The Croatian LNG terminal will have a positive impact on the regional gas market in terms of security of supply and diversification. Mario Matkovic, Chief Executive Officer of MET Croatia explains why this was the right moment to book capacities.
“With the construction of the new LNG terminal on the Krk island, the competitiveness of natural gas supply market in the CEE region will hopefully increase, due to the availability of an alternative gas supply route,” says Mario Matkovic. The total capacity of the LNG terminal will be 2.6 billion cubic meters (bcm) per year, and with domestic production included, the total available quantities will exceed the needs of the Croatian market. This is good for the security of domestic gas supply which is one of the main goals of the Croatian government.
The LNG Croatia ship of state-owned company LNG Croatia, which is developing the terminal on the Krk island, recently reached the port of Rijeka after departing from China in September. The ship is one of the main elements of the LNG terminal – as the terminal’s floating storage and regasification unit (FSRU). The commissioning activities at the terminal are expected to start in December, with the aim of launching commercial operations on 1 January 2021.
“We are proud to be among the first users of the terminal. I think that this is a strategically important investment for Croatia. Our decision to book capacities was made solely for commercial reasons,” says the Chief Executive Officer of MET Croatia, a subsidiary of Switzerland-based European energy company MET Group. The company monitored the market and waited for the favourable moment. It was a short time window: one year ago, booking capacities at the terminal was commercially unfeasible and it could become so again for any additional bookings, as the world gets back to a ‘normal mode’.
The LNG project fits naturally into MET Group’s business model. MET has been successfully operating its LNG desk since 2016, delivering LNG cargos primarily into its natural gas supply markets in Spain and Italy. The LNG terminal in Krk represents a new supply point for the CEE region, bringing with it greater opportunities for source diversification and therefore a greater security of supply.
To succeed on the LNG market, apart from the knowledge of a global LNG desk, it is also necessary to have a presence in the country of the terminal itself, i.e. the market in which the gas will be placed. As Mario Matkovic says, “MET Group is the only player in the region that has both.” MET submitted a binding offer to LNG Croatia to book capacities in the Krk terminal for a three-year period, amounting to 1.3 bcm overall.
The potential markets for LNG placement – apart from Croatia – are neighbouring countries with existing or planned interconnections to Croatia and a high gas import dependence. Natural gas demand in this region is around 15 bcm per year. However, price competitiveness should also be monitored due to the high cost of transport capacity, and each market must assess the profitability of alternative supply routes. It is expected that part of the gas arriving at the Krk terminal will be transferred to the Hungarian market, one that is dependent on imported gas.
MET Croatia’s Chief Executive Officer sees LNG as a tool to enable global price convergence between source basins and destination regions. Depending on the global supply-demand balance of LNG, it could serve as a price ceiling when LNG is the marginal supply, i.e. the second-best option after natural gas. However, after Fukushima for example, US gas prices were about €10/MWh, Europe was around €24/MWh and Japan between €36 - 44/MWh, but US liquefaction capacities were not available yet. Since the liquefaction capacity in the US has been increasing, during times when LNG supply is abundant, we are seeing prices among continents converging and correlating. But this is only possible if infrastructure is also available, further emphasising the importance of the Croatian terminal for the region.
On the other hand, the cancellation of US cargoes during the summer of 2020, due to very low absolute price levels in Europe, has seriously impacted the European market and lead to a significant rebalancing of quantities. This has meant more price volatility driven by the great flexibility of LNG supplies versus pipeline supply.
Obviously, the COVID-19 crisis has brought uncertainty into the gas industry’s future. “Just think about the COVID-19 outbreak in China when even LNG terminals were shut down and full vessels drifted around trying to find unloading spots. This resulted in a massive price drop which spread globally as demand plummeted,” recalls Mario Matkovic. As it is rather challenging to plan production and sales in times of uncertain consumption levels, the market should be closely monitored, with the needs of customers and stakeholders listened to and decisions adjusted accordingly.