European buyers appear to be comfortable relying on spot LNG procurement and managing the pricing volatility it brings rather than committing to long-term LNG contracts, market players told Energy Intelligence during the E-World energy trade fair in Essen last month.
Source: Energy Intelligence
Despite the importance given to energy security following the crisis exacerbated by Russia’s ongoing war in Ukraine, European buyers are banking on new LNG supplies coming online in the second half of the decade to push spot prices lower and rebalance the current tight market.
While it makes sense to have dedicated longer-term supplies to complement spot procurement, European players see three main obstacles for long-term contracts to be signed, namely the EU’s long-term climate policies, lower demand expectations and financial risks involving pricing terms on offer, according to Gregor Pett, chief economist at German utility Uniper.
There is an expectation that LNG supplies will be more abundant in five to 10 years, meaning there will be more spot cargoes available to cover Europe’s demand, which itself is not expected to increase significantly, according to Frank van Doorn, the head of energy trading at utility Vattenfall. Europeans are concerned about the risks that this strategy brings over the next few years but appear to be “not worried enough” to conclude long-term contracts, he said. “Having a diversified approach in their portfolio is not an issue. It’s rather the two years or three years that we need to bridge the gap,” according to Joerg Selbach-Roentgen, the CEO of MET Germany, the German branch of the Swiss-based MET Group. “That’s the difficulty, because you have to find a solution until then, how do you mitigate price risks in those shorter terms.”