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• There has been little of comparable interest on the other side of the globe. For North Americans, another year of splendid isolation from the global market is drawing to a close with another seemingly in the cards.2011 has been a remarkable year for the normally steady-state world of gas in Europe and Asia. The upsets began with revolution in major gas exporting countries in North Africa, followed by a major upheaval in global coal, gas and carbon markets in the aftermath of the catastrophic tsunami in Japan, and ended with a series of encouraging shale well results in Poland and the UK. These could have a dramatic impact on European pipeline projects and the security of supply debate that hinges on European dependence on Russian gas. Russia, meanwhile, has just started up the first of its Ukraine bypass pipelines, bringing gas directly to Germany for the first time.
• There has been little of comparable interest on the other side of the globe. For North Americans, another year of splendid isolation from the global market is drawing to a close with another seemingly in the cards. An endless stream of unconventional gas means that consumers in the US and Canada continue to enjoy some of the lowest natural gas prices in the world. A lack of liquefaction capacity prevents producers from capturing arbitrage opportunities elsewhere—a problem that may be addressed. The operator of at least one of the US’s near-idle LNG import terminals is seeking permission to re-engineer it to take Henry Hub gas, liquefy it and export it abroad.

Spot LNG

• The drama being played out in Europe and Asia concerns the rise in cross basin trade in LNG. This has created an almost genuinely competitive market as spot cargoes from the Atlantic Basin and the Middle East undercut the delivered cost of pipeline gas in Europe. Until March 11, there was little difference: Japan and Korea were paying roughly the same for Atlantic LNG as European customers, plus or minus the cost of shipping from one basin to the other. Both spot markets were offering prices much lower than those prevailing under European or Japanese long term contracts.
• However, the disaster in Japan in March quickly put the price of spot LNG for delivery in Asia on an upwards trend, to the point where it has exceeded the equivalent price of European spot gas. Even nuclear plants that were not hit by natural forces suffered, as Japan’s nervous—and now retired—prime minister told major Japanese utility Chubu to close down its 3.5 GW Hamaoka plant—a decision based on the precautionary principle. The effect of Japan’s nuclear closures sent buyers scrambling for replacement oil, coal and LNG. But the structure of integrated upstream LNG projects does not allow much flexibility for disasters on this scale, leading to a shortage of spot gas.
• By end-September, spot deliveries for December at Japanese and Korean ports were approaching or exceeding prices based on long-term contracts indexed to oil. Some companies have been able to increase their contractual purchase rights, in the same way they exercised their downward quantity clauses when there was an oversupply of gas on the market.This is not a battle Europe can win. There is no pipeline gas in Japan or Korea to speak of, nor are there competitive markets in gas supply. High-priced cargoes add to the weighted average cost of gas that is clawed back from utilities, which in turn can pass the cost on to their customers.
• The buyer in Europe has to hedge exposure differently. Storage is one solution: a cargo of LNG that is bought in October for delivery in November to make use of ship-or-pay terminal capacity might be vaporized and injected into storage and not be withdrawn until the peak demand days of January. Other cargoes are taken to Zeebrugge. The terminal has been reconfigured so that it can reload an empty vessel for redelivery to Asia. Traders say this circumvents the Qatari policy of not selling cheap spot LNG into oil-indexed Asia, since the cargo has initially been“sold” to Europe.Precautionary Principle
• Europe itself was not immune to the precautionary principle. German Chancellor Angela Merkel shut down seven of Germany’s oldest nuclear plants with almost immediate effect following Japan’s Fukushima disaster. The closure of the others in 2022 is costing operators €32 billion ($45 billion) at net present value and 0% interest rates in foregone profits, according to preliminary calculations by a senior economist at the OECD Nuclear Energy Agency, Jan Horst Keppler. But the gains for gas could be considerable. Nuclear’s replacement with wind, coal and gas will require some juggling with the country’s carbon emissions targets and the willingness of German taxpayers still groaning under the weight of the government’s commitment to support the euro to pay for expensive and intermittent sources of renewable energy. Gas is cheaper than wind and lower in emissions than coal. But that is not a problem for now, at least.

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