Exhibition & Conference

13-16 September 2021

Singapore EXPO, Singapore

Strategic Programme

Murray Douglas

Research Director - Europe Gas

Wood Mackenzie

14:00 - 14:25

Tuesday, 17 September 2019

S1.1 Do European Utilities Still Have an Appetite to Buy LNG?

European utilities are at various stages of re-evaluating their positions across the gas value chain. They retain many incumbency advantages: long-term contracts, access to infrastructure, customer relationships, and they understand how to navigate Europe's complex regulatory environment. However, they also have the most to lose. As an increasingly competitive market place evolves, a number of uncertainties emerge which will challenge the corporate strategies of those most exposed to the European gas market.

Many European utilities retain a traditional model of buying pipeline gas volumes for their legacy home markets. These long-term structural volumes can be leveraged. Indeed, some utilities have raised their activity in the LNG spot market – though in many cases this is primarily to hedge customer positions. But margins are thinner than ever. Options to buy pipeline gas have narrowed as production from the UK and Netherlands continues to decline. Equinor is marketing increasing volumes of its gas on the spot market while Gazprom is increasingly using its subsidiaries, Wingas and Gazprom Marketing and Trading to reinforce market share.

So what next for European utilities? Is committing to LNG a viable option? Well, a number of utilities have already started to narrow their focus across the gas and power markets of Europe – an emphasis on low carbon being the common objective. These decisions have led to a growing number of asset swaps and M&A activity. Engie sold its LNG business to Total after initiating a significant strategic shift in anticipation of a low-carbon future. But some players are taking a different stance. Uniper and RWE are actively pursuing options for LNG import capacity in Germany while Centrica and EDF have established trading partnerships with Japanese utilities to exploit cross-basin opportunities.

Europe's gas market is increasingly dominated by hub pricing which means LNG exposure remains a challenge for European utilities since LNG is still priced through oil-indexation or at Henry Hub. The appetite for European utilities to take Henry Hub price risk is thus far limited. US LNG likes the liquidity of Europe but the utilities will need to find a way to overcome the current impasse. Otherwise, they run the risk of losing significant market share to LNG portfolio players and commodity traders.

In this paper, Murray will explore the divergent strategies being adopted by Europe's largest utilities – focusing on those with legacy gas positions. Will the utility's chosen strategy in the power sector complement their exposure to gas – or provide opportunities to competitors? Which regions and which parts of the gas value chain will prove to be most exploitable for LNG players? What can European utilities do to protect and leverage their incumbent advantages?