Why cheap US gas costs a fortune in Europe – POLITICO
November 23, 2022
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The EU is under immense pressure to cap the price of imported natural gas to contain energy costs — but many of the companies making a fortune selling cheap U.S. gas to the Continent at eye-watering markups are European.
The liquefied natural gas (LNG) loaded on to tankers at U.S. ports costs nearly four times more on the other side of the Atlantic, largely due to the market disruption caused by a near-total loss of Russian deliveries following the invasion of Ukraine.
The European Commission has come under fierce pressure to sketch out a gas price cap plan, but some countries, led by Germany, worry such a measure could prompt shippers to send gas cargoes elsewhere. The Commission is also reluctant, and its proposal issued Tuesday sets such demanding requirements that they weren’t met even during this summer’s price emergency.
But a large part of the trade is in European hands, according to America’s biggest LNG exporter.
“Ninety percent of everything we produce is sold to third parties, and most of our customers are utilities — the Enels, the Endesas, the Naturgys, the Centricas and the Engies of the world,” said Corey Grindal, executive vice president for worldwide trading at Cheniere Energy, rattling off the names of big-name European energy providers.
Cheniere, which this year saw 70 percent of its exported LNG sail to Europe, sells its gas on a fix-priced scheme based on the American benchmark price, dubbed Henry Hub, which is currently at about $6 per million British thermal units.
On average, the price across all Cheniere contracts is 115 percent of Henry Hub plus $3, Grindal said. That works out to about €33 per megawatt-hour. For comparison, the current EU benchmark rate, dubbed TTF, is €119 per MWh.
It’s a big markup for whoever is reselling those LNG cargoes into Europe’s wholesale market, profiting from fears that there may not be enough gas to last the winter.
Despite fears that any EU cap will send gas to higher bidders in Asia and result in bloc-wide shortages, Grindal gave a resounding “no” when asked if a cap would have any impact on how Cheniere does business with European companies.
“Our balance sheet is underpinned by those long-term contracts,” he added.
Translation: If buyers choose to trade their precious cargoes away for higher profits beyond Europe once they receive them, that’s their decision.
The difference between U.S. and EU gas prices hasn’t gone unnoticed by European politicians — but most of the finger-pointing has been at American producers rather than the resellers closer to home.
“In today’s geopolitical context, among countries that support Ukraine there are two categories being created in the gas market: those who are paying dearly and those who are selling at very high prices,” French President Emmanuel Macron told a group of industrial players last week. “The United States is a producer of cheap gas that they are selling us at a high price … I don’t think that’s friendly.”
Macron’s dig conveniently ignored that the largest European holder of long-term U.S. gas contracts is none other than France’s own TotalEnergies.
At the company’s latest earnings call last month, TotalEnergies CFO Jean-Pierre Sbraire trumpeted the fact that the firm’s access to more than 10 million tons of U.S. LNG annually “is a huge advantage for our traders, who can arbitrage between the U.S. and Europe.”
“And now, given the price of LNG, each cargo represents something like $80 million, even $100 million. So, when we are able reroute or to arbitrage between the different markets, of course, it’s a very efficient way to maximize the value coming from that business,” Sbaire added. “Cash flow generation of this order of magnitude marks the start of a new era for the company.”
Spain’s Naturgy — which has some 5 million tons of U.S. LNG a year from Cheniere under contract — has also earned nearly five times more trading gas so far this year compared with 2021 thanks to “the increased spread between [Henry Hub] and TTF,” it wrote in its half-year report.
Long-term contracts with the U.S. weren’t always so profitable. In fact, from 2016 to at least 2018, buyers were mostly losing money on the fixed deals, leading some to sell them off.
In 2019 Spain’s Iberdrola, for example, pawned off its 20-year Cheniere contract to Asian trader Pavilion Energy, which is now benefiting from selling into a high-priced global market.
In the U.K, Centrica tried — and failed — to sell off its LNG portfolio in 2020 when government-ordered lockdowns drove real-time prices through the floor. That included a 20-year fixed Cheniere contract set to run through 2038.
Now that real-time prices have shot back up, Centrica — part of Shell-owned British Gas — is reaping the rewards and eagerly snapping up more long-term contracts, most recently a 15-year deal with U.S. LNG exporter Delfin beginning in 2026.
“This is a really important profit stream for us,” Centrica CFO Chris O’Shea told investors on a Friday trading update call.
Unlike some producers — for example in the Middle East — which restrict the final destination of the LNG to consumers in Asia and prevent it being sold onward at a higher price, American gas changes ownership the minute it’s loaded onto a ship and comes with no strings attached.
That leaves buyers free to redirect the precious supply wherever it’s most profitable — sometimes at the expense of their downstream clients, if it’s cheaper to break those pre-existing domestic delivery commitments.
“We can only control what we can control,” said Cheniere’s Grindal. “U.S. LNG is destination-free.”
But as far as getting it on the ship at previously agreed prices, “our focus is being that reliable supplier, being committed to the obligations that we’ve made to our customers, and we’re committed to doing everything that we can to help the EU in this situation.”