Why did it take so long to build a Croatian LNG terminal, and why is this such an important investment?
This investment project is one of the most important steps in the effective transformation of the region’s gas market. Its significance lies in the fact that from now on, other international actors will be able to use the terminal to sell natural gas in a region that is fundamentally dominated by Russian sources. The greater liquidity also allows the global pricing trends to slowly “trickle down” into the region, meaning we will not be as dependent on the former pricing logic.
The project itself started decades ago, though the technical content has changed continuously. The reason for the delay is rather due to the ownership structure: OMV, EON, and even the Slovenian transmission infrastructure operator had all been involved in addition to the Croatian state. It is no surprise that the different interests tended to block the project rather than pushing it towards completion. The fact that the ownership structure became simpler brought the necessary change: Croatian state actors took over 100% of the project ownership, and two years ago the Croatian government decided to carry out the investment, come what may. The decision was no doubt helped by the EU grant they received, which covers about half of the investment costs.
In practice, how is liquid natural gas, or LNG, transported?
Traditionally, natural gas is transported via pipelines, which are very expensive to construct. These investments take a very long time to provide a return, and the pipeline route also depends on geographical features, which is a factor in determining price levels. In LNG form, we transport the same gas, but its most important component, methane, becomes liquid at -162°C and shrinks to one six hundredth of its original volume: this makes it significantly easier and cheaper to transport using alternative methods, such as LNG carriers. From here on, LNG trade is similar to oil products, allowing LNG to enjoy a globally priced market.
Actors that are unable to deliver or are restricted in providing gas via pipelines for any reason, such as Qatar or the United States, can enter new markets using LNG. In these countries, natural gas is transported to liquefaction terminals, loaded onto the special carriers, and then transported to a harbor equipped with an LNG regasification terminal. This is the type of terminal that is planned to start operations in Croatia starting from the first of January 2021.
The capacity of a single LNG carrier is about 80-100 million cubic meters, which is equal to about 1.5% of Hungarian imports; the value of the transported LNG is about EUR 15-20 million. There are a lot of operation issues: if a company fails to deliver in time or to provide the contractual quality or quantity, it has to pay large fines. This type of transaction is much more complicated than if delivery were to take place via a pipeline. There are only a few dozen players on the global LNG market, and the majority are Asian. This game is played by the “big guns:” to use a poker analogy, the small blind is about EUR 50-100 million – if you don’t have the funds, don’t even sit down to the table because you’ll end up dropping out.
Is the LNG terminal important for just the Croatian market, or could it play a role in the region’s gas supply?
Croatia is currently a net importer even though it produces a significant amount of natural gas. After the terminal starts its operations, there will practically no longer be a need for Russian natural gas. So the terminal means a lot for Croatia, but some may end up in other countries in the region as well – about 1 billion cubic meters a year.
Recent years have seen news reports that LNG cannot be competitive with pipelines. Still, MET Group has booked capacities in the terminal. Why?
It is true that when the Croatian government made the final decision regarding the investment, the terminal was far from able to boast a competitive business model. Most actors thought that the decision was mainly fueled by politics (as the investment was strongly supported by American diplomacy), and they obviously didn’t want to let the EU funds go to waste, either. Even if this was the case, the situation has changed in 2020: both prices and geographical spreads have changed dramatically due to the COVID epidemic, and the math now supports the decision.
That’s when the MET Group booked capacities in the terminal and concluded contracts for the sources; it was the first to do so. There was a relatively short window of opportunity to do so: this was the first time for years (or even decades) when we were able to support our capacity booking with a business plan that is acceptable from a business aspect. It is quite likely that there will be no such opportunities in the coming years.
This capacity booking is very important for MET Group because, of the parties who made reservations, we are the only ones with a global LNG desk, a team of experts who have a thorough knowledge of the international market, which we can supplement with our knowledge of local markets. To use a practical example, although we conclude dozens of LNG deals on various continents each year, there is something romantic about shipping natural gas purchased on the other side of the globe and then delivering it to the plants of our Croatian clients the next day. When my colleagues and I started working in the industry, this is exactly the type of project we dreamed about.
Do you plan to sell the gas in Croatia?
The capacity of the Croatian terminal is 2.6 billion cubic meters of natural gas per year. Although the capacities have been booked in their entirety, there is no guarantee that this amount will be received, as the amount also has to be sold. Due to transport costs, the country to which we sell the volume is also an important factor: if we have to transport this gas out of Croatia, it might become economically unfeasible. That’s why MET Group is selling in Croatia. We plan to sell the majority of the reserved capacity in Croatia, though if we see better opportunities, then we will also sell to other markets, such as Hungary.
Who else has reserved capacities at the Croatian terminal?
To the best of our knowledge, MVM and a Qatari trading company have reserved capacities besides Croatian actors.
There were recently news reports that the gas purchased by MVM in Croatia and arriving to Hungary was never actually in Croatia, but arrives from Russia via pipelines, entering Hungary from Ukraine. What sources did MET reserve for its capacities?
MET Group purchases liquefied natural gas on the global market. We use the gas for the diversification of our regional portfolio, both for the purposes of pricing and transport, and we see this as an excellent opportunity to change this regional modus operandi.
How can regional energy projects, such as Romania’s natural gas production in the Black Sea, the LNG terminal, or the TurkStream pipeline, help Hungary’s natural gas supply?
This comparison is interesting. In the past three years, the Romanian Deep Neptun project, Turkish Stream, and the Croatian LNG terminal competed with each other for time: there is a great significance of who made it first. The Russian project walked its own path, but of the two international projects that challenge the status quo, the Romanian sources had seemed to be in the lead. Although it is still too early to call the race, it seems the Croatians managed to beat the Romanians by quite a bit. Until there is a serious political about face in Romania, the Black Sea volumes, which have several times the capacity of the Croatian terminal, probably will not be arriving in the region. Obviously all projects that increase diversification in the region support Hungary’s natural gas supply. The Turkish Stream is no exception: even if it does not provide an alternative source, it does offer an alternative pathway compared to the current solutions.
How did the coronavirus affect the industry? What changes has the second wave brought?
The first wave of the epidemic resulted in a hitherto unseen shock to demand, which obviously took the industry totally by surprise, and it was even more susceptible than usual to the downturn in sales. The best example is probably natural gas: to prepare for the Russian-Ukrainian crisis, all of Europe waited for this year with full gas storages. The Ukrainian crisis did not come, and a couple of months later sales volumes dropped to levels lower than any forecasts. There was no place to put these amounts, so we were forced to liquidate while keeping prices low. The WTI’s drop to a historical low point in April was due to similar reasons.
The second wave of the epidemic is different because the experiences of the first wave can be used by the market actors to pay closer attention to handling drops in demand. The general situation is that while the first wave did not cause mass bankruptcies, a number of companies might fall by the wayside in the second wave, which might have a very serious ripple effect.
In today’s situation, there are far-ranging changes in the strategies of energy companies. Does MET have to make any changes to its strategy? If yes, in what areas?
The essence of our strategy is to operate along the lines of an integrated energy company concept. Our three main activities are Sales, Trading, and Asset Management: the advantage of these is that we are able to operate in situations that are as difficult as what we are currently facing, and in harsh environments. Sales to our end-users felt the effects of the drop in volumes and the lower prices; however, our wholesale activities, trading, and asset management were able to counter the temporary problems.
Is MET Group thinking about any acquisitions? Has the COVID epidemic provided any possibilities for entering new markets or making purchases?
We are always studying acquisition opportunities, mainly in Western Europe. Any asset-related project in the energy sector may be of interest, though we are also thinking of buying sales portfolios; the effects of the COVID crisis may result in significant changes in the latter area. In addition, we are also progressing as planned in the field of renewables. In recent weeks, we announced our Bulgarian wind park transaction and inaugurated our solar power plant in Kaba. Together, these two projects generate almost 100 megawatts of renewable energy in the region.
Source: Portfolio.hu