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Thirty-five tankers are idling or sailing slowly around northwest Europe and the Iberian Peninsula, according to Felix Booth, head of LNG at energy and shipping data firm Vortexa. Six of the giant tankers are moored in Spain’s Bay of Cadiz, and there is another cluster in the English Channel.
Europe is experiencing the biggest energy shock since the 1970s after Russia cut gas supplies, blaming sanctions that Western governments enacted after Moscow’s invasion of Ukraine. Typically, Russia supplies a big chunk of the gas the continent uses to heat homes and power industries. The standoff over Ukraine has cut that flow, sending prices sharply higher, forcing some companies to cut back production and threatening rationing if supplies get dangerously low.
The waits are in large part the result of Europe having too few terminals capable of receiving the imported gas, much of which is coming in from Qatar and the U.S.
Delivery volumes have surged in recent months, according to shipowners, as European utilities stock up ahead of winter.
Compounding the congestion, much of the storage space at existing terminals is full.
Enagás SA,
which runs Spain’s gas-transmission network, this week said LNG imports would face delays at least until November because of high storage levels.
The pileup, in some ways, reflects the success Europe has had securing extra gas this winter. But it also demonstrates how the continent’s energy infrastructure hasn’t been able to cope. For now, the giant ships, each carrying enough to power and heat a million homes a month, are serving as temporary, offshore gas storage facilities.
All the extra gas is depressing gas prices, making it potentially more lucrative for sellers of the stuff to keep their gas parked out at sea and hope prices increase. Europe’s benchmark gas contract has slumped more than 40% over the past month, though is still almost nine times as high as it was two years ago.
“The market right now is really awash,” said Massimo Di Odoardo, vice president for gas at consulting firm Wood Mackenzie.
LNG is supercooled to allow it to be transported aboard ships as a liquid. But tankers need to pull into so-called re-gasification terminals that turn the fuel back into its gaseous state allowing it to be shipped onward by pipeline.
Together with Portugal, Spain boasts a third of Europe’s re-gasification capacity, spread across six harbors including Barcelona, Huelva and Gijón. Northwestern European countries are racing to position and connect floating LNG terminals to ease the constraint. Some countries including Germany and Italy are building new terminals, but those won’t be ready to receive ships soon.
The Gulf of Cadiz, in particular, is a good place for ships to wait as traders decide where and when to unload their LNG. The waters lie between northwest European and Mediterranean ports, a spot that enables ships to pivot in either direction.
A re-gasification plant at the Port of Barcelona, Spain.
Photo:
David Zorrakino/Zuma Press
The pileup comes with risks for Europe. If prices suddenly surge in Asia, traders may decide to deliver their gas there. Market prices right now don’t make that likely, said Toby Copson, global head of trading at China-based Trident LNG.
The cost of chartering vessels to transport LNG has rocketed to record highs because of Europe’s rush to stock up on gas. So the journey to Asia and back to the U.S. Gulf Coast, for instance, to pick up a new cargo comes at a huge expense for traders who didn’t lock in shipping costs months ago.
Demand in Asia also remains subdued. There is little sign that the Chinese government is likely to ease Covid-19 restrictions significantly, a move that could boost economic output and energy demand.
For now, traders in control of the ships can profit from waiting to sell their cargoes into Europe over winter. They can fetch higher prices for gas if they unload in coming months, instead of delivering in the next few weeks.
That is a market pattern called “contango.” In this case, it is largely because storage is brimming and winter demand hasn’t kicked in yet. Warm weather means residential demand for gas in Germany, France, Italy and Spain is no higher than it was in late August, Wood Mackenzie’s Mr. Di Odoardo said.
The market dynamic is so pronounced that traders can make money by waiting even as the cost of renting their ships has soared. Further out, traders are betting consumption will increase, depleting supplies and boosting prices.
Write to Joe Wallace at [email protected]
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