HH-NBP Convergence Underpins Fragile Gas Export Economics

BMI View: The convergence of Henry Hub and National Balancing Point (NBP) gas prices underscores the changeable and volatile economics of exporting US liquefied natural gas (LNG) to Europe. We already forecast that prices will converge towards the end of our forecast period based on increased domestic demand for US gas, but the fact that benchmark prices are currently heading for parity (based on weather-related phenomena) highlights the economic fragility of such plans while the natural gas market is in a state of flux.

Although National Balancing Point (NBP) gas prices are likely to rise once the summer in Europe has come to an end, the current pricing dynamics will be of interest to US liquefied natural gas (LNG) exporters and European utilities. With an unseasonably warm winter in Europe meaning large volumes of gas have remained in storage, and demand for gas currently subdued moving into the summer months, NBP prices have declined rapidly since the start of 2014.

In early June, NBP was priced at USD6.1/mn British Thermal Units (BTU). While we reiterate that we expect NBP prices to rise towards the end of 2014, we believe there are two implications.

  • Prices Converging, For Now
    Henry Hub And National Balancing Point Gas Prices (USD/mn BTU)

BMI View: The convergence of Henry Hub and National Balancing Point (NBP) gas prices underscores the changeable and volatile economics of exporting US liquefied natural gas (LNG) to Europe. We already forecast that prices will converge towards the end of our forecast period based on increased domestic demand for US gas, but the fact that benchmark prices are currently heading for parity (based on weather-related phenomena) highlights the economic fragility of such plans while the natural gas market is in a state of flux.

Although National Balancing Point (NBP) gas prices are likely to rise once the summer in Europe has come to an end, the current pricing dynamics will be of interest to US liquefied natural gas (LNG) exporters and European utilities. With an unseasonably warm winter in Europe meaning large volumes of gas have remained in storage, and demand for gas currently subdued moving into the summer months, NBP prices have declined rapidly since the start of 2014.

In early June, NBP was priced at USD6.1/mn British Thermal Units (BTU). While we reiterate that we expect NBP prices to rise towards the end of 2014, we believe there are two implications.

  • Henry Hub is currently priced at USD4.7/mn BTU - meaning the difference with NBP is just 1.4/mn BTU. With our Oil & Gas team indicating that the cost of liquefaction and shipping adds about USD3.00 to the cost of gas, exporting from the US to Europe under the current pricing dynamics would not make financial sense. Asia would be a much more attractive market for US LNG exporters, even taking into account higher shipping costs.

Prices Converging, For Now
Henry Hub And National Balancing Point Gas Prices (USD/mn BTU)

This is important because it highlights the questionable economics of exporting LNG to Europe should our long-term forecasts play out.

We forecast that Henry Hub prices and NBP prices will converge towards the end of our forecast period in 2023 (albeit at a higher level of around USD8-9/mn BTU) due to higher Henry Hub prices in the US. These higher prices will be a symptom of higher domestic demand - due to the establishment of LNG export capacity, increased consumption in the power sector and growth in the domestic petrochemicals industry. This would throw into doubt the economic viability of exporting to Europe. The critical point, however, is that pricing dynamics are currently in doubt due to the weather alone, before demand-related Henry Hub price rises have even been taken into account.

We believe this highlights the fragile economics of US-Europe LNG exports. This will encourage European gas suppliers such as Gazprom and Statoil, who will hope to avoid competing with US LNG exporters.

Positive Spark Spreads Support Gas Switching
UK - Dark Spread, Spark Spread, Dark-Spark Margin (GBP/MWh)
  • At this low price, dark-spark margins (at spot prices) indicate that switching between gas and coal fired electricity generation in Europe is increasingly viable - especially for the most efficient gas-fired power plants. We have long highlighted that gas-fired plants have been unprofitable over 2012 and 2013 - weighing on utilities' margins and meaning greater volumes of coal have been burned in power generation. While this is still the case in many European markets - with the dark-spark margin at just GBP1.82/ megawatt hour (MWh) there is upside to our forecasts for gas generation in 2014 in markets like the UK and Netherlands (see chart above).

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This article is tagged to:
Sector: Oil & Gas, Petrochemicals, Power
Geography: Europe, United States
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