The situation is different on all other continents: In the USA, the shale gas revolution more than 10 years ago promoted the fuel switch from coal to natural gas, as fracking enabled cheap tapping of “unconventional” natural gas deposits. Thus, the new abundance of cheap gas triggered a small economic miracle and at the same time improved the CO2 footprint. Globally, conventional gas fields continue to be developed. At the same time, the infrastructure for the ramping of the export of foreseeable surpluses across the world's oceans is being built up - the beginning of the age of liquefied natural gas (LNG). In North America, Asia, Africa and Australia, a veritable LNG boom has emerged in recent years, with no end in sight. According to the latest IEA report, which serves as the main source for data in this report, natural gas use worldwide increased by 3 % in H1 2024, mainly in Asia (+10 %) and especially in the industrial sector. Only in Europe consumption decreased, by 3.5 %.
Procurement to THE hurts twice as much
As of today, we know that not all processes can be electrified. Green fuels are still far from being available in sufficient quantities and remain very expensive. This puts the procurement of natural gas back on the agenda. When low-cost old contracts expire this year or next, procurement will be doubly painful. The price in the German market area Trading Hub Europe (THE) is trading at twice the level it was before the start of the gas crisis in 2021. One of the reasons is that the gas market in our country has changed from cheaper pipeline gas to more expensive, technically more sophisticated LNG.
Now that Russian pipeline deliveries via the Baltic Sea and Poland have gradually come to a standstill or are expected to cease via Ukraine from 2025, the only remaining major pipeline supplier for the EU is Norway. In addition, there are smaller volumes from the UK and Algeria as well as Russian and Azerbaijani volumes via Turkey via the Turkstream and TANAP to south-eastern Europe.
Abatement of Russian pipeline gas deliveries has been compensated by consumption savings to a large extent. Due to gas prices soaring from the second half of 2021, consumption in the EU fell by around 15-20 % overall - and Russian supplies were replaced by LNG where possible, mainly from the USA. In 2023, the markets have calmed down again and prices have returned to a level similar to or slightly below those in Asia - except that the LNG suppliers there tend to come from Australia or the Middle East. As a result, LNG imports into the EU have also fallen again by around 20 % in 2024, which is also reflected in the current low-capacity utilization of European LNG terminals. The only exceptions are natural gas imports from Russia, which have increased by 9 % for LNG and by 7 % via pipeline.
Price advantage of LNG
From the perspective of large gas consumers in Germany, who have been procuring their natural gas at market-based prices for many years, one might think that the difference between pipeline gas and LNG is irrelevant for their own procurement, as the price is not formed in the USA or Qatar, but in the THE or TTF market area. This is where supply and demand meet and a transparent and fair price is formed. So does it make any sense at all for large consumers to deal with LNG? For this, one has take a closer look at the LNG supply chain. US LNG, for example, is traded at the Henry Hub. If you want to buy LNG there, you have to bring it to Germany. LNG import terminals are gradually being commissioned, with enough capacity to import half of our country’s consumption. At the Henry Hub, natural gas costs roughly between €5 and €10 per MWh, whereas here it is trading between €30 and €35/MWh. If the logistics costs are sufficiently low this makes buying at the Henry Hub appear very attractive. The loading of gas onto the LNG tanker can be calculated with a surcharge of around 15 % on the purchase price. However, for subsequent steps, a reliable calculation becomes increasingly difficult. Further LNG logistics, i.e. transport to Germany, regasification and structuring, are difficult to generalize. A report from July 10 2024 in the news portal energate provides an indication of the price free market area THE. According to this, a US company wants to conclude LNG contracts with German customers whose price is 25 to 30 % below the current TTF level. At currently about €32/MWh, that would be between about €22.5 and €24/MWh. This is, of course, more of a sales indication, but not necessarily unrealistic if you recalculate the individual steps of LNG logistics. However, if you want to conclude a contract with this company, you have to accept a long-term commitment and bear one or two risks such as a take-or-pay‑obligation. Otherwise, it would simply be arbitrage: you buy the gas for €23/MWh and sell it to THE for €32/MWh: in this case €9/MWh or €900,000 at 100 GWh/a. Advantageous would be balancing the two marginal options, namely long-term, self-negotiated import contracts as with higher risk exposure as only procurement source on one hand and completely foregoing the economic advantage of LNG on the other hand. This approach mandates that the supply to the end consumer does not change much: the LNG must be added to the company's own portfolio by a supplier, as is the case when procuring pipeline gas from THE. The task at hand is, therefore, to find a supplier who buys the LNG from the tanker at the terminal and then delivers it to the customer's balancing group, comparable to special item dealers who pick up their bargains at factory gate and sell them below the usual price on street markets.
Many LNG export terminals are currently under construction and will be commissioned in the next few years. An LNG glut might be looming, which, in the EU, would encounter a declining market; prices from 2027 already suggest this. Such market upheavals have also led to price distortions in the past. This was the case, for example, when the “supply chain based pricing” was superseded by a market-based price at the beginning of the 2010s. Suddenly, the market price was significantly cheaper than corresponding supply contracts with an oil price link, and six-figure savings were rather the rule than the exception. In 2018, Gazprom launched its own “electronic sales platform” in order to directly supply customers in the EU. Operations were discontinued in 2021. The weighted average price of the transactions was significantly lower than the average price of Gazprom's long-term contract sales to Europe. Companies whose contracts offered enough flexibility in the procurement structure were able to benefit from this.
LNG pool generates volume
Provided that enough customers would be bundled in an LNG pool, LNG suppliers would be requested to test the market. This would require an additional supplier to add the LNG to the respective end consumer's portfolio. As it purchases and redistributes the gas volumes centrally for many customers, it is called a “central buyer”.
In order to evaluate this alternative procurement channel, a sufficient volume of demand is required. The stakes are rather low, the potential profit high. EnB Energieberatung GmbH, a subsidiary of VIK e. V., and ecotec offer interested companies the opportunity to contribute their volumes to the LNG pool. The pool is managed by ecotec. The AggregateEU energy platform, which has been in operation since 2023 (see issue 2/23 of VIK Mitteilungen), offers the opportunity to request for LNG supply proposals on the international market. The next demand aggregation will start in October. Tenders will be invited for the years 2025 to 2029. Let's get the show on the road.
LNG-POOL
The LNG-POOL is an initiative of ecotec und Energieberatung GmbH, a 100 % subsidiary of the VIK Association of the Industrial Energy and Power Industry. The purpose and goal is to enable large natural gas consumers upwards of approx. 50 GWh/a to purchase liquefied natural gas (LNG). Participation in the pool does not automatically oblige companies to purchase LNG. If you are interested, please write to LNG[at]ecotec.de for futher information.