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In the pipeline: Qatar’s Japan LNG deal to boost UK gas prices
Qatar's weekend LNG deal with Japan to cut UK supplies; UK gas prices likely to rise on lower LNG imports; Gains likely to be limited by coal, European gas demand
April 18, 2011 1:35 by Reuters
UK gas ceiling
The new trains, each able to produce 7.8 million tonnes a year of LNG were ordered before the unconventional gas production boom priced most LNG out of the U.S. market, should ensure Europe remains well supplied.
“Qatar could have offered almost any amount, given the amount it now has available. It was more a question of what the Japanese needed,” independent consultant Andrew Flower said.
Flower expected Japan to need around 6 million tonnes a year more LNG as a result of the loss of its nuclear power capacity but believed it would source some from other suppliers.
“They (Qatar) will probably still send more to Europe compared to what they sent in 2010, because they have more to send. But it will be less than it would have been without the Japanese crisis.”
Any UK gas price rises that may come in response to lower-than-expected LNG supply are also likely to hit a ceiling of oil-indexed European gas supply contracts prices.
Unlike Britain, where wholesale gas prices are largely dictated by supply and demand, most European gas is delivered under long-term contracts linked to the price of oil.
Surging oil prices over the last year have made those supplies, mainly from Russia, much more expensive, prompting European buyers to import record amounts of gas from Britain through a pipeline link with Belgium.
If the gap between British and oil-indexed gas prices closes, traders will likely switch to selling gas to the UK, keeping a cap on prices, Campbell said.
Moreover, coal may recover some of its advantage against gas in the winter. At current market prices, coal is likely to be the power generation fuel of choice next winter, as it was the usual case until U.K. winter gas prices were lower than usual due to heavy LNG imports.
If coal remains a more attractive fuel for UK power generators next winter, when gas prices are usually stronger because of high heating demand, UK gas demand could be limited. (By Daniel Fineren and Regan Doherty, Editing by Robert Campbell and Mike Nesbit)
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