Explanation: Why does Europe need an EU LNG pricing benchmark?

Explanation: Why does Europe need an EU LNG pricing benchmark?

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LONDON/MADRID, Sep 15 (Reuters) – The European Union plans to create a benchmark for liquefied natural gas (LNG) to set fair, market-based prices for imported gas that could ultimately reduce price differentials between the bloc’s various gas hubs and reduce volatility market. read more

Since Russia’s invasion of Ukraine, Europe has become a major LNG market, buying massive amounts of marine fuel to replace Russian pipeline gas, which used to account for nearly 40% of the continent’s imports.

The main discrepancies in prices between the gas hubs in the block are partly due to their different capacity to receive LNG cargoes. Gas prices in countries with multiple LNG terminals, such as France, are lower than other hubs, such as Germany, which currently has no LNG terminals.

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WHAT ARE THE MAIN LNG MARKETS IN EUROPE?

LNG cargoes delivered by ship (DES), which means the price includes delivery to a specific port, are arriving in several gas markets in Europe. The most notable of these are Northwest Europe, which includes the UK, the Netherlands, Belgium, and Atlantic France, and Southwest Europe, including Spain, Portugal, and Italy.

In addition, there is the Western Mediterranean and Adriatic market, including Greece and Turkey, each with different import capabilities and different connections that allow gas to reach consumers or other countries.

ARE OTHER LNG PRICE BENCHMARKS USED IN EUROPE?

Historically, the European gas price at the Dutch hub Title Transfer Facility (TTF) has been considered sufficient to deliver LNG to Europe.

The British National Balancing Point (NBP) is second only to TTF in terms of liquidity and ability to attract buyers and sellers. There are also less active gas hubs in Germany, France, Austria, Italy, Spain, Belgium and the Czech Republic. However, UK gas prices are subject to the same volatility as TTFs.

Although the TTF is primarily used to set the price of LNG in Europe, some long-term LNG contracts are still pegged to the price of oil.

Many pricing agencies use the LNG New DES index, which better reflects the price of LNG cargo delivered to NW Europe without ships than TTF.

WHAT IS THE PROBLEM WITH TTF BENCHMARK?

The TTF is widely used as a price benchmark for LNG supplies to Europe, with a small spread added to match the costs of regasifying the gas and sending it to the grid. But a significant reduction in Russian gas supplies has made the price of TTF highly volatile.

The underlying monthly gas supply contract in the Dutch TTF this year fluctuated between a low of $23 per million British thermal units (mm Btu) in February and a high of $89.3 per million Btu in August.

Meanwhile, DES-based LNG shipments to NW Europe were mostly discounted for TTF.

Germany is currently installing five floating LNG terminals and building three onshore terminals, which will increase LNG import capacity in Northwest Europe.

Industry sources say the EU LNG market should be priced to reflect actual supply and demand, and to reduce reliance on TTF, which due to gas price spikes is currently the most expensive compared to other gas benchmarks, such as Japan Korea Marker (JKM) in Asia or Henry Hub (HH) in the USA.

More than 70% of LNG cargoes arriving in Europe this year came from the US. Such LNG cargoes traded in a tight range somewhere between TTF and HH, which recorded a very wide spread reaching $80-$90 in August, making it difficult for companies to value LNG against these gas benchmarks.

HOW DOES LNG DES VS TTF?

Earlier this month, SparkNWE, an index that tracks the difference between LNG shipments delivered to Northwest Europe based on DES and TTF, recorded a discount of $20/MMBtu over the price of TTF, according to Henry Bennett. , head of pricing at Spark Commodities, which launched the index earlier this year.

“While an increase in import capacity in Europe is planned, which may ease these import restrictions in the future, the forward curve shows that dislocations (differentials) are priced into at least the next year, with the SparkNWE discount in September 2023 still at over “$8/MMBtu,” Bennett said.

CAN THE EU LNG BANCHMARK CHANGE?

Industry sources said the EU did not need to create an LNG benchmark as many pricing agencies already use the DES LNG index, adding that the industry could develop one on its own.

Kaushal Ramesh, senior LNG analyst at Rystad Energy, said trying to replace TTF “is a gamble because it won’t properly reflect European fundamentals and could have unintended consequences for what was a heavily deregulated market.”

Creating a benchmark by itself will not help the European energy crisis in the short term, according to a European trader, while in the long term it will depend on whether the industry starts using it and whether banks start offering financial products based on it.

“If the financial market is not behind it, if you cannot use it to hedge your positions, it will be useless,” he said.

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Reporting by Marva Rashad in London and Isla Binni in Madrid; Edited by Susanna Tweedale and Susan Fenton

Our standards: Thomson Reuters Trust Principles.

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