EU LNG access regimes baffle market [NGW Magazine]

The utilization rate of Europe’s LNG terminals stood at around 45% in 2019, almost twice as much as the year before, data published by Gas Infrastructure Europe show. Moreover, Europe imported over a record amount – 108bn m³ – of its gas demand as LNG in 2019, according to the European Commission (EC)’s most recent quarterly report on gas markets. Lower demand from Asia and new liquefaction projects in the US and Australia broadly explains why more LNG cargoes found their way to Europe.

However, the increase in LNG imports also means that the access regimes across Europe’s 24 terminals have come under further scrutiny. Securing access to import capacity – berthing, storage and regasification – is not always straightforward for third parties, despite most terminals applying a use-it-or-lose-It (UIOLI) secondary capacity market or similar method to prevent hoarding.

Regasification capacity at several import terminals is booked by only a few users on a long-term basis, exemplified by Belgium’s 9bn m³/year Zeebrugge terminal where Qatar Petroleum has booked all capacity from 2023 to 2044. Another example is the 5bn m³/yr Swinoujscie terminal in Poland where the national incumbent PGNiG in October 2017 booked all regasification capacity until 2034, which it repeated with the additional capacity tender earlier this year. Unlike Zeebrugge and most other European terminals, Swinoujscie does not have a functioning secondary market so third parties are unable to bid for unused capacity, at least for the time being.

A recent study commissioned by the EC and carried out by consultants at Trinomics, REKK and Enquidity, found that capacity allocation at both primary and secondary markets are not operating as smoothly as it could.

“Although all LNG terminals are in principle relying on non-discriminatory mechanisms to allocate their primary capacity, some operators have in practice allocated all available capacity via long term contracts to a single terminal user,” the study said, adding that this outcome might negatively affect market liquidity and competition.   

“Additionally, at several terminals short-term bookings can only be secured in secondary markets accessible for registered terminal users, and as most primary capacity is typically booked by a limited number of users engaged in long-term contracts at terminals, this limits opportunities for a wider group of market parties to use the terminal,” the study said.

Even when regasification capacity is made available on secondary markets, there is not always enough time for third parties to line up a cargo as slots at some terminals are announced just one or two weeks in advance – less time than it takes to cross the Atlantic.

No common framework

Generally speaking, LNG terminals are not as rigidly regulated by EU law as gas pipelines. Ownership unbundling, for example – a requirement for pipelines under the Third Energy Package – does not apply to LNG terminals. Third party access requirements do apply, however, although six terminals are exempted to varying degrees. They are Dunkirk in France; South Hook, Isle of Grain and Dragon, all in UK; Gate in the Netherlands; and Porto Levante in Italy. It is worth noting that Grain’s 20-year exemption period expires in 2025.

Moreover, even the common EU rules on the UIOLI capacity allocation mechanism for LNG terminals give terminal operators a certain degree of discretion when designing secondary markets.

Operational practices across Europe therefore vary significantly. The study estimated that at Italy’s three regasification terminals, no capacity was offered at secondary markets in 2019 while at Spain’s seven terminals, up to 100% was offered on secondary markets. It also noted that many shippers in Spain opt for short-term over long-term primary capacity slots.  Moreover, the Iberian Mibgas exchange has started to allocate capacity through a virtual model, whereby shippers book storage and regasification through a single platform that combines the capacities of all terminals in the peninsula, the operators being recompensed after.

Yet the study casts doubt over Spain’s goal of becoming an LNG trading hub as the market is not liquid enough for traders to buy and sell large quantities of gas. Limited cross-border interconnector capacity with France is also hindering more competition.

“Given recent trends it is more likely that the PSV (Punto di Scambio Virtuale) in Italy will become the reference hub for southern Europe, that its price signals will be referenced to attract LNG, and that it might become over time the leading supply route for pipeline gas into northern Europe,” the study says.

Gas release programme

Illiquid markets are a concern for LNG players in southern and eastern Europe, including Portugal, Greece and Lithuania. The study suggests that forcing dominant market players to release some volumes of imported LNG on local hubs at regulated prices could boost competition. This is not a new idea: gas release programmes have previously been implemented in countries such as the UK, Italy and Spain to boost competition and they still exist in some, smaller gas markets.

In Romania, for example, the national regulator ANRE on 13 May approved a gas release programme that obliges the main domestic producers Romgaz and OMV Petrom to offer 30% of their production over centralised markets – for example the Romanian stock exchange or the Romanian gas and electricity market operator – through standardised forward products.

There are 12 LNG terminals under planning or construction across Europe, many of which will be in illiquid markets. One example is the 2.6bn m³/yr KrK terminal offshore Croatia which is expected to be commissioned early next year. All regasification capacity has been booked for the following three gas years. Confirmed capacity holders are Qatari firm PowerGlobe, Hungarian-owned MFGK Croatia and Swiss-controlled MET Croatia.

However, a lack of interconnectors between Croatia and neighbouring countries means export potential is limited. Croatia has a 7bn m³/year interconnector with Hungary – which became bidirectional in January this year – while the planned 5bn m³/year Ionian Adriatic Pipeline (IAP) bidirectional project could link Croatia with Albania, Montenegro, the south of Bosnia and Herzegovina and ultimately the Trans Adriatic Pipeline. Other planned LNG terminals in nations without established hubs include the Shannon terminal in Ireland and the Alexandroupolis terminal in Greece.

Lower rates to attract custom

Lowering tariff rates at terminals is another possible measure to further boost LNG trade in Europe. The study said comparable standardised tariff rates for regulated terminals range from €0.35/MWh at the Klaipedos Nafta terminal in Lithuania to €4.04/MWh in Rovigo in Italy. Slashing regasification tariffs across all terminals in the EU would bring benefits to trade, offset by concerns related to lower revenues for operators.

“Implementing a uniform 50% decrease in regasification tariffs would strongly increase LNG flows into EU markets and lead to lower gas prices and hence higher consumer benefit levels,” the study said. However, it cautioned that “decreases in tariff levels would affect some terminals more severely than others, and increased volumes of gas influx would not necessarily fully compensate for the impact of the tariff decrease for LSOs.”

It is unlikely that the EC will propose common legislation for LNG terminals soon. It said the study does not bind it in any way, but that the recommendations will “be assessed in the context of the policy objectives established in the Green Deal Strategy and subject to an impact assessment.”

But as more and more LNG cargoes find their way to Europe, calls for more transparency and at least some harmonised rules on capacity booking will grow louder. A study by the Oxford Institute For Energy Studies released in January this year noted that the lack of a LNG-specific EU regulation and the general nature of the Third Package and Gas Regulation 715 “have resulted in a situation where the LNG import terminals in the EU are governed by a patchwork of terminal codes developed by their operators, the national regulatory authority’s guidance, and the exemptions, thus making it extremely difficult for an LNG seller to understand the rules.”

Of course, shippers that took a risk by investing in new LNG terminals should be able to book capacity long-term, but a transparent and harmonised framework for unused capacity would nevertheless be welcome.