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SEM Chart of the Week

2020

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Rock the boat: Exploring the commercial merits of Shannon LNG

Joe Camish
Joe Camish

Back in April we delved into Ireland’s growing import dependency amid a backdrop of record gas imports into the SEM. Four months on and the trend has persisted, with figures out to the end of July showing imports at a two year high, 29% higher than last year at 2.6bcm.

April’s SEM Chart of the Week ended looking at the findings of GNI’s Long Term Resilience Study, which saw suggested construction of a floating LNG terminal as a cost-effective option to secure supplies in the `future.

This week’s SEM Chart of the Week seeks to interrogate Ireland’s LNG future, focusing on the proposed Shannon LNG project.

The proposed plant, which would be built at Tarbert in Co Kerry, was acquired early this year by American owned New Energy Fortress and has since been embroiled in a legal dispute with Friends of the Irish Environment. This has seen a judicial review of the planned terminal referred to the European Court of Justice.

Rock the boat

The original plans saw an LNG terminal consisting of four storage tanks with a capacity of 200,000m³ each, along with jetties for ships ranging in volume between 70,000-265,000m³. This would mean the proposed terminal would be able to harbour the world’s largest LNG tanker class, the Q-Max.

The arrival of a Q Max tanker, with a capacity of 265,000m³, would represent a gasified capacity of 159.0mcm. Observing this against the annual gas demand for the SEM, one single tanker would represent 2.4% of annual demand alone.

As Figure 1 highlights the development could be a significant introduction into the SEM, with the facility able to process 4.1bcm of gas annually. Hypothetically speaking, if the terminal was working at maximum capacity throughout the entire year it would be able to supply the SEM with 61% of its gas demand. This would mean Ireland would be able turn-down imports from the UK via Moffat, and ultimately diversify its gas supplies.

Don’t tip the boat over  

Would the SEM even be able to attract cargoes to the terminal?

Observing the price differential between month-ahead gas contracts on the NBP and American Henry Hub shows that shipments to Ireland from the US would be economically attractive, with the NBP a premium market for shipments with the current market differential averaging 14.9p/th as Figure 2 highlights. The NBP is used as a proxy due to the fact that most of Ireland’s gas is sourced here.

We’ve been sailing with a cargo (full of love and devotion)

One factor that can fundamentally change supply patterns are shipping economics, this is why Europe saw an influx of LNG cargoes in the first half of the year.

In 2018, the cost of chartering an LNG tanker averaged $88,692 per day. Working on the assumption that a shipment to Shannon from a US gulf coast LNG terminal would roughly take 15 days, the costs incurred on a round trip using last years’ average charter rate would come to 5.7p/th ($0.7MMBtu). With these applied the differential is reduced but the NBP market would remain a profitable destination

Voyage costs can fluctuate and shift, if these costs become too high shipments will look to travel shorter distances. In this instance US cargoes could look to travel to South American markets. Demand patterns can also suddenly change, if demand for gas increase in another market increasing their gas prices, other markets can become more economically attractive, resulting in instances of shipments changing course to where is most economically beneficial – dependent upon its contractual situation.

Such developments can cause volatility for gas and power prices, an influx of LNG can depress wholesale prices one moment, while a scarcity of supply can cause prices to rise in response.

A similar sentiment was aired by GNI in their Long Term Resilience Study. If the terminal was to be built and become operational it would provide the gas network with a direct connection to the global gas market, easing its dependence upon UK pipeline imports. However, as GNI note in their report, “greater exposure to the LNG market comes with price risk”, which can make supplies uncertain.

A quiet place to harbour

Focusing on the Shannon LNG project from a purely import dependency perspective, there are merits to opening Ireland up to global LNG market as such a move would likely ease Ireland’s precarious dependency on imports via the UK. Especially as you factor in the long-term declining production forecast in the North Sea. However the potential risks concerning price volatility should be taken in consideration.

Cornwall Insight hosted a webinar on the 11 June in which we provided our insights on the state of the international Liquified Natural Gas (LNG) market and the impacts this has on GB wholesale gas and electricity prices. Follow the link here to purchase the recording.

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