Who is hungry for LNG?

In early 2000s, gas markets were flooded with optimism towards what was then called ‘the golden age of gas’. The rising demand in East Asian markets alongside high prices on long term contracts spurred enthusiasm amongst venture capitalists. This stopped abruptly in 2012-2013 when coal underwent an unexpected ‘renaissance’, displacing gas in power generation across a number of domestic markets. The cheap and plentiful US coal supplies took advantage of the ETS’s (EU carbon permits trading scheme) collapse, which allowed for CO2 to be emitted without being taxed. Currently gas markets are experiencing hard times with LNG (liquefied natural gas) suffering most.

LNG demand is barely staying afloat. In the past 3 years demand for LNG has been flat whilst prices have been steadily going down. For example, Japan the largest LNG importer, was paying at the beginning of 2015, the lowest price level since 2010. It is indeed a ‘golden age for gas’, but for gas consumers rather than producers. The newest exploitation projects of Exxon Mobil and Shell are meagerly holding up to the expectations of their venture capitalists. Since 2014 LNG market response was close to an anxiety attack, which lead to stalling all near future investments projects.

Looking ahead, the sector doesn’t look particularly dependable across a number of regions, as challenges abound. Political instability, the most critical of risks, is present in a number of LNG prospective regions across the globe. In these areas, political regimes are deemed unstable or the tactical political forces have the potential to derail the market. One such example comes from the US market where in 2012 governmental intervention temporarily limited LNG exports under claims that it negatively impacts domestic gas prices. Besides political challenges, logistics have been posing difficulties for LNG project developers. Industry history of construction delays and cost overruns have become the norm rather than the exception. This often happens because of insufficient tanking infrastructure and/or skill labour market tightness, which often push construction costs higher. An independent study by Ernst and Young (EY), a consultancy firm, argued that besides political and logistic challenges, LNG developments are vulnerable to legal ambiguities. Emerging markets are often confronted with immature legal and fiscal systems, which render the first years in the project development highly litigious.

Despite the general pessimism in the air, LNG is projected to see better days, even ‘golden’ ones by some forecasts. In 2014, EY published an extensive report on the future of LNG markets, advocating for the golden future of the fossil fuel. International Energy Agency (IEA) is sympathetic to this forecast, which projects that LNG demand will near 500 mtpa by 2030, almost double compared to the demand level of 2012. This begs the question, in this pessimistic energy climate who is hungry for LNG?

EY LNG forcasted demand

EY LNG forcasted demand

The projections indicate that LNG markets are to undergo a transformation rooted in market behaviors. There are two scales at which changes are to unfold. The first scale is national markets, and the second is international industry sectors.

A wind of change is blowing in international LNG trade. Countries such as Russia, which has maintained a strong position in LNG supply is planning to consolidate that even further till 2030. The 2014 Russian-Chinese deal to export 38 bcm/yr, alongside the investment-exploration project with the French firm Total, will tap closely to its goal of controlling almost a fifth of global LNG supply. The US, which until a few years back was building import capacity at the Louisisana LNG terminal, is now planning to use it for LNG exports. Projections are that operations will start in 2016, and the export capacity will near 75bcm/yr by 2018. Across the globe LNG terminals are planned ahead. The IEA projects that from the number of nations holding LNG facilities will almost double by 2020, reaching 50 from 29 in 2012. Among the latest nations added to the list are Israel, Singapore and Malaysia, but Poland, Croatia, Indonesia and Algeria are moving fast to catch up.

An indication of where the LNG demand is nested comes firstly from nations that are building LNG terminals, such as Indonesia, Singapore and China. In the case of Indonesia, currently a LNG exporter, supply is slowly decreasing at a time when the nation is struggling to keep up with the surging power demand. The government is pushing forward ambitious plans to build the necessary import infrastructure while at the same time ensuring long term supply contracts with the US and Eastern African nations.

The example of Indonesia is not singular in the region. Other nations, such as Singapore, Malaysia and China, are confronted with similar issues. The highest LNG imports in the region will continue though to be absorbed by Japan, who uses the fuel to compensate for its inactive nuclear capacity. This is projected to stay flat, as long term supply contracts are due to run till 2020.

Elsewhere in the world, appetite is building up. Europe is expected to gradually shift to LNG in case Russian gas threatens to run short. Lithuania, which is struggling to free itself from overpriced Russian pipeline gas, as bought a floating regasification terminal. With this, the nation paid itself for fruitful bargaining power, and other nations as such should follow. And other nations are following. Poland and Croatia are prospecting LNG terminals in the future which can bring a breath of fresh air for security of gas supply in the region.

The additional LNG demand is argued to serve nations chiefly for power generation, but sectorial dynamics are bubbling up. The most significant one is the shipping industry which is making efforts to green itself. Maritime transport could greatly benefit from GHG emission cuts by replacing the heavy fuel oil with cleaner LNG. A first notable attempt in this direction comes from the CLEANSHIP project, a Baltic Sea shipping group which pleads for a switch in shipping fuel.

In conclusion, future LNG demand is rooted in Asia, but Europe and African nations could account for a portion of the additional demand if the political climate alters security of supply for oil, and the infrastructure developments incur some degree of urgency. Until then, Asian nations are prone to bring about most of the additional LNG demand. It is reckoned that the fuel will be mainly used for power generation, but also the shipping industry could slowly shift gears to replace oil for LNG as fuel.

Despite all this I reckon that there are important aspects two aspects to be aware of when looking forward at LNG markets. First is that although the share of LNG in natural gas trading has increased in the past decade, the fuel is still mostly traded in long term contracts. For this commodity to start running a viable market there is an increased need for spot trading, as volume is already catching up. Second aspect relates to the over optimism of the forecasts in some markets such as Japan. It is my opinion that some shadow should be casted on the Japanese LNG demand forecasts, as the nation has recently announced that it is planning to soon restart some of its cheap nuclear capacity.

Framing the Russian Gas

EU Energy Consumption of Russian Natural Gas

EU Energy Consumption of Russian Natural Gas

The tense situation in Ukraine these days can be attributed to a series of causes as they are discussed at large on a variety of media outlets worldwide, but it is beyond the scope of this post to identify them and even further develop on them. This post aims to put into perspective what the Ukrainian crisis means for the EU from an energetic perspective, and question how the general state of the situation is going to unfold for EU-28 in the coming years.

Generally, in the context of the international resource dispute the EU-28 countries have started to change their long term energetic strategies by diversifying their energy mix and resource partners. For example, in the wake of the Fukushima nuclear disaster Germany and Sweden have started decommissioning their nuclear reactors; while Denmark is progressively pushing for an ever higher share of renewables in its energy mix.. France and UK are making a move towards gas being it conventional or unconventional. At large, European nations are moving towards less carbon intensive fuels.

The position of the EU countries in the Ukrainian crisis is delicately linked to the EU-Russian relations in a variety of aspects among which the geo-resource position of Russia as a coal, oil and gas exporter. This position is arguably of strategic importance for the EU importing countries especially in areas concerning gas. The dependence on Russian gas can be historically traced back to the end of World War II, but more recent events (the end of the Cold War) have tighten the strings and lead to bilateral cooperation. After the Cold War, European powers envisioned to unify the energy market in the same manner they’ve done with the Coal and Steel Community after the World War II, and thus further strengthen their position as a unified economic power in the international markets. By intending so, France made the first move and engaged Denmark and Germany alongside in a dialogue with Russia about building a gas pipeline extending from Russia all the way to France. This pipeline would feed-in the energetic needs of the transit countries and France, in the context of an increasing energy demand in the West European nations in late 1970s. At the time when this project was initiated it was rather ambitious and risky for Europe, which is why eventually it did not take off. In the coming years France moved on in building a nuclear fleet and Germany exploiting its coal resources, but mid 1990s brought back the need for cheap and reliable fossil resources in Europe. This reopened the EU-Russian dialogue for the Russian gas pipeline (Nord Stream) which was launched in 1997 and inaugurated in 2011. This pipeline accounts for about 20% of the European gas imports from Russia, a share which is prone to increase year by year (CIEP, 2013).

With the expansion of the Nord Stream pipeline in late 2013 the Ukraine transit gas pipeline is facing pressure. Even if absolute imports via Ukraine have changed little over the past years, the share of Russian gas imports in Europe via Ukraine has decreased (CIEP, 2013). This means that the Ukraine transit gas pipeline is feeding less gas into Europe via Romania and Bulgaria, than it used to; and this downward trend is expected to continue in the coming years mainly because of the gas hub associated with Nord Stream and the tense situation in Ukraine. A CIEP report (CIEP, 2013) on the issue argues that the Ukraine transit Russian gas pipeline renders vulnerable Eastern EU Member States such as Romania and Bulgaria which import 25% and respectively 100% of their gas needs via this route (Financial Times, 2014). These nations are faced with the challenge of ensuring gas security of supply because of their relative weak integration of transmission systems with the rest of Europe.

Crunching the numbers shows in fact how little the Russian gas incoming through Ukraine actually accounts to the overall EU-28 energy consumption. In 2013 the Russian gas imports transiting Ukraine represented about 15% of the total gas consumption of the EU-28 Member States, which in absolute terms represented about 80 Bcm/year (2013). Of the total volume of gas import incoming through Ukraine, only 53 Bcm/year are under security of supply ‘threat’, and of meager concern for EU-28. This volume represents a marginally 2.3% of the total energy consumption of the EU-28 (2013) and can be compensated for by the diversification of pipeline routes and the reliable storage levels put in place after the 2006 and 2009 shocks. At large, the Russian gas transiting Ukraine is a sensitive issue when there are no alternatives to address this supply, but alternatives could be set-up through joint efforts. Rough estimates argue that EU-28 can survive without Russian gas cca 300 days/year (2013), an estimate which has improved greatly since the first gas shock in 2006.

When factoring in the recent developments of the EU-28 energetic infrastructure one might argue that Europe is an energy shocks free region. With EU 2030 Climate and Energy Framework ambitions ahead, the European nations are making progressive steps towards achieving the 40% CO2 reductions (1990 base year). The means to achieve this is through peak shaving and switching to less carbon intensive fuels; the combination of both is LNG in NGCC. The existing 28 units (2012, incl. under construction units) are expected to be enforced by the additional 32 projected units. This impels for a Europe wide effort to unify the gas network for an increased energy security in the region.

In conclusion, the EU-28 has reasons to be concerned about the security of gas supply of its Eastern Member states in the context of the Ukrainian crisis but the bigger picture shows a unified strong European energetic market, which could easily tackle gas shortages via the storage capacities available and the diversified pipeline routes. As pointed out above, the dependence on the Russian gas transiting Ukraine, is marginal in absolute terms and the diversification of pipeline pursued in the last decade (Nord Stream, Blue Stream) softened the risk of transit related supply disruptions