How LNG Supply Additions Could Affect Gas Prices in
Europe?
C5, Gas and LNG Supply Contracts Forum Berlin, June 20, 2018
Sergei Komlev Head of Contract Structuring and Price
Formation Directorate Gazprom Export*
*Views expressed in this presentation are the author’s sole responsibility and do not necessarily represent that
of Gazprom Export
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According to Conventional Wisdom, Doubling of Global
LNG Capacity Should Bring European Gas Prices Down,
but…
2
Historic Precedent of the Opposite Outcome: Ignoring Dependence of Hub Prices on Oil
Indexes and Overestimation of LNG Glut Impact Have Let to Hefty Losses for
Traders/Midstreamers in 2010
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Unique Nature of Natural Gas as Commodity Needs to be
Taken into Consideration in Assessing LNG Glut Effects on
Hub Prices
There are three main features of natural gas as a commodity which make it one of the kind:
1. Market prices of natural gas are set up by two forms of competition – gas-on-substitute (inter-fuel) and gas-on-gas competition. No other global commodity is characterized by this duality.
2. LTCs play a leading role in the global natural gas supply and here to stay for years ahead, while a move to exchange-based pricing in other commodities is associated with elimination of the long-term contact arrangements or their radical transformation.
3. Simultaneously functioning different pricing mechanisms in natural gas have direct effect on hub price, making it a hybrid product both on macro and micro level.
Assessment of these specific characters of natural gas as a commodity represents not only an academic interest but has sensible practical business-related implications.
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Competition with Other Carbons
Locks Natural Gas in Price Envelope
Source: Shell
4
Global natural gas prices irrespective of their inter-regional differences firmly sit within a price envelop set up
by oil (ceiling) and coal (floor), see grey area in the Charts.
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Inter-Fuel Competition Sets up
Corridor for Natural Gas Prices
Ceiling
Floor
Oil/Oil products parity
Coal parity
5
Inter-fuel Competition Makes Hub Prices
Rangebound
Source: Gazprom Export
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Inter-fuel Competition at Work: Oil Price Sets
Resistance Level for Natural Gas Prices
Source: BP, Gazprom Export
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Inter-fuel Competition at Work: Coal Price Sets
Support Level for Natural Gas Prices in Europe and US
Source: BP, Gazprom Export
7
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… and Asia
Source: BP, Gazprom Export
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Special Arrangements are Required for Gas
to Outcompete Coal
What Should One Know about Natural Gas Pricing Fundamentals?
NBP* compared to UK coal-to-gas switching price
NCG** compared to German coal-to-gas switching price
Sources: Argus, Platts, IEA *NBP day-ahead **NCG day-ahead
9
0
100
200
300
400
500
600
US
D /
mcm
NBP actual price Switching price
0
100
200
300
400
500
600
US
D /
mcm
NCG actual price Switching price
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Inter-fuel Competition at Work: Gas Price
Corridor Width
Gas Price Corridor Width is Determined Mainly by Oil Price Volatility
and Stretched from Nearly Zero in 1988, 1995 and 1998 to 13 USD/MMBTU in 2013
Source: BP, Gazprom Export
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European Gas Has not Lost it Dependence on Oil,
Although Indirect Dependence via LTC is Now Less Pronounced
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Source: Gazprom Export
Brent - TTF* 84,3% 82,9% 80,7% 84,4%
Brent - TTF 3M 81,8% 77,5% 80,6% 74,0%
Brent - TTF 6M 76,3% 63,5% 83,0% 35,7%
Brent - TTF 9M 70,7% 48,7% 85,4% -5,0%
Brent 3M - TTF 86,2% 84,8% 83,6% 84,0%
Brent 6M - TTF 88,7% 89,8% 85,9% 77,0%
Brent 9M - TTF 88,7% 91,1% 86,1% 72,2%
Brent +3M - TTF 86,9% 86,7% 84,3% -
Brent +6M - TTF 81,2% 77,8% 82,0% -
Brent +9M - TTF 65,0% 50,4% 75,2% -
CIF ARA - TTF 63,2% 42,6% 67,9% 87,4%
CIF ARA - TTF 3M 58,8% 38,5% 58,5% 78,3%
CIF ARA - TTF 6M 51,5% 27,4% 48,6% 48,3%
CIF ARA - TTF 9M 44,4% 12,8% 44,5% 10,2%
Correlation ratio 2009-2017 2009-2013 2014-2017 2016-2017
* Hereinafter TTF Month Ahead
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Oil Indexes Retain Their Dominant Position in
European Pricing
What Should One Know about Natural Gas Pricing Fundamentals?
12
When Quasi-Oil Indexed Contracts are Taken into Consideration, Oil Indexes
Retain Their Dominant Position in European Prices*
68,4% 59,4% 57,8%
26,0% 31,7% 33,1%
5,6% 8,9% 9,1%
0%
20%
40%
60%
80%
100%
1Q 2016 1Q 2017 1Q 2018
Oil- and quasi-oil-indexed Hub-indexed Fixed price
* Norway is considered as an internal supplier Source: IEA, «Gazprom export» LLC assessment
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ACER Report: Correlation between Oil and
Gas Still High due to Existence of LTCs
Long-term contracts… provide as well orientation for hub price formation, so there is a close interdependence between sources (ACER 2017 Report, P. 34)
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Do All Exchange Traded Goods Correlate
with Commodity Super Cycle?
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Beef Meat, sheep
Meat, chicken
Swine (pork)
Banana, Europe
Orange Juice
Natural gas, Europe
1990-2016 75% 88% 72% 38% 76% 76% 92%
1995-2016 77% 86% 66% 53% 75% 71% 90%
2000-2016 67% 81% 51% 68% 67% 58% 86%
2005-2016 38% 68% 3% 62% 28% 30% 70%
2010-2016 7% 78% -54% 67% -6% 19% 91%
All Exchange Traded Goods Have Strong Correlation with Oil due to Commodity Super Cycle:
Not a Sound Explanation
Despite commonalities in price behavior over the last 25 years, commodities by few exceptions had a strong momentum of their own after the 2008 crisis
Source: based on IMF and WB data (monthly)
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Although Correlation of Gas Prices with Coal Price
Increased Positive Price Spreads Between DA
and MA Prices Point to Emerging Gas Deficit
* At the basis of daily quotes ** Quotes with delivery in the same month are used
Source: Gazprom Export
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LNG Deliveries to the European Market in Q1 2018 were Down
Q1 2017 Q1 2018 change (bcm)
change (%)
Qatar 5.1 4.9 -0.2 -3.9%
Nigeria 3.5 3.7 0.2 5.7%
Algeria 4.0 3.7 -0.3 -7.5%
Russia (Novatek) 0.0 0.8 0.8
Norway 1.3 0.8 -0.5 -38.5%
Trinidad and Tobago 0.2 0.7 0.5 250.0%
Peru 1.0 0.4 -0.6 -60.0%
USA 0.8 0.4 -0.4 -50.0%
Angola 0.3 0.1 -0.2 -66.7%
Equatorial Guinea
0.2 0.1 -0.1 -50.0%
Dominican Republic
0.1 0.0 -0.1 -100.0%
Lithuania (re-export) 0.0 0.0 0.0 -100.0%
TOTAL 16.4 15.7 -0.7 -4.3%
Despite growing gas
demand in 1Q 2018
(+0.9 bcm or +0.5%)
LNG deliveries to the
European market fell
in 1Q 2018, being
attracted by other
markets with higher
margins
Source: IEA, ENTSOG
LNG Ignores European Gas Market Even Though Deliveries are
Breakeven at Current Prices on Full Cost Basis
0,00
1,00
2,00
3,00
4,00
5,00
6,00
7,00
8,00
9,00
0
50
100
150
200
250
300
350
USD
/mm
btu
USD
/mcm
US LNG breakevenprices (full cyclecosts)US LNG short-run
marginal costs(excl. tolling fees)TTF Month Aheadand Futures
Germany border
price (BAFA)
Prices of US LNGdeliveries to Spain(Cedigaz)Prices of US LNG
deliveries to Italy(Cedigaz)Prices of US LNGdeliveries to UK(Cedigaz)
10.0
8.5
7.1
5.7
4.3
2.8
1.4
0
Source: Bloomberg, Cedigaz, IHS Calculated on the basis of Henry Hub Futures prices, P = HH * 115% + X where X – costs of liquefaction, shipping to Europe, regasification
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As Contract Obligations are not Fully Met,
Costs for Spot LNG Volumes Could be Subsidized
Source: IHS, Gazprom Export
23% 20%
38%
66%
63%
0
2 000
4 000
6 000
8 000
10 000
12 000
H1 2016 H2 2016 H1 2017 H2 2017 H1 2018
Liq
uefa
cti
on
Vo
lum
e,
MM
cm
LNG trains cap, MMcm Contracted cap, MMcm
Supplies to Middle East, MMcm Supplies to Latin America, MMcm
Supplies to Europe, MMcm Supplies to Asia Pacific, MMcm
% of Contracts Used and Real Volume, MMcm
Sabine Pass T1
+Sabine Pass T2
+Sabine Pass T3
+Sabine Pass T4
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LNG Ignored Demand Hikes in Europe in January-April 2018
Despite Associated Price Hikes
5,1 5,6 5,7
5,2 5,8
4,6 5,3
4,3
0
2
4
6
8
January February March April
bcm
19,1 16,3 15,6 15,8 17,3 17,4
19,7 17,2
0
5
10
15
20
25
January February March April
2017 2018
bcm
LNG Deliveries to Europe, bcm
Gazprom Export Deliveries to Europe, bcm
Source: IEA, ENTSOG
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Incremental Demand For LNG in
January-April 2018 Came From Asia
Net LNG Demand Increase in Jan-Apr 2018 vs. Jan-Apr 2017
Source: IHS Markit
* Excluding Mexico
12,9
0,2 -0,5 -0,4 -2,2 -2,2
-4
-2
0
2
4
6
8
10
12
14
Asia North America Middle East Latin America* Africa Europe
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Year-by-Year North-West Europe Receives Less
LNG for Same Size of Asian Premium
*Monthly averages Asian premium is JKM-NBP spread Source: Bloomberg, IHS Markit, Interfax-GGA, Platts
0
20
40
60
80
100M
Mcm
/day
2014
2015
2016
2017
2018
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