December 19, 2022

WWW.ENERGYINTEL.COM

EU Nails Down Elusive Deal to Cap Gas Prices

EU energy ministers have broken the deadlock and reached an agreement to cap wholesale gas prices — a deal made possible by the inclusion of safeguards to ensure security of supply and stability of the European gas market.

The cap will be triggered when two conditions are met: the price of the front-month Dutch TTF gas futures contract exceeds €180 per megawatt hour for three days and also exceeds an international LNG reference price by €35 (about $56 per million Btu) for the same three days.

Those are much lower triggers than initially proposed by the European Commission: a front-month Dutch TTF price that exceeds €275/MWh for two weeks and also exceeds the LNG reference price by €58 for 10 days.

The front-month Dutch Title Transfer Facility (TTF) contract — traded on the Intercontinental Exchange (ICE) Endex exchange — serves as a benchmark price for the broader European gas market.

The agreement comes after weeks of political wrangling and follows a recent ultimatum from EU heads of state and government to get a deal done.

Czech Industry Minister Jozef Sikela, whose country currently holds the rotating EU presidency, said the agreement "will shield citizens from skyrocketing energy prices."

A sharp reduction in pipeline supplies of Russian gas to Europe briefly pushed the Dutch TTF front-month contract above €300/MWh in August.

Prices have since retreated from those highs, with the front-month January contract mostly trading in a range of €100-€110/MWh on Monday. However, that remains well above historical levels seen prior to Russia's war in Ukraine.

February Launch

The EU's so-called market correction mechanism will be launched from Feb. 15 and remain in place for one year.

If and when gas prices hit the trigger levels, it be activated for at least 20 working days and during that period, trading in the front-month, third-month and year ahead futures contracts will be suspended.

In addition to the Dutch TTF hub, the cap will also apply to all other EU gas hubs, although some of them may be exempted at some point, according to EU officials.

But Sikela and EU Energy Commissioner Kadri Simson said that the market correction mechanism will be deactivated if the EU faces a shortage of gas or if the mechanism leads to a disruption of the market.

It will also be deactivated if the bloc's gas demand increases by 15% over a period of one month or 10% over two months.

Sikela called the final agreement a "balanced compromise" between one camp within the EU that had pushed hard for a price cap and another that had opposed it.

Opposing Camps

A group including Poland, Belgium and Greece had sought a trigger price of €160/MWh to protect vulnerable consumers and businesses in Europe from sky-high gas and electricity prices.

Their tenacity appears to have paid off, given that the trigger price adopted is more than €100/MWh below the commission's initial proposal.

However, the safeguards that were agreed should appease countries including Germany, the Netherlands and Austria, which had expressed concerns that a price cap could prevent the EU from securing the LNG it needs in a competitive global market.

ICE — which operates the ICE Endex exhange — said it will review whether it can continue to operate an orderly market in TTF gas futures, now that the EU has gone ahead with plans allowing it to intervene in the market.

"We have consistently voiced our concerns about the destabilizing impact a TTF price cap will have on the market and the risks it presents to financial stability," it said.

ICE has also estimated that the price cap will lead to a big increase in margin calls (collateral) for trading firms.

It added that normal trading will continue while it carries out its review of the potential impacts of the price cap.

Traders, meanwhile, have voiced skepticism about the effectiveness of efforts to rein in gas prices, noting among other things, that the EU measures will not affect the big market in over-the-counter trading of gas, outside exchanges such as ICE Endex.

Germany Gets on Board

The safeguards hammered out over the last week or so succeeded in winning over Germany — the EU's biggest gas consumer — which had previously dug in its heels on grounds that a price cap would restrict gas supplies.

One EU diplomat confirmed to Energy Intelligence that Germany had voted in favor of capping prices, while the Netherlands abstained from voting in the end.

Safeguards were not the only thing that secured Germany’s support for the cap, however.

Sikela said an agreement to streamline permitting processes for renewable energy projects had also played an important role in bringing Germany on board.

"We basically re-opened the permitting file, with the aim to allow the faster implementation of renewables," he said.

Simson said only one EU member state had voted against the price cap and a Central European diplomat told Energy Intelligence that the country in question was Hungary.

Hungary opposed the agreement because it has supply deals with Russian gas giant Gazprom that are linked to TTF gas prices. It is worried that Moscow may make good on its threat to cut supplies to countries that cap prices for its oil or gas.

Kremlin spokesman Dmitry Peskov reiterated that message on Monday, saying the EU price cap was an infringement of market principles and "cannot be accepted." He said Russia will "thoroughly weigh all pros and cons while working on its response."

The agreement on capping gas prices means that the EU can now proceed with a broader package of energy measures, including joint procurement of gas and fast-tracking approvals for renewable energy projects.
Eric Thorp, Brussels

China Tilts Toward Domestic Gas, Pipeline Gas

China imported 6.42 million tons of LNG in November, a drop of 5.4% from last year, latest data from the General Administration of Customs showed. Meanwhile, the country’s pipeline gas imports amounted to 3.89 million tons, a slight increase of 2% from last year.

In the first 11 months of this year, China imported 56.88 million tons of LNG, down 20.1% compared with the same period last year. At the same time, China imported 42.12 million tons of pipeline gas year to date through November, increased 10% compared with the same period last year (see table below).

The impact of expensive natural gas spot prices is sweeping the world, and China, a major natural gas importer, is not immune. In the first 11 months of this year, the cost of LNG imported into China increased by 26.3% and the cost of imported pipeline gas increased by 56% compared with the same period last year.

Winter Countermeasures

A decrease in imported natural gas this year has left some northern Chinese cities with heating shortage issues this winter.

To make up for a part of the shortage, China hasn't imposed strict restrictions on coal this year. According to local media reports, 121 heating units in ten northern provinces have been launched to protect residents’ heating. As of Dec.16, China Energy Group has completed 569 million tons of self-produced coal, up 4% year-on-year.

China also hopes to protect itself from the risks of shifting international markets by strengthening its domestic natural gas production.

New LNG Import Terminal

Last week, Zhejiang Zheneng Natural Gas Group announced that Zheneng Zhoushan Liuheng LNG receiving terminal project has been approved by the National Development and Reform Commission.

The design scale of the project is 6 million tons/year of LNG receiving capacity, with an LNG berth, and four 220,000 cubic meter storage tanks. The total investment is about 9.5 billion yuan ($1.36 billion). Once completed, the project will have a new natural gas supply capacity of 8.4 billion cubic meters/year and a maximum gasification outflow capacity of 57 million cubic meters/day.

In January this year, Zhejiang Energy, which controls Zhejiang Zheneng Natural Gas Group, signed a long-term agreement for LNG with Novatek. The agreement provides for the supply to China of up to 1 million tons of LNG per year for a period of 15 years.

China's Gas Consumption
Domestic Production (Bcm)%Chg.Y-o-YTotal Gas Imports (million tons)%Chg.Y-o-YLNG Imports (million yons)%Chg.Y-o-YPipeline Gas Imports (million tons)%Chg.Y-o-Y
Jan - Feb37.26.7%19.86-3.8%12.68-8.7%7.186.3%
Mar19.76.37.98-8.54.63-173.368.8
Apr17.74.78.09-20.34.35-34.53.749.3
May17.74.99.07-10.64.93-28.14.1526.0
Jun17.30.48.72-14.64.82-263.911.5
Jul17.18.28.76.94.74-15.43.968.0
Aug176.38.85-15.24.72-28.14.139.0
Sep16.44.610.15-3.75.9-11.64.259.8
Oct18.512.37.61-18.94.03-343.5811.5
Nov18.98.610.32-3.86.42-5.43.891.8
Total197.46.4%99.01-9.7%56.88-20.1%42.129.7%

Staff Reports

India’s LNG Imports Fall in November

India’s demand for LNG remained weak in November despite a fall in prices, according to the latest oil ministry data.

The world’s fourth largest LNG buyer imported 2.32 billion cubic meters of LNG last month, which was down 3.7% compared with 2.41 Bcm in October, the data showed. Imports were down 6% on year.

For the January-November period, LNG imports are down 11% on year at 26.18 Bcm (see table below).

Price Sensitivity

Despite the fall in volumes, India’s LNG import bill in November was flat on month at $1.6 billion.

Around mid-November, spot prices of LNG in Northeast Asia plunged to $22.50 per million Btu, from $65/MMBtu in early September, according to Energy Intelligence assessments for deliveries four to eight weeks ahead. Still, that did not entice buyers.

With prices climbing again as cold temperatures have set in across the Northern Hemisphere, buying may remain lukewarm in December. Spot LNG prices have edged upwards to $32/MMBtu as of mid-December.

Long Recovery

The Ohio-based Institute for Energy Economics and Financial Analysis, in a recent note, said that India’s LNG demand is not expected to surpass 2020 levels through 2025 which means capacity may continue to be underutilized.

India has an LNG import capacity of about 42.7 million tons per year.

But half of the six operational LNG import terminals operated at below 20% capacity during the April-October period of the current financial year that began Apr 1, the data showed. It did not provide numbers for November.

The weak capacity use at the terminals is stalling work at new terminals. Hoegh LNG cancelled its 10-year charter and rerouted its vessel to Europe due to delays at the Jaigarh LNG project of H-Energy.

Domestic gas production also contracted, down 1.7% on month in November to 2.78 Bcm, the data showed. This pulled total gas consumption last month down 2.6% compared with October to 5.1 Bcm, its lowest volume since August (see table below).

India’s domestic gas production will see an increase as Reliance Industries is set to start production from a new satellite field in the Krishna Godavari basin, off the east coast, this month.

India's LNG Imports
(Bcm)20222021%Chg.
Jan2.102.69-22.2%
Feb2.022.52-19.70
Mar2.622.83-7.40
Apr2.412.85-15.20
May2.532.63-3.50
Jun2.452.71-9.50
Jul2.572.64-2.80
Aug2.372.92-18.90
Sep2.372.83-16.30
Oct2.412.43-0.80
Nov2.322.47-6.00
Total26.1829.52-11.30%
India's Gas Demand
(Bcm)Nov'22Oct'22% Chg.Nov'21
LNG Imports2.322.41-3.7%2.47
Domestic Production 2.782.83-1.72.80
Total Consumption 5.105.24-2.6%5.27

Rakesh Sharma, New Delhi


In Brief

Romgaz, Socar Sign Gas Supply Deal

Romania's Romgaz has signed a long-term natural gas supply deal with the trading arm of Azerbaijan's Socar, the first such contract between the two countries.

The contract does not have a fixed duration, but deliveries will start on Jan. 1, 2023. No details about volumes or pricing were provided.

The gas is expected to be shipped through the 10 Bcm/yr Trans Adriatic Pipeline through Turkey into Greece and then north via the new Interconnector Bulgaria Greece line, and then into Romania via the Bulgarian gas grid.

The deal builds on a framework agreement signed by the two companies earlier this year.

In October, Romgaz and Socar signed a memorandum of understanding (MOU) to perform a feasibility study for an LNG project in the Black Sea, which would include liquefaction and regasification facilities for exports/imports of Caspian gas.

The EU and Azerbaijan also signed an MOU in July, under which Baku committed to double its gas exports to Europe to 20 Bcm by 2027.

Romgaz is developing the Neptun Deep offshore gas field in the Black Sea alongside OMV Petrom, which is expected to reach a final investment decision on the project in 2023, with first gas planned for 2027.
Jaime Concha, Copenhagen


Data Snapshot

LNG Netbacks at Key Receiving Terminals

LNG Exporter Netbacks Between Key Receiving Ports
($/MMBtu)AlgeriaAustralia WestAustralia EastMalaysiaNigeriaNorwayOmanPeruQatarRussiaTrinidadUS GulfUS East Coast
Dahej, India28.5028.9728.4928.9728.0427.8929.5227.4129.4228.5627.7027.3727.76
Sodegaura, Japan28.9930.5730.5830.7028.8924.8330.1127.5829.9731.1128.0627.0129.11
Zeebrugge, Belgium43.8841.8241.2741.9443.2443.6842.7841.2942.6341.3343.3842.1743.49
Huelva, Spain20.6318.8718.4218.9720.0419.8119.6918.3119.5618.4620.1018.9820.11
Isle of Grain, UK29.0227.1226.6227.2228.4628.8328.1526.6327.8726.6728.5627.4628.66
Everett, US5.984.244.604.335.645.450.015.164.923.826.21----
Created with Highcharts 9.0.0($/MMBtu)QATAR TO NORTHEAST ASIANetbackNetback18. Jul1. Aug15. Aug29. Aug12. Sep26. Sep10. Oct24. Oct7. Nov21. Nov5. Dec19. Dec10203040506070Energy Intelligence

LNG Market Indicators

Spot LNG Pricing
Latest WGIDailyDaily Chg.Chg. From Latest WGI
NE Asia32.0031.870.11-0.13
SW Europe34.1521.28-4.36-12.87
Futures Pricing
($/MMBtu)Chg.LatestPreviousWeek Ago
Henry Hub, US (futures)-0.755.856.606.59
NBP, UK (futures)-2.2332.8235.0541.21
European Spot Pricing
Chg.LatestPreviousWeek Ago
Dutch TTF-3.9633.0236.9942.58
Zeebrugge (Belgium)--------
German NCG-2.3529.9932.3338.41
NBP (UK)-4.3829.9034.2741.44
US Markets
US Spot Prices
Sabine Pass, Louisiana-0.685.916.596.73
Corpus Christi, Texas----0.00--
Cove Point, Maryland-7.848.2716.119.36
Elba Island, Georgia--5.91--5.85
Nymex Henry Hub Futures
Near Month-0.755.856.606.59
Second Mth-0.595.716.306.42
Third Mth-0.355.255.605.79
Created with Highcharts 9.0.0($/MMBtu)GLOBAL GAS PRICINGUS NymexDutch TTFNE AsiaJan '22Feb '22Mar '22Apr '22May '22Jun '22Jul '22Aug '22Sep '22Oct '22Nov '22Dec '220255075100125Energy Intelligence