Ukraine attack could herald LNG silver lining for Woodside

Assuming the outbreak of war between Russia and Ukraine strangles essential energy supplies to Europe, it’s Woodside Petroleum (ASX: WPL) and to a lesser extent other exporters of liquefied natural gas (LNG) that could stand to benefit.

European gas prices were already looking toppy going into a full-on invasion by Russia, with Brent crude oil recently passing the all-important psychological $US100 a barrel price for the first time in around eight years.

What could play nicely in Woodside’s favour is Germany’s suspension manoeuvres around the new Nord Stream 2 pipeline project from Russia.

Given that Woodside has already flagged its intention to set aside around 25% of its LNG to be sold into short-term and spot markets, the company looks well positioned to benefit from any heightened shortfall in supply.

Where oil goes LNG tends to follow

What’s playing out in Eastern Europe serves to remind the market that the current pricing of Australian LNG exports is entwined with long-term contracts linked to the price of oil. 

Given the potential supply squeeze in Europe, typical time lags of three and six months in pricing – on long-term contracts held by the likes of Woodside, and others that are indexed to crude oil - clearly creates short-time supply opportunities for those with the capacity capitalise on it.

Could Russia turn the taps off?

What could make short-term supply issues even more acute, noted Rystad energy’s head of gas market research Sindre Knutsson is the prospect of Russia reducing or ceasing gas flows into Europe, which would further exacerbate the region’s price crisis.

Knutsson anticipates near-term spot prices in Europe taking on a risk premium especially given the uncertainty over sustained flows from Russia.

While halting NS2’s certification increases the likelihood that Russia could reduce or stop gas flows into Europe, Knutsson concedes that further price increases may be limited without any restrictions in supply.

“Further out in 2022 and into 2023, we see a risk that European balances could experience a deficit, leaving the region reliant on LNG, which would impact global flows,” Knutsson said.

Domino effect

To cover any gap from a shortfall in either NS2 or Ukraine transit volumes, Knutsson concludes that Europe will have little choice but to rely on imports from the LNG market.

Cleary, declining exports from Africa, and limited possibilities within Europe to lift domestic production, plays nicely in the hands of local suppliers.

What Knuttson expects to drive up prices significantly is the requirement for Europe to compete with global buyers for additional LNG cargoes.

Woodside 'come-on-down'

Admittedly, while there’s little prospect of gas being shipped from Australia to Europe - should Russia cut or reduce supply - local producers are expected to benefit from any momentum on Asian LNG spot prices.

Based on Credit Suisse analysis, Woodside has the best pole position of any companies locally when it comes to any mopping up in the wake of Europe’s gas crisis.

The broker’s numbers suggest around 2 million tonnes of LNG, up to 25% of the company’s production, could be linked to European gas or spot LNG prices.

Last week, Woodside CEO Meg O’Neill noted that while the company could not help Europe directly, it would happily capitalise on the underlying strength of the LNG market.