A Win-Win Deal: Supply Diversification and Risk Management
Statoil's recently announced sale of approximately 0.4 million tons (6-7 cargos) per year for five years (2015-2019) to Lithuanian gas supplier LITGAS makes a whole lot of sense - to both sides. Statoil secures a foothold in the Baltics, an important and growing market that is logistically and strategically compatible with Statoil's asset portfolio. And LITGAS, for the first time, diversifies its gas supply away from Russia, which has historically provided 100% of its needs, increasing both its supply security and its leverage in price negotiations with Gazprom. This has reportedly already paid off, with LITGAS securing a significant discount in its most recent pipeline gas purchases.
This deal is also a step toward diversifying LITGAS's financial risk away from the oil-indexed pricing preferred by Gazprom, toward natural gas-hub based pricing, given the Statoil deal's indexation to the UK National Balancing Point (NBP) hub. LITGAS also anticipates the opportunity to reload and reexport cargos to other destinations to the extent that arbitrage opportunities present themselves.
LNG Contract Pricing Based on NBP Indexation
Based on the publicly released information regarding the deal, it can be estimated that the contract price for this supply is at a premium of approximately $2.25/mmbtu to the NBP index. This pricing is in line, on a levelized basis, with our European LNG forward price curves for the relevant period (2015-2019). The figure below presents expected monthly pricing for this deal based on the latest NBP forward price curve:
Sources: Quandl; Capra Energy
Implications for LITGAS's LNG Trading Strategy
The estimated contract pricing presented above has a number of implications with regard to how LITGAS might make optimal use of this newly contracted supply. We list a couple of these below, both of which relate to the impact that NBP's relative seasonality might have on LITGAS's LNG supply and trading strategy:
- The extremely pronounced seasonality in the NBP curve translates into an almost $2/mmbtu contract price premium, on a forward basis, for peak winter months versus shoulder months. This seasonal price spread is likely greater than that found in LITGAS's oil-indexed supplies from Gazprom, making it likely that LITGAS will find a strong incentive, on a forward basis, to exercise downward nomination flexibility on the Statoil contract, to the extent available, and upward flexibility on its Gazprom supply agreements.
- While reload cargos from Europe once moved predominantly to East Asia, other markets, most notably Latin America, have become more popular destinations since 2013. In line with this trend, the contract pricing for the Statoil deal does not suggest open arbitrage opportunities on a forward basis against our estimated East Asian LNG forward price curve for the period, but there does appear to be more arbitrage potential against Latin American forward markets. However, Latin American long-term forward LNG pricing is more strongly tied to Henry Hub, which has a much less pronounced winter peak (see figure below) than NBP does (i.e., the Henry Hub seasonal spread is less than $0.40/mmbtu as compared to a spread of about $2/mmbtu for NBP). Therefore, the NBP/contract price seasonality may also limit the ability to lock in open arbitrage opportunities via reloads for forward winter periods on a term contract basis (things can play out very differently in the spot market when the winter months arrive however).
Sources: Quandl; Capra Energy