In late 2000s and in the beginning of 2010s 3 issues were shaking the European natural gas industry:
- The renewables, especially wind reshaping power markets
- The fear of dependency on incumbents and hub-based price and oil indexed price clashes
- US Shale gas and its possible effects in the world natural gas market
Under the effect of these factors the natural gas market was doomed to change forever as EU had chosen to integrate all markets not only by interconnectors but also, by means of regulations, systems that would bring transparency with the goal of market coupling.
On top of that came the Russia-Ukraine crisis in transmission of gas to Europe which resulted in failure to deliver gas in winter when cold weather hit European markets. Consequently, and for other political reasons throughout Europe,
- Renewables were favored and subsidized to decrease reliance on fossil fuels
- Natural gas, especially LNG gained importance due to its flexibility
- Long term and oil indexed contracts left its place to shorter term and hub-based prices
- Last but not least, when markets started acting like communicating vessels, the prices converged and especially in Northern Europe, gas became the accompanying resource for renewables.
Although the LNG from US was not delivered in Europe until 2018, the released cargoes that once were destined to go to US and the probable competition in near future caused incumbents react and change their contractual and operational models. Price and take or pay clauses changed probably for long, if not forever. Without long term contracts big US LNG investments would not be realized, and competitors supplying gas to Europe had already taken precautions.
An analysis of that time showed that oil indexed contracts would not be able to compete against US LNG, if it was available, whereas if incumbents reacted early, they might stop European companies to commit long term purchases from US, and they did. In the meantime, some net importer countries connected their systems better with neighbors, some had to go offshore for their independence (Lithuania). In the end most of the Northern European markets coupled.
The high oil price cases would not help conventional price formulas to beat US LNG, and high Henry Hub prices did not look probable. As a result, even before US LNG arrived in Europe its preliminary effect with 2 other factors mentioned above, had already curtailed the natural gas prices, probably for long.
To put it in another way, it was foreseen that the main outcome of US shale gas on European markets would be that it would put a cap on European gas prices rather than Europe off-taking huge volumes of US shale gas originated LNG. What European buyers wanted was actually an option, an insurance against incumbent suppliers’ oil indexed, long term contracts with huge take or pay responsibilities, which could sometimes be interrupted due to intermediaries.
Today while some countries are still against the incumbent suppliers’ commercial and investment actions and their dominant role, additional pipelines are already built to supply gas to Europe from the same sources, removing reliance on intermediaries. On the other hand, EU tries to regulate all the capacity over-hoarding possibilities and trying to keep old routes open as well. The first wave of LNG exporters from the US had better chances in the global market and used it wisely to sell their gas mainly to East Asian buyers or aggregators. Today second wave US LNG companies backed by the administration, on one hand face difficulties with East Asian markets due to so-called trade wars, on the other hand expect to sell their long-term insurance policies to European buyers while there are not many eager to pay for the premium.
From this point on the importance and number of aggregators and traders will increase to take some of the risks of further US LNG export capacity increases, and we might see some US companies taking positions in the downstream market where reliable market structures exist.