Spanish PVB provides best netback in Europe

Friday, 01 November 2019
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Atlantic basin LNG producers, notably at the US Gulf Coast, can achieve a better netback value at the Spanish Virtual Balancing Point (PVB) than elsewhere in Europe. However, offtake obligations for Algerian pipeline gas will limit how much extra LNG the Iberian market can absorb in 2020.

Enagas, the Spanish system operator, has several long-term offtake gas contracts with the Algerian state-owned supplier Sonagas, based on contractual take-or-pay clauses.

These offtake obligations have already been reduced, analyst at Energy Aspects observed, as Spanish buyers provide competitively priced spot LNG cargoes. Still, “the contractual downside limit on Algerian imports will constrain the flexibility of Spanish gas buyers and limit their ability to snap up spot LNG cargoes.

In 2020, Engas expects gas demand in Spain will reach its highest since 2010, when demand collapsed when the country went into recession following a banking crisis. Looking ahead, Enagas pegs next year’s demand at 389.6 TWh, equalling 37 Bcm, in its base case and at 417.7 TWh, or 39.7 Bcm, in its high demand scenario.

Spain's GDP growth spurs gas demand

Spain’s GDP grew by 2.1% in the first half of this year, and industrial gas demand is forecast to rise to 21.3 Bcm in 2020, up from 20.6 Bcm this year. Gas-burn in the power sector, meanwhile, could retreat slightly from very high levels after there has been a lot of coal-to-gas displacement by means of power plant retrofits.

“There is some scope for further displacement of coal by gas in the power sector early in 2020 but little remaining scope later in the year,” analysts said. The planned closure of eight of Spain’s remaining 13 coal-fired plants by mid-2020 is expected to provide “only modest upside” to power sector gas demand.

Limited scope to absorb US LNG

The Iberian limit on LNG import growth puts pressure on LNG suppliers to deliver incremental LNG into other markets in Europe next summer. “We already see Europe struggling to absorb the incremental supply being brought online,” analysts said, implying US exporters might well have to cut liquefaction next summer.

The limited scope to absorb additional LNG has depressed the PVB front-summer market relative to the Dutch Title Transfer Facility (TTF), analysts noted. The PVB 2020 contract was last seen trading at a 0.54 $/MMBtu premium to the TTF. Prices for the frontmonth at PVB averaged 0.63 $/MMBtu premium to the TTF in the period from 2 January to 30 September. 

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