Market questions new Spanish LNG regime

Market participants are questioning the flexibility of the recently introduced allocation system for LNG unloading and regasification capacity, which may be preventing terminals from achieving higher utilisation rates and from the Spanish market becoming a European LNG gateway.

The system prevents access to unloading capacity on a prompt basis, even if terminals have capacity available, leaving firms with the only option to seek unloading slots on the secondary market once the last auction for month-ahead capacity is completed, market participants said. Aggregate LNG inventories at Spanish terminals are 1.68mn m³ at present, equivalent to 51pc of capacity, but firms have no direct access to that capacity as the last auction for October slots closed on 11 September.

"Everybody is shocked about how few slots Enagas is offering", one trader said. "This has created an inflation of prices at auctions, and on the secondary market too," he said, adding that the secondary market for unloading slots has become "quite active".

Before the new regulation was introduced, market participants could negotiate bilaterally with Enagas for access to unloading slots on a prompt basis. Under the new system firms also have reduced flexibility to adjust delivery windows of previously scheduled slots, some added.

The amount of unloading capacity offered is also determined by system operator Enagas, which only takes into account expected demand in the Spanish market, having already considered what portion of that demand is scheduled to be met by pipeline imports. This effectively establishes a merit order between pipeline and LNG, which prevents Spain from reversing flows at the French-Spanish border and exporting regasified LNG to other European markets, some said.

Disconnecting access to LNG import capacity from a demand estimate based entirely on the Spanish market could weigh on the differential between PVB prices and other European hubs, and provide scope for some volumes to be re-exported towards France and the rest of Europe, particularly as LNG supply availability in the Atlantic basin is set to remain ample in the coming years.

Spain's export capacity towards France remains limited, with only one of the two pipelines able to reverse flows up to 225GWh/d. But Spain may have scope to reduce imports from France. Spanish pipeline imports from France averaged 86GWh/d in January-August, down from 133GWh/d a year earlier. Flows at the French-Spanish border had briefly reversed in late 2019 for the first time since at least 2012, with Spain exporting 65GWh/d to France in December, after front-month prices at Spain's PVB gas hub fell below corresponding contracts at France's Peg in late October, for the first time since at least 2015, and remained largely at a discount until early 2020.

Enagas "strictly follows the regulation set by CNMC in its circular 8/2019 and its resolution of 3 April 2020", a spokesperson for the firm told Argus, but declined to comment on whether further adjustments to the regulation may be needed. Market participants did not find evidence of Enagas not complying with the existing regulation while setting the LNG capacity offer.

New rules were designed to avoid congestion at Spanish terminals. Ample LNG supply availability in the Atlantic basin, coupled with a steep contango in delivered prices, had pushed many firms to seek access to Spain's ample LNG storage capacity in the 2019 summer, when Enagas was heard to have denied access to the terminals to several cargoes as Spanish demand was deemed insufficient to absorb further deliveries.

Average LNG stocks at Spanish terminals have been lower than a year earlier so far in 2020, despite a sharp increase in deliveries. LNG storage capacity utilisation averaged 45.7pc in January-August, down from 51.8pc a year earlier, as aggregate deliveries rose to 170TWh from 159TWh. The recent introduction of a virtual LNG hub — the Tanque Virtual de Balance (TVB) — may also be facilitating balancing actions between different terminals, although only minimal volumes have so far been traded at the TVB. Aggregate TVB volumes — comprising within-day and day-ahead trade — totalled 18.1GWh in August, down from 20.4GWh in July.

By Antonio Peciccia