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György Vargha: LNG trading has its pitfalls

György Vargha: LNG trading has its pitfalls

March 18, 2023
Just a few weeks ago, fears about a gas shortage in Europe were large in some circles. The danger has been averted for this spring. Even with a view to the coming winter, there are increasingly signs of easing. On the other hand, industry insiders are still warning of potential bottlenecks.

Original article: Finanz und Wirtschaft, 18 March 2023

One of them is György Vargha, who heads gas trading at the Zug-based MET Group. He has recently been absorbed in expanding the Liquified Natural Gas (LNG) business. In 2022, MET traded 3 billion cubic metres of LNG. He gives an insight into the booming business in an interview with FuW.

With gas sales totalling around 50 billion cubic metres, MET is one of the biggest European gas traders. In this country the company tends to go a bit under the radar. It first came to Switzerland from Hungary in 2012 and does not have a licence to supply local energy suppliers.

Mr. Vargha, you have an overview of the European gas trade. The danger of a supply gap has been averted for this spring. Some experts are also giving the all-clear for the coming winter. UBS, for example, recently published a study which showed a baseline scenario where European gas storage facilities could even be up to 50% full in March 2024. According to this everything is fine. What is your prediction for next winter?

We need to define what ‘fine’ means. European factories are shutting because they are unable to pay their energy costs. And jobs are being lost. Another example: over the last three months we haven’t been heating our house fully at night, in line with the recommendations. I have two children – three and six years old. Both have now been ill for three months.

In Zug? Really?

Yes, really. If that means everything is fine, then I would say yes, no problem.

But it plays into the hands of companies like MET, if the goods you sell are seen as scarce.

If you are asking if we will run out of gas by the end of this winter, then definitely not. Because when we approach this point more industries will close and rely more on LNG and MET has secured a lot of regasification capacities in many countries in Europe. But we also have to buy the LNG ourselves. It won’t be until 2026/2027, when there is a large expansion in Qatar and the US, that additional gas production goes into operation that is not significant. Until then Europe has to outbid other LNG buyers.

Last year European purchasers ousted Asian purchasers. Aren’t LNG suppliers bound to the original contracts?

There are two types of contract. For example, you can buy the gas directly from the liquefaction plant in the US. Here we talk of FOB contracts (FOB stands for Free on Board). There is a growing number of these types of contract. Japanese, Korean, Chinese and also many European companies buy LNG from liquefaction and can then decide where it’s going. However, if you buy the LNG at your location, you need to agree with your suppliers to divert the LNG to Europe, which, as a rule, is more complicated. But if you want to divert vessels that you control, it’s no problem.

What are the typical terms of this type of purchase agreement?

There are three different time scales: short-term, until the end of the year. Then there are medium term contracts which run from the next year for three to five years. And then there are long-term contracts which run for a maximum of ten, 20, 25 years.

That’s a long time!

At the moment we don’t have any contracts that long. But we are considering it. You have to take it one step at a time to avoid the pitfalls of LNG trading. And they definitely exist. If the energy comes from the US, for example, American liquefaction companies turn the gas into LNG. If there are problems with the liquefaction capacity, that is force majeure, and suddenly you have nothing. Or there is bad weather when the LNG is supposed to be loaded onto a vessel, and the next thing the carrier has gone because it needs to be somewhere else 15 days later. If all went well with the loading, the vessel travels the whole way to the terminal. But here too, bad weather can get in the way. A lot of things can go wrong before the LNG is fed in to the system.

That sounds like new business for the insurance sector.

Insurance companies don’t insure for all the associated risks.

When you talk about contracts with such long durations, it goes contrary to the climate targets which aim to totally eliminate greenhouse gases in the coming decades.

As a company we believe in gas as a transitional solution. We do not partake in business activities which are more climate damaging with even more emissions, i.e. we do not trade in coal or oil. Humanity is probably already a bit too late in the fight against climate change. But we also need to be pragmatic.

Major price fluctuations on the electricity market forced traders to deposit significantly higher collateral in the form of cash, which took some suppliers to the brink of insolvency. We heard less about gas trading in this regard.

The admission ticket for LNG trading is more expensive than for electricity trading. Small companies do not engage in LNG trading. Last year a cargo was worth EUR 100 or 200mn. One cargo. Even in the good old days before the energy crisis, the entry-level price was EUR 20 to 30mn. What many companies therefore did was to turn to banks or countries to receive financial help. MET managed the situation without state aid.