May 3, 2019 / 9:13 AM / 19 days ago

European buyers of U.S. gas bristle at terms

LONDON (Reuters) - As European and U.S. officials praise the soaring trade of liquefied natural gas (LNG) between the regions, a pillar of U.S. President Donald Trump’s drive for American “energy dominance”, some buyers are bristling at the terms.

Trading executives at French, German and Spanish utilities said accelerating U.S. LNG production undoubtedly added liquidity and transparency to the growing global market.

But they pointed out that prices for Europe were often too high and certain commercial structures in long-term contracts that underpin U.S. liquefaction projects needed to change.

Spain’s Naturgy, the second largest buyer of U.S. LNG having signed deals years ago when LNG exports were just being conceived, says future contracts must change as the buyer has been taking on both volume and pricing risk.

“We think it is critical that LNG projects take some of that market risk,” Naturgy LNG supply director Carlos Humphrey told a roundtable of U.S. and European LNG executives and EU officials, kicked off by U.S. Energy Secretary Rick Perry in Brussels on Thursday.

“If they don’t take this market risk, I think it’s very difficult anyone in Europe will contractually buy more U.S. LNG.”

Several executives referred to offtake deals with Cheniere Energy, the dominant U.S. producer. Here the LNG tends to be priced at 115 percent of Henry Hub natural gas plus a $2.50 to $3 fee per million British thermal units (mmBtu).

The contracts last for 20 years, although recent deals are shorter, with stipulated volumes and “take or pay” clauses, which is how buyers take on both the volume and price risk.

Add shipping and regasification costs and the LNG price amounts to $7 per mmBtu compared to the TTF Dutch hub natural gas price of $4.75 per mmBtu today.

“It’s a $7 million loss per cargo,” RWE Supply & Trading Chief Commercial Officer, Andree Stracke, told the forum.

“Right now, U.S. LNG is not competitive.”

Naturgy is contracted to buy 5 million tonnes a year (mtpa) of LNG from U.S. terminals. RWE has no direct known commitments to buy U.S. LNG but trades around 10 mtpa globally.

By comparison, European countries imported just under 50 million tonnes last year with Spain, France and Turkey accounting for half of that volume.

PRICE TO DUTCH HUB?

The debate about price and pricing mechanisms reflects a volatile market in the past year with LNG lurching from four-year highs last summer to two year-lows in March.

In that time and right after Europe promised Trump more buying of U.S. LNG in an effort to stave off a trade war, volumes soared. But that was largely due to lower than expected Asian demand.

The debate also reflected the evolving LNG market, which is nowhere near as liquid and established as crude oil.

“Really, what Europe needs to manage risk is to have it (U.S. LNG) on a TTF basis,” said Gordon Waters, head of global LNG at French energy firm Engie, referring to the Dutch hub price which is a benchmark for gas sold around Europe.

U.S. LNG executives said such contracts were not possible as gas turned into LNG is priced to Henry Hub and, while that price is normally far lower than TTF, a guaranteed “floor” would need to be put in place in contracts.

“For us to sell on a TTF basis, which we have tried, we would need someone to sell (gas) to us at TTF ... Those discussions break down very quickly,” said Joe B’Oris, chief development officer at Magnolia LNG, a project in Louisiana.

“So it’s a perfect marriage but we’re currently sleeping in different bedrooms, possibly in different houses,” quipped the head of U.S. industry group LNG Allies, Fred Hutchison.

“Or maybe we’re just engaged,” replied Jonathan Westby, co-managing director at Centrica Energy Marketing and Trading, a British utility.

Reporting by Sabina Zawadzki; editing by Jason Neely

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