Over the last few years our research has stressed the increasing importance of Henry Hub prices to global gas. We have also argued that at times the global gas market will need to balance by ultimately closing the arbitrage window between North America and the European markets.
The arb will close when the spread between Henry Hub and European hubs (TTF/NBP) narrows to a level that does not cover the variable costs of liquefaction, transport and regasification. While we looked at the variable costs of the other components before (Insight: LNG transport – fixed or variable?, April 2017), this Insight looks at the variable costs of European regas facilities.
The first issue we consider is whether the capacity costs associated with securing a regas facility should be included in the consideration of variable costs. We feel the answer largely depends on whether that capacity is secured under a long-term contract, in which case the charges are unavoidable (fixed).
Within European LNG infrastructure, around 95% of the installed regas capacity in the northwestern markets is locked up under long-term contracts, compared to just under half in southern markets. The main holders of that capacity are gas producers and European utilities.
All European LNG terminals have to make short-term capacity available through ‘use it or lose it’ (UIOLI) provisions. However, terminals exempted from third-party access regulation are not obliged to publish capacity charges. This means there is little transparency on regasification charges in the UK, Netherlands and Italy. For the older regulated terminals—largely in Belgium, France (excluding new terminal Dunkerque), and Spain—there is better information.
In terms of the regulated terminals, LNG terminal charges for short-term capacity reservations largely fall in the 0.2 to 0.4 $/mmbtu range. While the application of reserve prices for UIOLI capacity suggests that those charges could be a bit higher, it is unlikely that a ‘market’ rate would be significantly higher than what we see at the regulated terminals.
However, a large swathe of European LNG capacity is booked over the long term, including entry, suggesting that the only variable costs that would strictly be included in the calculations of whether to do the trade are the energy costs, which at 1% of the delivered gas would be less than 4 cents/mmbtu.
Given this, we expect that the Henry Hub to NBP/TTF spread will be in the 1.05 $/mmbtu to 1.91 $/mmbtu range, and that the bulk of trades will only be discouraged once prices go below the bottom of that range. This suggests the relevant arb will close at a fairly close level to Henry Hub.