LNG as a Price Driver

Introduction

The global LNG sector is in a state of flux. A new tranche of LNG liquefaction capacity has come on-stream in response to bullish energy demand prior to 2008. The subsequent financial crisis and the boom in US unconventional gas extraction has created a glut in the market. Such developments are having an increasing impact on European LNG metrics, in turn impacting on retail prices.

Scope

*A detailed introduction to how the LNG market has developed regionally and what drives current growth in Europe

*An overview of how LNG interacts with gas and other sources of power generation, with particular emphasis on interplay with new and existing pipelines

*A set of price case scenarios for European LNG prices, encapsulating the effects of financial markets, geopolitics, technology and legislation

*A unique econometric model designed to explore the effects of upstream LNG changes on European retail prices and utilities' margins

Highlights

The current rash of new liquefaction capacity coming on-stream combined with the effects of the global financial crisis will subdue European LNG prices in the near term. This will be exaggerated in the short-term by on-going growth of unconventional gas extraction in the US and the addition of new pipelines into Europe

The differentiation between states' fiscal regimes and the margins utilities receive means the role wholesale costs play in overall retail prices varies across Europe. The impact of LNG price changes is essentially determined by artificial inputs. This is the case albeit to a lesser extent even in countries which rely heavily on LNG over pipes

Assuming current retail margins are maintained to 2015, residential retail prices in Germany and France will be most affected by LNG-driven wholesale price increases. Low margins in states such as Spain cushion the effects of LNG price rises, even though Spain relies far more on LNG than on pipelines.

Reasons to Purchase

*Understand the international LNG trade, and its impact on gas retailing businesses across key European markets

*Gain insight into wholesale gas supply trends, and the link between upstream supply scenarios and the retail market

*Explore your own assumptions using the interactive model; testing the impact of different global LNG scenarios on retail prices and margins

Report Highlights
Highlights

The current rash of new liquefaction capacity coming on-stream combined with the effects of the global financial crisis will subdue European LNG prices in the near term. This will be exaggerated in the short-term by on-going growth of unconventional gas extraction in the US and the addition of new pipelines into Europe

The differentiation between states' fiscal regimes and the margins utilities receive means the role wholesale costs play in overall retail prices varies across Europe. The impact of LNG price changes is essentially determined by artificial inputs. This is the case albeit to a lesser extent even in countries which rely heavily on LNG over pipes

Assuming current retail margins are maintained to 2015, residential retail prices in Germany and France will be most affected by LNG-driven wholesale price increases. Low margins in states such as Spain cushion the effects of LNG price rises, even though Spain relies far more on LNG than on pipelines.
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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY` 1
ANALYSIS 2
Europe will come to fulfill an increasingly important role in the global LNG market 2
Global LNG output has increased rapidly since 2000 and is produced from an increasingly diverse range of sources 2
Global LNG supply will continue to increase to 2020 despite the global economic downturn 4
In Europe, LNG has been presented as a solution to the energy conundrum - declining reserves, climate change and security of supply 5
LNG capacity in Europe will grow to around 325bcm per year by 2017, spurred in part by the Russia-Ukraine gas crisis in January 2009 6
New pipelines and terminals in conjunction with existing facilities mean European gas markets could actually become saturated by 2020 7
Over 2011-12 and again in 2014-15, European pipeline capacity will increase significantly as new routes come on-stream 8
Datamonitor uses five key metrics to determine a high, reference and low price scenario for European LNG prices in 2020 9
The economic outlook, pipelines, EU legislation, upstream trends and alternative generation determine Datamonitor's LNG price scenarios 9
European price trends differ according to global economic growth but all will rise from 2015 as the current glut in LNG is replaced by scarcity 10
Under a low price scenario, limited demand and slow economic recovery precipitate weak European LNG prices 11
The global economic recovery is weak and demand growth for gas is slow until 2015 11
The global economic recovery is slow and fragile 11
The world suffers an 'L-shaped' recession, only recovering fully after 2015 11
EU-Russia relations enjoy a rapprochement as gas supplies stabilize and diversify, while indigenous production declines at a slow pace 12
Gas supplies to Europe are abundant, diverse and stable 12
Internal EU policy encourages integration and energy efficiency, reducing overall demand 12
Efficiency gains and progress towards a single market are tangible and rapid 12
The current glut of upstream LNG supplies persists until 2015, while Asian demand grows slowly 13
Global LNG supply and EU regasification capacity increase 13
Alternative power generation booms and demand for gas fired plants registers only moderate growth, weakening overall gas demand 13
Progress in technology produces clean, cheap substitutes for gas-fired generation 13
Under a reference price scenario, gas prices increase steadily against a backdrop of fitful and regionally differentiated economic growth 14
The economic recovery is uneven across the globe and commodity prices remain unsettled 14
Economic recovery is sporadic and localized until 2012-13, hindered in part by trade barriers and monetary policy mismanagement 14
The world experiences a 'W-shaped' recession; growth comes sporadically, in different regions 14
Russia remains the dominant supplier to Europe but infrequent crises continue to damage EU-Russia relations; alternative pipelines come to pass but slowly 15
Supply capacity margin remains tight but not critical; only limited progress is made in new pipelines 15
EU legislation aimed at cutting gas consumption and improving collective security is delayed by slow-moving institutions and intransigent governments 15
Liberalization and efficiency policies do progress but slowly 15
Asian demand for LNG grows, pushing prices slowly although a global market does not appear: Asian, US and European markets remain essentially decoupled 16
Continued growth in re-gas capacity with mild competition for supply with Asia 16
The closure of many coal plants, delays in new nuclear build and missed renewables targets push demand for gas, stimulating LNG development 16
Fewer coal plants and limited new nuclear build push up demand for gas significantly 17
Under a high price scenario, regular supply disruptions and large swings in the economic cycle produce high, volatile European gas prices 18
Tight supply and bullish, mercurial economic growth produces high demand for LNG 18
Although the global economy recovers quickly, the economic cycle becomes more pronounced and erratic; growth is uneven and tempestuous 18
The global economy recovers rapidly from the 'V-shaped' recession; growth spreads 18
Russian supplies to Europe are frequently interrupted while alternative routes are blocked and indigenous supplies decline precipitously 19
Security of supply weakens as Russia becomes increasingly unreliable as and other CIS producers divert supply elsewhere 19
The EU fails to implement meaningful energy efficiency reforms or integration policy but baseload demand grows significantly as electric cars spread 20
Integration agenda stalls and efficiency gains are minimal 20
Upstream investment dips in response to the financial crisis and state ideologies, storing costs for later on, while Asian & US demand for gas booms 20
Bottlenecks and Resource Nationalism limit upstream supply; Asian/US demand high 20
A high carbon price, the Large Combustion Plant Directive and failure in CCS technology push demand for gas 21
CCS technology fails; nuclear renaissance stalls; gas dominates generation mix 21
APPENDIX 22
Further reading 85
Ask the analyst 85
Datamonitor consulting 85
Disclaimer 85
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List of Tables
List of Figures
Figure 1: Global LNG trade flows (billion cubic meters) 2
Figure 2: Global LNG production by source since 1985 3
Figure 3: The compound annual growth rate over 2013-20 will be extremely high at around 9% 4
Figure 4: The European energy conundrum 5
Figure 5: The UK and Italy will account for a significant increase in European regasification capacity 6
Figure 6: European gas demand and supply by type, 2009-20 7
Figure 7: European import capacities: EU total and member states' 8
Figure 8: Datamonitor projections and expectations of average European LNG prices 10
Figure 9: Global gross domestic product and gas demand: low case scenario 11
Figure 10: Global gross domestic product and gas demand: reference case scenario 14
Figure 11: Global gross domestic product and gas demand: high case scenario 18
Figure 12: Existing LNG contracts with deliveries commencing before 2015 22
Figure 13: Existing LNG contracts with deliveries commencing before 2015 23
Figure 14: Existing LNG contracts with deliveries commencing before 2015 24
Figure 15: Output from Price Impact Data Model 25
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