LNG

Japan’s most powerful government department, the Ministry of the Economy, Trade and Industry, is considering a new liquefied natural gas stable supply framework after recent winter price spikes and demand surges for power generation led to drops in satisfactory levels of LNG available in storage.

The upward momentum of Atlantic Basin headline shipping charter rates and economics was halted in its tracks and rates dropped from mid-high $50,000 per day to the mid-high $40,000 per day in early September before recovering, according to the monthly LNG shipping review from London-based brokers Simpson Spence Young.

“AB economics went from 100 percent LNG and 50 percent-100 percent hire back to load-port to hub economics,” said the report.

With regard to cancellations, five or fewer cargoes were cancelled for November, marking the lowest number of monthly cancellations since May 2020.

This signalled further recovery of US exports into the fourth quarter.

“In the Pacific region, Japan-Korea Marker gains were supported on a mixture of production uncertainties and stronger end-user demand,” it added.

The report noted that on the demand side, the Japanese Meteorological Agency said in its winter weather report that 10 out of 12 regions in the country are expected to experience cold temperatures below the 30-year-average over December 2020-February 2021, which is the country’s peak winter heating demand season.

“Additionally, in South Korea two consecutive typhoons led to alternative fuels being sought in the prompt market. This supported spot purchasing of LNG and additional coal imports,” said the report.

“The Pacific Basin also remained long with independent and portfolio player length on offer throughout the month. There were certain loadings which were faced with fewer suitable candidates and these vessels commanded premium rates,” stated Simpson Spence Young.

“For the most part however, headline rates for Tri-Fuel, Diesel-Electrics (TFDE) vessels were largely in the mid-high $40s with BB 100 percent LNG and 50 percent-100 percent hire back to load-port,” stated the report.

“On the newbuilding front, SMART LNG a joint venture of Russian shipowner Sovcomflot and compatriot energy company Novatek announced the contract signings on orders for 10 Arc7 LNG carrier newbuilds. The ships ordered will serve the Arctic LNG 2 project,” it added.

Furthermore, three new offtake contracts were signed in September.

Shell has agreed a long-term LNG supply agreement with Hungary for 0.25 Bcm per annum of gas equivalent via the planned Croatia LNG import terminal.

Hungary’s state-owned MVM, through its trading subsidiary MFGK, booked 1 Bcm per annum of regasification capacity at the 2.6 per annum of LNG import terminal in Croatia, which is due to begin operations in January 2021.

“At the time, MFGK pledged to source its LNG imports for the facility only from western European players so as to reduce its dependence on Russian gas,” said the report.

“India’s Bharat Petroleum Corp. signed a 15-year Brent-linked LNG purchase contract from Mozambique LNG for the supply of 1 MTPA and UK natural gas company Centrica has signed a deal with China’s Shenergy for the supply of LNG,” it said. 

The Northern Sea Route (NSR) from Arctic Russia to North Asia has reopened earlier than in recent years, providing scope for LNG shipments to be re-directed from the Atlantic Basin to Pacific Basin as prices remain low, though are rising faster in Asia.

The NSR is officially defined by Russian legislation as lying east of Novaya Zemlya archipelago and specifically running along the Russian Arctic coast from the Kara Sea to the Bering Strait to enter the Northern Pacific Ocean.

The 172,600 cubic metres capacity Arctic-class LNG carrier “Christophe de Margerie” left the Yamal LNG export plant in Northern Siberia, operated by Novatek, on May 18 and is scheduled to arrive at the Chinese Tangshan import terminal on June 11 after a transit of 23 days.

The Tangshan terminal is in the northern Chinese Hebei province and is operated by PetroChina.

Shipping data shows that the “Christophe de Margerie” is accompanied by another tanker and two nuclear-powered ice-breakers, the “Yamal” and the “Vaygach”.

It is only in recent years that the NSR has started to be used earlier by LNG carriers pushing ahead to deliver cargoes to North Asia.

The 172,600 cubic metres capacity LNG carrier “Vladimir Rusanov” was the first vessel to use the NSR in 2019, having lifted a cargo at the Yamal plant in mid-June.

However, the “Vladimir Rusanov” is in Western European waters and scheduled to discharge a cargo on May 24 at the Montoir-de-Bretagne terminal in Western France.

According to analysts, the early availability of the NSR, coupled with a slowly opening Europe-Asia LNG arbitrage window - at historically low values - will result in a redirection of many Yamal cargoes away from Europe and to be pointed at North Asia.

Three other carriers are currently heading back to the Yamal plant's port at Sabetta from Europe and at least one could lift an Asia cargo.

They are the two 172,000 cubic metres capacity vessels, the “Georgiy Brusilov” and the “Vladimir Vize”, and the 172,600 cubic metres capacity carrier “Vladimir Voronin”, with arrivals scheduled before the end of May, according to shipping data.

The re-opening of the NSR comes as the Platts Japan-Korea Marker spot cargo price for North Asia cargoes for July is at $2.280 per million British thermal units and at $2.425 per MMBtu for August, higher than several weeks ago.

That’s as the European LNG price indicators, the UK National Balancing Point and the Dutch Title Transfer Facility, were lower at the equivalents on May 20 of $1.40 per MMBtu and $1.55 per MMBtu respectively.

There is currently a wider debate in Russia about accommodating much more energy shipping traffic on the NSR as usage increases.

Russian oil company Rosneft is progressing with the development of its Vostok Oil Project, a venture that is projected to deliver 25 million tons of shipments from a special seaport via the NSR by 2024.

The oil project is based on the development of several fields, including at least three in the Vankor area.

Vostok Oil will also include the development of 15 new industry towns, two airports and about 800 kilometres of new pipelines.

The traditional NSR that has been the main reference point in Russian Arctic shipping is now being debated by the government.

Growth in shipments on a wider route have been rising. Russian government data shows that in 2019, a total of 31.5 million tons of shipments were transported on the NSR, an increase of over 55 percent from 2018.

Most of the extra shipments were LNG from the Yamal plant.

Now the Russian government is referring to the Northern Sea Transport Corridor and has drawn up a report on increasing traffic volumes.

According to the Association of Sea Trade Ports, the transport corridor will be clearly referred to in the new Russian Arctic Strategy, a document that now awaits approval by the government.

The document has been written by the Russian Ministry of the Far East and Arctic and was submitted to the government on 7th of May 2020. The strategy covers the period until 2035.

Wood Mackenzie, the UK-based energy consultants, said the while the collapse of LNG prices towards US production break-evens was foreseeable, the narrative for the rest of 2020 could not be more unpredictable.

In their latest short-term natural gas and LNG outlook, the consultants weigh the risks that coronavirus, sustained low oil prices and LNG oversupply pose to the sector this year.

“An already oversupplied LNG market comes out of a mild winter with high inventories across Europe and Asia, only to face a global pandemic which has already destroyed gas demand across China and looks increasingly set to do the same across the Asia Pacific and Europe,” explained Wood Mackenzie research director Robert Sims.

“We expect global LNG demand to grow by 6 percent year-on-year to 371 million tonnes in 2020; the numbers will need constant revision as economies around the world feel the force of the growing pandemic,” said the report.

Wood Mackenzie said the impact to gas consumption in China had been severe, as robust containment measures were quickly put in place through January and February 2020.

With a resumption in economic activity, the report estimates a full-year gas demand reduction of between 6 billion cubic metres and 14 Bcm in 2020, translating to a 4 percent to 6 percent growth in gas demand this year.

“With the daily number of new cases continuing to fall in China, policy focus has turned to gearing up economic recovery,” said Wood Mackenzie.

“Daily tariff indicators suggest transport and logistic constraints are being lifted quickly,” it added.

“Also, the government is reducing gas prices to non-residential users, which provides support to coronavirus-affected businesses to resume operations,” stated the report.

However, in Wood Mackenzie’s view these measures were insufficient to stir lost-demand recovery and new coal-to-gas switching programmes.

China’s LNG demand is expected to reach 65MT this year, representing a 6.6 percent growth year-on-year.

The report noted that in Europe, low gas prices continue to support gas-fired generation, though future coronavirus containment measures and threats of an economic downturn pose a risk to market growth.

“Worst-case scenarios could see lockdowns deployed in more countries, risking severe disruptions to global supply chains by restricting movements of people and goods,” said Wood Mackenzie.

One outcome of the oil slump appears to be that sustained low prices supports coal-to-gas switching in the power sector but hurt US producers

Wood Mackenzie forecasts that should low oil prices be sustained, oil-indexed LNG contracts in Japan and South Korea will become cheaper and this could disrupt coal generation in favour of gas in both markets.

This could happen as early as August 2020 and the effects would be similar to sustained low Dutch Title Transfer Facility prices in 2019 removed coal from power grids across Northwest Europe.

The consultants expect Japan’s LNG demand to grow 5.1 percent to 81MT in 2020, compared to last year.

At the same time, the forecast South Korea’s LNG demand could rise 7.7 percent to 42MT as more LNG displaces coal in the power sector of both countries.

Singapore LNG spot cargo prices fell, led by a decline in North Asia of around 3 percent on the week and in the Middle East and India as traders looked to September and beyond for higher values.