Europe benchmark gas soars amidst Australian LNG strike threats. Here’s why

Australian LNG strike looms

Europe's benchmark gas prices have surged by as much as 18 percent due to escalating fears of potential LNG strikes in Australia, according to a report by Bloomberg. The concerns are centred on the potential disruption to liquefied natural gas (LNG) supply from Australia, a major global exporter.

Over the last week, European natural gas futures have spiked 40 percent in reaction to the threat, German broadcaster DW reported. At one stage prices reached €43 ($46.75) per megawatt-hour (MWh) and remained elevated at €36.90 till August 18, DW added.

Australia is the second largest LNG exporter worldwide. The three LNG plants in question, located in Western Australia produce 10 percent of the world’s LNG supplies used primarily for electricity generation in Asia and Europe and for industrial purposes, Reuters reported.

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Citigroup has warned that if the Australian strikes proceed and continue, Europe could see gas prices double by January 2024, to around €62 per MWh, the DW report added. A similar strike by staff on the Prelude gas ship in Australia last year lasted 76 days, until Shell reached a pay agreement with the Australian Workers’ Union and Electrical Trades Union.

The facilities

Located on Barrow Island, the Gorgon Facility comprises a three-train, 15.6 million tonnes per annum (mtpa) LNG facility and a domestic gas plant with the capacity to supply 300 terajoules of gas per day to Western Australia, according to Offshore Energy.

Meanwhile, the Chevron Wheatstone project is one of Australia’s largest resource developments and its first LNG hub. The project consists of two LNG trains with a combined capacity of 8.9 mtpa, and a domestic gas plant. Its first shipment of LNG took place in October 2017.

Further, the Woodside Energy Group operates Australia’s biggest LNG plant at North West Shelf.

The issue

Unions representing workers at Woodside Energy Group's North West Shelf offshore gas platforms have announced plans for strike action as early as September 2, Reuters reported. This announcement marks the latest escalation in a long-standing dispute over pay and conditions. The dispute over pay and conditions has led to growing tensions, raising questions about the potential impact on LNG supply to Asia and Europe, where the super-chilled fuel is used for electricity generation and industrial purposes.

The possibility of industrial action has also extended to Chevron-operated Wheatstone and Gorgon LNG ventures. The Offshore Alliance, a union coalition of the Maritime Union of Australia and Australian Workers’ Union, is finalising a strike vote for these facilities by August 24. It is seeking to apply pressure on companies while avoiding prolonged disruptions, Reuters reported.

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The Offshore Alliance's strategy involves applying enough pressure on companies to meet their demands without causing significant financial losses or disrupting shipments and while avoiding prolonged disruptions. Reuters reported that sources within the LNG companies suggest that some form of industrial action is likely in the coming weeks, as similar disputes have historically played out in this manner. The companies, on the other hand, want to uphold their positions without resorting to declaring force majeure on LNG shipments, columnist Clyde Russel told Reuters quoting sources.

Unions in Australia are required by law to give companies seven working days' notice before any industrial action but can elect to call off any action before then, Reuters added.

Ana Maria Jaller-Makarewicz, Europe energy analyst at the Institute for Energy Economics and Financial Analysis (IEEFA) told DW that until the disputes are resolved, European gas prices could remain volatile.

Factors contributing to price hike

The potential for limited industrial action and ongoing negotiations has led to increased volatility in spot LNG prices. Cargoes designated for delivery to North Asia have experienced a notable rise in price. The spot price reached $14.00 per million British thermal units (mmBtu), up from $9 in June, and the highest level in five months, marking a 55.5 percent increase from the earlier low, Reuters reported.

Additionally, fundamental support for LNG prices is evident as demand in Asia, particularly from Japan and South Korea, accelerates ahead of the winter season. Asia's imports for August are expected to lift to 22.86 million metric tons, up from 21.61 million metric tons in July; and the strongest since January's 23.37 million, data from Kpler shows. For Japan, it is on track to import 5.56 million metric tons of LNG in August, up from 5.09 million in July and the most since February; while South Korea's imports are expected to be 3.64 million in August, the highest since March, Kpler data showed.

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However, a contrasting trend is observed in Europe. The continent's LNG demand continues to decline, with August imports estimated to be at their weakest level since November 2021. August imports in Europe were pegged at 8.20 million metric tons; while July’s numbers were 8.78 million metric tonnes, as per Kpler. This is the weakest imports since November 2021, as per Reuters. The decline is attributed to high natural gas storages and structural changes in gas demand following reduced pipeline supplies from Russia.

Potential impact

European natural gas futures experienced a 40 percent spike in reaction to the threatened Australian LNG strike. Last summer price of gas futures touched record highs of €340 per MWh and are could reach €50 by winter, spiking energy bills, DW noted.

The surge in European gas prices comes at a critical time for the continent's economies, which are still recovering from last year's energy crisis triggered by Russia's actions in Ukraine. While European gas prices remain lower than the previous summer's record highs, they are significantly higher than in previous years. Concerns about a freezing winter, combined with the potential LNG disruption, have spurred increased price volatility.

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Europe's reliance on Russia for a portion of its gas needs adds to the complexity of the situation. The Kremlin's ability to wield energy as a weapon could further restrict gas supplies to Europe, compounding the impact of the Australian LNG strikes. Citigroup's warning that European gas prices could double by January if the strikes are prolonged underscores the potential for significant economic repercussions.

Notably, while Europe's switch to renewable energy could help mitigate the impact, the continent remains reliant on gas imports, which may lead to competition for alternative sources and potentially higher prices. Jaller-Makarewicz also told DW that the EU's gas consumption declined 12 percent year-on-year (YoY) in July, and “if this trend continues, the impact of any strikes could be much lower.”

Future outlook

The future trajectory of this situation hinges on the resolution of the disputes between unions and LNG companies. While concerns about LNG supply disruptions persist, the most likely outcome, for now, remains limited industrial action and ongoing negotiations. The timeline for these developments will depend on the maturity of the negotiations and the willingness of all parties to reach a compromise.

Europe's gas market, in the midst of significant shifts in demand and supply dynamics, will continue to closely monitor these developments for potential broader implications on energy prices and economic stability.