“NWE” kids on the block – the role of north-west Europe in unlocking value for the next wave of US LNG

After years of stalled growth, President Trump’s “Unleashing American Energy” executive order seeks to unlock a new wave of US liquefied natural gas (LNG) final investment decisions (FIDs). It does this by mandating the resumption of permitting applications and eliminating delays to the permitting process. With almost 180 million tons per annum (Mtpa) of potential pre-FID projects awaiting non-free trade agreement (FTA) permits and environmental approvals from the Federal Energy Regulatory Commission (FERC) to begin construction, there is now clear political will to unlock the next phase of growth in US LNG.

Approvals status of US LNG projects

But political support aside, LNG projects also require long-term offtake commitments to underpin their significant capital investments. Although these projects will look towards Asian markets (which will continue to dominate demand volumetrically) to secure the commitments they need, shifting perspectives on the resilience of gas demand in Europe and its value as a market have increased the appetite for taking long-term market access positions in the Atlantic basin.

Stronger support for European hub-Henry Hub (HH) differentials should also attract market participants. Russian gas exports to Europe have fallen close to zero since their ~200 billion cubic metres (Bcm) peak in the 2010s. In 2018/19, ramped-up Russian gas production flooded the European market, contributing to a global supply glut and the subsequent crash of the Title Transfer Facility (TTF) price and US LNG netbacks (before the Covid-induced shut-ins of 2020). But with pipeline exports to the continent at near-zero, and little chance of Russia regaining meaningful market power in the foreseeable future (even with the potential resumption of some flows), the Russian bear has lost its teeth. What’s more, support for European hub-HH spreads is compounded by the increasing correlation between TTF and Asian Japan/Korea Marker (JKM) prices, which has intensified inter-basin price competition as a result of Europe’s ever-increasing reliance on LNG.

But while market fundamentals drive the intrinsic value of LNG contracts, the optionality and flexibility that downstream European market access can provide for the supply portfolios of US LNG players can unlock further extrinsic value. These players are no longer dominated by traditional exploration and production companies. Infrastructure investors, downstream utilities and pureplay trading houses are also now increasingly investing across the gas and LNG value chain to manage their LNG supply portfolio. Taking a position at a regasification terminal can unlock value by securing access to physical liquidity at European hubs.

The value of downstream access for new market entrants

As global markets become more interconnected, these positions will become increasingly significant for optimising LNG portfolios. With long-term capacity available across several key terminals in north-west Europe (NWE) – including the UK, France and possibly Germany – competition for slots is likely to intensify as the next wave of US LNG takes FIDs. But there are structural differences between terminals based on their regional characteristics, including the spread and liquidity of local hub pricing to the European TTF benchmark. The wide array of products available also provides a source of differentiation, offering alternative tenures, send-out flex, tariffs and secondary market rights and obligations.

Baringa’s gas and LNG experts have a wealth of strategy, commercial and transaction advisory experience, in addition to deep analysis of market fundamentals and modelling capabilities with respect to regasification. Because the challenges faced by the companies we advise are unique, we take a tailored approach to solving them. We address each problem using our tested commercial appraisal frameworks, in-house LNG portfolio value and global gas market modelling tools, and our detailed terminal databases.        

If you’d like to hear more about how we can help, contact Mashal Jaffery or Peter Thompson.