Friday, 11 March 2022 08:13

Monthly Data - March 2022

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Friday, 11 March 2022 07:08

Monthly Data - March 2022

In February, our data showed global LNG trade had dropped by 5.29mmt (-15 percent) compared to January. However, the shipped amount of 29.64mmt remains broadly in line with the 29.56mmt shipped in February 2021.

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Shell has called for strategic reform against a backdrop of declining Russian gas supplies that predate the current Ukraine crisis and a general gas supply pivot towards China, our Markets Editor Alexander Wilk reports.

The ongoing tensions in eastern Ukraine, which at the time of writing had escalated into military conflict, coupled with the protracted outage of Norway’s Snøhvit LNG and a tight global LNG market, have moved Europe’s gas supply vulnerability into sharp focus.

European gas stocks are at historic lows whilst supply of Russian pipeline gas has been in strong decline since long before the most recent escalation of events in Ukraine. 

Russian gas supplies via pipeline to the European Union have been on a declining trend since the beginning of 2020, data by Gazprom show.

They comprise gas transits via Belarus and Ukraine as well as implicitly transmissions via Nord Stream.

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The same trend is corroborated by data on gas throughput via Ukraine published by the country’s pipeline transmissions operator.

Throughput peaked at roughly 4.11 billion cubic metres (bcm) per week in late 2019, the Gazprom data show, but had dwindled to just 1.35bcm by w/c 21 February.

Gazprom's website could not be reached for an update since. This represents a reduction of 67 percent and a gap of roughly 2.76bcm from the peak in 2019. In total, Gazprom’s data indicate weekly Russian pipeline gas exports to the EU were down by 90.64bcm since January 2020 when compared to their respective weekly equivalents in 2019.

Whilst it is unclear why exactly Russia’s gas supply has declined to that extent – potential reasons range from Covid-19 related impacts, ageing gas fields, political calculations or a combination of the three – Gazprom has maintained the reduction is within the bounds of its contractual terms.

Russian LNG shipments to Europe have also embarked on a declining trend, albeit it is not as steep as its pipeline counterpart, our data show.

This trend also precedes events in Ukraine as well as sanctions by the European Union and the United Kingdom, which banned UK ports from accepting Russian vessels (N.B. it is unclear to what extent these sanctions would capture Yamal LNG's foreign-registered ARC-7 fleet).

Exports from Yamal LNG – the only Russian LNG project shipping conventional LNG cargoes (i.e. not small-scale) to the EU+ (European Union + the United Kingdom) – have decreased by 6 percent in 2021 compared to 2020 and by almost 11 percent compared to 2019. In 2021, Yamal’s LNG shipments to European buyers amounted to 13.81mmt (19.04bcm) in 2021 compared to 14.71mmt (20.31bcm) in 2020 and 15.47mmt (21.33bcm) in 2019, according to our data and calculations.

Russian gas pivot to Asia

A recurring theme in global energy supply is the pivoting of suppliers towards lucrative markets in Asia, led by China.

This winter, European buyers had been seen to compete with Asian demand centres for free LNG cargoes, which pushed spot prices to historic highs. In line with this global pivot, Russian LNG shipments to the Far East grew by 1.74mmt (14 percent) to 13.98mmt (19.28bcm) in 2020.

They grew slower by 1.04mmt (7 percent) to 15.02mmt (20.71bcm) in 2021 but at 2.28mmt (3.14bcm) have kept broadly steady year-on-year in the first eight weeks of this year, our data and calculations show.

Such competition notwithstanding, even prices in oil-linked long-term contracts are bound to increase in line with the hike in Brent following recent sanctions on Russia.

At the time of writing, Brent Oil Futures stood at more than US$114/bbl, the highest mark since 2013. 

A similar development can be observed in our estimate of Russian pipeline gas exports to China.

Based on previously published Chinese customs data, Russia has been supplying gas via pipeline at a price of roughly US$0.47/m3 between December 2019 and June 2020.

This below-market-price was probably a function of the extensive investments in the Power of Siberia pipeline by Chinese institutions.

Unfortunately, it has since become Chinese government policy to no longer publish imported pipeline gas quantities categorised by exporters.

Only total monetary expenditures for a given month by exporter are provided. Based on this information, and assuming a constant price of US$0.47/m3, we have estimated that Russia’s pipeline gas supplies to China have shot up in 2021, although they remain drastically below monthly supplies to the EU+ and by far not as lucrative due to an apparent lack of a Brent link.

There is also a notable difference in the 10bcm reportedly sold by Gazprom to China in 2021 and the delivered volumes implied by China’s Customs Authority at the 2019/2020 price.

Prices in 2021 would have to have been half those of 2019/2020 for delivered volumes to approach 10bcm.

Eastern expansion

Revenue aside, our estimates point to a clear trend in Russia’s future energy supply strategy, which is corroborated by Russian President Vladimir Putin announcing a new gas supply agreement upon his meeting with President Xi Jinping in Beijing in February. The agreement encompasses an increase in gas exports to China through a new pipeline.

Gazprom, the Russian gas conglomerate that holds a monopoly on the country’s pipeline gas exports, said in a statement that it plans to increase gas exports to China to 48bcm a year, including via the newly agreed pipeline which will deliver 10bcm annually from Russia's Far East. Under previous plans, Russia aimed to supply China with 38bcm by 2025.

The announcement did not specify when it would reach the new 48bcm target.

Reuters also reported an industry source confirmed Gazprom had agreed on another 30-year contract with China's CNPC, with the first gas to flow through the new pipeline by around 2025.

Shallow decline

Concurrently, European gas production has been locked in a shallow, long-term declining trend since around 2014, with ageing offshore fields in the United Kingdom and the Netherlands particularly affected.

Notably, a general policy redirection towards renewables has led the UK regulator to deny Shell permission to develop the ‘Jackdaw’ gas find in the North Sea in October last year.

Meanwhile, Norway has continued with some relatively expensive exploration, development and production drilling in the North Sea and the Arctic but the region is ecologically sensitive and Norwegian regulators have thus often taken a conservative stance towards permitting and demanded expensive environmental safeguards.

Moreover, the protracted outage at the Snøhvit LNG development is not expected to be rectified until mid-May this year.

The plant has been shut down since scheduled maintenance in the summer of 2020 as well as technical difficulties and a fire in September that same year.

Before the plant’s shut down, Snøhvit produced flat out and shipped more than 4mtpa of LNG (roughly 5.52bcm per year) primarily to European buyers.

Low LNG stocks

Coupled with a series of relatively mild European winters (including the current one), this has led to general gas as well as LNG stocks in Europe decreasing to ever lower levels year-on-year.

LNG stock levels of 2021 have to date been the lowest since 2018, ALSI data show. Although stock levels started the current year above their 2021 counterparts, they have since reverted to levels akin to the previous year.

This signals potential trouble for Europe’s energy economy, especially if gas is to play an increasing role in a global energy transition away from dirtier fossil fuels.

News on price rises for both industrial and domestic consumers have been ubiquitous this winter. Energy analysts have cautioned that a cold snap or unscheduled maintenance to Norway’s pipeline grid could plunge Europe into a gas crisis. 

Wider pivot towards Asia

Overtures by the United States to secure European gas supplies notwithstanding, it is unlikely the world’s three largest suppliers of LNG – Qatar, Australia and the United States – would be able to plug the gap currently left by Russia’s reduction in gas exports. Australia especially has tied up its capacity to supply the leading Far Eastern economies of China, South Korea and Japan.

Production from the United States has historically favoured Pacific buyers, too, partly due to long-term tolling contracts with Asian utilities and partly because Asia's state-backed buyers have previously often been less price sensitive.

Qatar has also begun to focus its efforts on expanding its market share in Asia. A number of new long-term deals in the Far East that have come into effect since January this year highlight Qatar’s sustained push into Asia as the country is set to spend almost US$30 billion on expanding its LNG infrastructure.

According to our data, Qatar has shipped 39mmt of LNG via 396 cargoes to China since January 2018 and thus remains among China’s most important LNG suppliers, surpassed only by Australia.

“China is a key and strategic energy partner for the State of Qatar throughout the entire energy value chain.

It is also a main driver of the growth in the global LNG market as the government adopts increasingly progressive environmental policies,” Qatar Petroleum said when announcing a new long-term deal with Sinopec.

Similar agreements with Taiwan’s CPC and South Korea’s KOGAS have also either come into effect or are due to come into effect in the coming years.

Accordingly, Qatar’s Minister of Energy and President and CEO of Qatar Petroleum, Saad al-Kaabi, has rebuffed notions that Qatar could bring extensive relief to Europe’s gas shortage. 

“There is no single country that can replace that kind of volume, said Saad al-Kaabi at a recent Gas Exporting Countries Forum.

He also made clear that Qatar would have limited capacity to cover Europe’s supply shortfall. “The majority [of Qatar’s LNG capacity] is tied up in long-term contracts, the divertible volume is probably 10-15 percent”

Based on installed capacity at Ras Laffan, that means around 11.5mtpa (18bcm) would be available for diversions to Europe in the best of cases, less than 40 percent of Europe’s pipeline gas shortfall from Russia last year.

These additional volumes would also likely be coming at a premium price as European buyers would have to compete against their Asian counterparts.

Qatar’s LNG complex at Ras Laffan operated at full capacity in 2020 and 2021, our data show.

Need for reform

Against this backdrop, international energy conglomerate Shell has warned that Europe’s fuel procurement is in urgent need of strategic reform to address inherent vulnerabilities in its energy supply policy.

The company footed its warning on a prediction of a looming global shortfall of LNG in its LNG Outlook 2022.

According to the Outlook, LNG demand will almost double over the next 20 years. At the same time, European utilities are deterred from signing long-term LNG supply contracts due to uncertainty surrounding future policies and regulation on gas usage, the Times quoted Shell’s head of integrated gas and renewables, Wael Sawan.

Europe’s reliance on buying LNG cargos on spot markets, together with declining domestic production and a lack of policies to ensure that gas storage sites are replenished, made for a “combustible mix that requires urgent reform” as gas markets remained “incredibly tight”, Sawan elaborated.

Publishing its annual LNG outlook in late February, Shell highlighted that “European gas fundamentals point to continued exposure to price volatility", which showed “the need for a more strategic approach to secure reliable and flexible gas supply in future to avoid exposure to price spikes”.

Shell is trying to make the case for continued investment in gas as part of the global transition to greener energy.

Its figures show the global LNG trade had increased by 6 percent to 380mmt last year and that demand would rise to 700mmt by 2040, driven by growth in Asia. Our data show loaded cargoes amounted to 383mmt last year. 

Accordingly, LNG markets would be tight until the middle of the decade, with “a supply-demand gap that’s quite material opening up thereafter”, Steve Hill, Shell’s executive vice-president for energy marketing, said.

“The world needs new LNG projects, new LNG investments.”

In 2021 China overtook Japan to become the world’s biggest importer of LNG and accounted for about two-thirds of the long-term LNG supply contracts that were agreed last year, Shell's report further highlighted.

“While we can see China taking action to improve its security of supply going forward, we are not seeing the same action happening in Europe,” Hill said.

Demand for LNG imports to Europe is expected to grow, as domestic gas production and pipeline imports decline quicker than demand.

The open-ended suspension of certification for the Nord Stream 2 pipeline - in which Shell was an investor before Russia escalated the crisis in Ukraine - is bound to compound this development. 

Hill said that it was “quite tough for a European utility” to strike a long-term LNG supply contract because of “uncertainty over future regulation, future government policies on gas’s share in the energy mix, and the tax environment and carbon price environments around that”. 

Meanwhile, renewables constituted only 22 percent of Europe's energy mix in 2020, according to the latest set of European Commission data from October 2021.

This includes data from countries with a natural predisposition for wind and hydropower, such as Norway and Sweden. The Commission's 2021 report also highlighted that some EU member states were at risk of missing their national target for renewables. 

Concluding thoughts

Russia's pivot towards Asia, and China in particular, is a hard reality. Although being scheduled to unfold only in years to come, Russia’s persistence in unlocking Asian markets is a stark reminder European markets cannot indefinitely rely on their current lucrative status.

Available data suggest the economics of Russian gas exports to China are not as favourable as those to Europe with its established pipeline network and high prices at the moment, but the pipeline business is fundamentally a long-term business. In this context, it is also important to note that Russia’s gas fields supplying Europe are relatively old with pipeline exports having started in the 1980s.

Their counterparts in Russia’s Far East earmarked to supply China are much more recent developments of the past decade.

As such, whilst Shell’s call for reform is coloured by its business interests, it nonetheless remains valid. It certainly highlights an inherent conflict in Europe’s drive to reduce carbon emissions, gas as an important transition fuel as well as a reluctance to expand European domestic production at times of a tight global market.

Major LNG suppliers have made clear they would find it difficult to replace even the current shortfall of Russian pipeline gas.

For now, there is a silver lining to Europe’s gas shortage – winter is approaching its end – but a cold snap could intensify the continent’s current energy shortage. 

Sky-high and volatile gas prices are the result of “inadequate supply,” the International Energy Agency (IEA) says, pointing at LNG capacity outages, limited feedgas, and a small number of final investment decisions (FIDs) for new liquefaction projects. But demand dynamics changed drastically with Russia’s invasion into Ukraine. The first cargo from Venture Global’s new Calcasieu Pass LNG terminal is expected to herald a wave of new US project sanctions as Europe is seeking to reduce its dependence on Russian gas; our Markets Editor Anja Karl investigates.

Our February data show a drop in LNG flows as Qatar and the United States curtail exports alongside significantly lower Far Eastern demand, our Markets Editor Alexander Wilk reports.

Wednesday, 09 March 2022 08:21

LNGCs’ smooth sailing in warm waters

Some of the world’s biggest LNG export terminals are situated in warm waters, thus Hempel’s Hempaguard X7 fouling defence systems help LNGCs stay fouling free.  Mads Raun Bertelsen, Head of Marine Solutions, Hempel has more

In a recent DNV Maritime Impact video talk, the class society’s Business Director Gas Carriers, Martin Cartwright, outlined the opportunities and challenges faced.

Wednesday, 09 March 2022 08:07

LNG road transport development accelerates

Demand for sustainable transport will be one of the main drivers of innovation in LNG road transport this year, as the recovery from Covid accelerates plans for natural gas fuelled vehicles.  Fuelling Editor Malcolm Ramsay has more.

Wednesday, 09 March 2022 06:42

Market Tracker Supplement - 7 March 2022

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Wednesday, 09 March 2022 06:39

Market Tracker - March 7, 2022

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