LNG PROSPECTS

The cold weather has passed. Europe effectively addressed the challenge of providing warmth to its consumers amidst the severe winter and reduced Russian gas supplies. However, the arrival of spring did not bring stability to the global energy market. Due to the military actions in Ukraine, Europe had to adjust its import routes and boost liquefied natural gas (LNG) purchases. Following Russia's supply reduction, LNG imports to Europe surged to 35 percent of total gas supplies, with a significant portion acquired at spot prices.

Europe has now established itself as a key player in the international LNG market, competing for supplies with traditional buyers in Asia. The advantage lies in the EU's freedom from reliance on a single source, yet it faces price fluctuations influenced by Asian competition.

In April, leaders in the gas market gathered at the 5th Budapest LNG Summit to discuss the industry's future. This unique regional-level forum brought together key company executives, high-ranking government and EU officials, financial and consulting company leaders, innovators in technology, and respected researchers.

Plans and Challenges

At the summit, Hungarian Foreign Affairs and Trade Minister Péter Szijjártó reiterated his country's commitment to reliable energy supplies and favourable contracts. He emphasized Hungary's rejection of political pressure on energy supply issues and its intent to maintain advantageous partnerships and contracts.

Minister Szijjártó highlighted the importance of diversification, emphasizing the inclusion of new sources while maintaining existing partnerships. He hailed the success of the TurkStream pipeline, noting Hungary's recent receipt of Turkish natural gas, a deal signed last summer enabling the import of 275 million cubic meters of gas in 2024.

With the TurkStream pipeline, Hungary aims to secure its energy security even if Ukraine halts Russian gas transit after 2024. Minister Szijjártó praised achievements such as the Slovak-Hungarian pipeline construction, cooperation with Azerbaijan on gas supplies, Hungarian-Romanian gas transport capacity expansion, and an LNG contract with Shell.

Despite Russia's gas still constituting 15 percent of EU imports, the community aims to phase out Russian gas imports by 2027. The European Parliament approved new gas policy rules empowering EU governments to ban Russian LNG imports. While no major importer has signalled intent to use this right, such actions would likely boost LNG demand and prices.

According to Commerzbank analysts, substituting Russian LNG supplies is feasible but may temporarily cost more due to heightened global LNG competition amid rising gas demand, particularly in Asia.

At the same time, the Hungarian minister accused the European Union of reducing aid for energy infrastructure in Southeastern Europe, emphasizing the crucial nature of these projects for diversification. Gas supplied by Russia, including pipelines and LNG, currently makes up 15% of EU imports. Nevertheless, the community countries have committed to phasing out Russian gas imports by 2027 and are progressively working towards this objective. The European Parliament has already sanctioned rules enabling EU governments to prohibit Russian LNG imports. The new gas policy regulations are intended to offer legal mechanisms for governments to block Russian gas from entering their countries, although no major importer has indicated an intention to exercise this right yet. Should this occur, an increase in LNG demand and prices would likely be inevitable.

"Substituting Russian LNG supplies does not appear unfeasible. In the short term, it might incur higher costs due to heightened global competition for LNG, especially with recent indications of rising gas demand, notably in Asia where LNG prices have surged," noted analysts from Commerzbank.

In the view of Shell Energy Integration & Fundamentals Vice President Jefferson Edwards, both pipeline and liquefied natural gas have significant roles to play in ensuring energy security and facilitating the energy transition on a global scale. "Global LNG demand is projected to increase by over 50% by 2040, driven by the industrial shift from coal to gas in China and South Asia, as well as the growing use of LNG in Southeast Asian nations to support their economic expansion. Moreover, liquefied natural gas remains pivotal in bolstering Europe's supply diversification," he stated.

Addressing global developments, MET Central Europe's Director of Wholesale and Portfolio Optimization Esther Sekeres highlighted the substantial influence on gas prices; approximately 20% of Europe's pipeline gas supply has been supplanted by LNG in recent years. "Despite price levels nearly returning to pre-crisis levels, volatility has not diminished," she observed.

Zoltan Rahoti, Senior Director of Structured Gas and LNG Trading at MVM CEEnergy, emphasized that a key outcome of recent developments is that the EU now possesses adequate re-gasification capacity, expanding the global framework to tackle potential supply crises, including access to the LNG market.

The conference also underscored the role of LNG in enhancing energy security, supply flexibility, and competitiveness.

"To access LNG from the US and other regions worldwide, long-term contracts offering certainty are essential," stated OMV Petrom board member Frank Neal. He highlighted Romania's achievement of becoming a net gas exporter for the first time in 2023. Regarding OMV Petrom's supply diversification and projects in the Black Sea region, F. Neal expressed optimism not only about initiatives in Romania but also about the company's ventures in Bulgaria. He identified a lack of volumes and financing as the primary challenges facing the LNG market.

Vitaly Beglyarbekov, SOCAR's Deputy Vice President, urged countries to explore new energy cooperation opportunities in Azerbaijan. "Stability in our relationships is paramount," he stressed. "Let's leverage oil and gas as a bridge in strategic relations, not as a weapon."

Gas Vertical

The Budapest conference also addressed the Vertical Gas Corridor (VGC) project, aimed at establishing bilateral natural gas transport between southern and northern Europe to enhance regional energy security. Involving stakeholders from Greece, Bulgaria, Romania, Hungary, Slovakia, Moldova, Ukraine, as well as the Gastrade consortia and the Greece-Bulgaria Inter-connector, the VGC aims to reduce Europe's reliance on Russian energy.

Ferenc I. Szabolcs, CEO of FGSZ Zrt, praised the VGC as an effective initiative fostering collaboration between gas network operators and LNG infrastructure operators. He highlighted that by making minor adjustments to the existing gas pipeline system, new gas sources and LNG options will be accessible, benefiting the Balkans, Ukraine, Central and Eastern Europe. The VGC system will organize gas supplies from Greece to Bulgaria, Romania, Moldova, Slovakia, Hungary, and Ukraine's underground storage facilities.

The project will utilize gas from Azerbaijan via the Southern Gas Corridor to Greece and global LNG deliveries to Greek LNG terminals. The LNG terminal in Alexandroupolis, Greece, along with the revamped re-gasification station on Revitousa Island and the TAP pipeline, are key components of the Vertical Gas Corridor. Modernizing existing inland gas pipeline systems across European countries, completing missing pipelines in certain areas, determining necessary pipeline capacities, and installing compressor stations at inter-connector connections are crucial for project completion.

All gas distribution system operators in the project countries have committed to conducting mandatory market verification of capacity allocation at their connection points simultaneously in July 2024. Capacity expansion projects will be initiated ahead of schedule based on market demand along the VGC route.

By the way, preliminary work has already started aimed at expanding the capacity of the Greece-Bulgaria pipeline from the current 3 to 5 billion cubic metres per year. Why is this important? Because it will make it possible to supply Azerbaijani gas and large volumes of LNG from Greek terminals to Bulgaria, Hungary, Romania, Northern Macedonia and, in the future, Austria.

If we focus on the countries taking part in the VGC project, we can observe that most of them are connected to Azerbaijan through the initiative known as the "Ring of Solidarity" (STRING). On 25 April, it will mark exactly one year since the signing of the Memorandum of Understanding for cooperation between the gas transmission system operators of Bulgaria (Bulgartransgaz), Romania (Transgaz), Hungary (FGSZ), Slovakia (Eustream), and SOCAR, aimed at implementing this very STRING initiative.

Throughout this year, various events have occurred that will ultimately enable the Ring of Solidarity to operate at full capacity. These events include agreements between Azerbaijan and Hungary regarding gas supplies, the commencement of the Bulgaria-Serbia inter-connector, and deals on Azeri gas supplies to Serbia.

Beglyarbekov mentioned that Azerbaijan aims to provide 5 billion cubic meters of gas annually to the Balkan countries through the Ring of Solidarity. He also highlighted the potential for similar volumes to be additionally supplied through the Southern Gas Corridor to Italy, Greece, and neighbouring nations.

Overall, in 2024-2025, Azerbaijan plans to boost gas exports to Europe by 17% compared to the 2023 volume, reaching 14 billion cubic meters. Furthermore, starting from 2026, Azerbaijan intends to further increase its gas exports.

The SOCAR representative emphasized that the progress of "specific projects" is reliant not on SOCAR but on European customers. He expressed a keen interest in expanding supplies while underscoring the importance of having the necessary infrastructure. Additionally, he stated that Europe will continue to be Azerbaijan's primary market for many years to come.

The Energy Ministry estimates that Europe's demand for Azerbaijani gas stands at 30 billion cubic meters annually, indicating substantial potential for both sides. It appears that the current focus is on Europe's actions in this regard.