepts of market reports, industry charges and energy policies to help users get more out of wholesale and industry reporting.
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