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Why U.K. Is Getting Natural Gas From the Amazon: QuickTake Q&A

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The U.K. received its first natural gas from a new supplier across the Atlantic: Peru. The Gallina liquefied natural gas tanker docked at the Isle of Grain terminal east of London on Saturday after taking advantage of an expansion of the Panama Canal that shaved almost 4,000 miles off its journey from South America. Its long trip is a reflection of shifting world demand for heating and power-plant fuel.

1. Where does Britain normally get its gas from?

The U.K., the biggest gas consumer in Europe after Germany, relies on imports for about two-thirds of what it needs. Norwegian pipeline gas dominates Britain’s gas imports, followed by liquefied natural gas. More than 90 percent of the LNG comes from Qatar, the biggest of the world’s 19 exporters of the fuel, with the rest from nations including Norway, Algeria and Trinidad & Tobago. Imports may become even more important for the U.K., since domestic production in the North Sea is on the decline.

2. Where does Peru normally send its gas to?

The most convenient destination for Peruvian LNG is nearby Latin America. The biggest market has been Mexico, receiving 34 of the 71 tankers Peru loaded in 2016. European recipients of Peru’s supply have typically been Spain and, to a lesser extent, France.

3. So why the new relationship?

The expansion of the Panama Canal allowing it to be used by standard LNG tankers since June means Peru’s shipping distance to Britain is now comparable to Qatar’s. Also, Peru LNG stopped shipments to Mexico in October. Its main offtaker, Royal Dutch Shell Plc, may be trying to get higher prices elsewhere, according to Claudio Steuer, director of SyEnergy, a Poole, U.K.-based consultant focused on LNG and gas-to-power projects. Shell declined to comment on specific commercial arrangements.

4. So the U.K. is a more lucrative market for Peru?

It looks that way. Gas for next-month delivery rallied to the highest level in more than two years on Feb. 3 on the U.K.’s National Balancing Point, one of the world’s biggest traded markets. That was three days before the Peruvian cargo was loaded. That price -- about $7.30 per million British thermal units -- was competitive with the $7.50 in northeast Asia at the time, according to broker data on Bloomberg and spot LNG prices from World Gas Intelligence. Peru probably determined it couldn’t place this LNG “in an Asian, South American, or possibly even Middle East, market at a premium to European hub prices,” Howard Rogers, senior research fellow at the Oxford Institute for Energy Studies, said by email.

5. What’s ahead for LNG imports into Europe?

The Gallina’s is one of three cargoes the U.K. is set to receive in a three-day period, more than the nation in the whole of February. Starting from the second quarter, LNG imports into Europe are slated to increase about 60 percent from the previous year as new facilities globally start producing the fuel, according to Energy Aspects Ltd. LNG imports into the U.K. slumped 21 percent last year because higher prices in Asia diverted gas from the European market in the latter part of 2016, government data show. As Asian demand falls from highs during the winter, tankers are starting to head to Europe.

6. What about U.K. production?

The U.K. is looking to avoid increasing its reliance on foreign supplies by expanding onshore shale gas production, starting with the scheduled hydraulic fracturing of five wells this year. The results will be used to determine if further exploration is warranted. Protests have delayed the use of new technological developments in so-called fracking that can boost production.

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