China Pushes LNG Imports to the Limit
China is importing record volumes of liquefied natural gas (LNG) to meet its air quality targets and may have no alternative for the next several years, experts say. In November, China’s LNG imports soared 48.5 percent from a year earlier to 5.99 million metric tons, according to customs figures. In the 11-month period, imports of 47.52 million tons climbed 43.6 percent from a year before, the official Xinhua news agency said. Total natural gas imports, including both pipeline gas and LNG, rose 31.9 percent to a record of 90.39 million tons last year, the General Administration of Customs said Monday. Last year marked the second in a row of LNG growth rates of over 40 percent as the government presses ahead with its wintertime fuel-switching policy to reduce heating with high- polluting coal. Despite higher costs and infrastructure problems, the government has shown determination to pursue the gas policy as the gap between domestic production and consumption grows. In November, China’s gas output jumped 10.1 percent from a year earlier, but the daily consumption rate also rose to a new record on Nov. 21, Reuters reported, citing the National Development and Reform Commission (NDRC). A detailed study released last month by the Oxford Institute for Energy Studies suggests that China faces a critical period between now and 2020 with implications for the international LNG market, depending on how far the government pushes its fuel-switching campaign. Total natural gas consumption in 2020 will range between 300 billion and 400 billion cubic meters (10.6 trillion and 14.1 trillion cubic feet), based on minimum and maximum estimates of coal-to-gas switching, said the study by senior researchers and analysts at Osaka Gas Co., Ltd. of Japan. Central Asian pipeline network Domestic gas production is likely to contribute 180 billion to 200 billion cubic meters (bcm), or anywhere from 45 to 67 percent of consumption. In the first 11 months of 2018, China’s gas output inched up 6.6 percent from a year earlier to 143.8 bcm, Reuters said, citing National Bureau of Statistics (NBS) data. China can fill some of the gap with imports of pipeline gas, but capacity and supplies will be limited, the study said. The country’s major Central Asian pipeline network from Turkmenistan through Uzbekistan and Kazakhstan is nearing its rated capacity of 55 bcm per year. Efforts are planned to boost the volume to 65 bcm with new compressor stations, but progress on building a fourth strand of the system through Tajikistan appears stalled. Last year, the Central Asian system increased supplies by 21 percent to 46.9 bcm, according to state-owned Turkmengaz, as reported by Azerbaijan’s Trend News Agency. Another import pipeline through Myanmar is expected to deliver only modest volumes to China in 2020, estimated at 4 bcm, despite its 10-bcm capacity. And Russia’s mammoth Power of Siberia gas pipeline project, scheduled to open next December, will supply China with only 6 bcm in 2020, the analysts said. By then, the total of pipeline gas available to China will reach only 55- 65 bcm, they said. The rest of China’s demand will have to be filled by LNG imports, although the conclusions are subject to a host of variables. Last year, China overtook South Korea to become the world’s second-largest LNG importer, surpassed only by Japan. According to the study, China had 19 receiving terminals for the tanker-borne fuel with an annual capacity of about 59.6 million tons as of last August. The volume is the equivalent of about 81 bcm. By 2020, new terminals and other infrastructure could raise LNG import capacity to as much as 70 million tons, or about 95 bcm. ‘Virtually impossible to meet projected demand’ Although some of China’s terminals have already operated at more than 100 percent of their rated capacity, the study concludes that “it will be virtually impossible to meet projected demand” if China sticks to its maximum target for switching from coal to gas. Capacity constraints will also keep China from meeting its 2020 target for raising the natural gas share of its primary energy supply to 10 percent, the study said. Gas is believed to account for about 6 percent of the country’s energy mix now. The authors also see implications for LNG demand beyond 2020 if Russia’s plans for larger volumes of pipeline gas are delayed. The study said that “LNG demand will depend above all on steady growth in natural gas imports from Russia from 2020 onward. If imports from Russia grow steadily, this makes it more likely that LNG imports will slow from 2020. Conversely, if natural gas imports from Russia do not, for some reason, grow as planned, dependence on LNG will increase further.” The conclusions suggest that China may have to pursue more moderate targets or build even more LNG infrastructure to avoid excessive reliance on Russian supplies. Mikkal Herberg, energy security research director for the Seattle-based National Bureau of Asian Research, said the report highlights both pluses and minuses for China as gas demand rises at astronomical rates. On the plus side, the finding that eastern LNG import terminals were able to operate at over 100 percent of rated capacity suggests there may be elasticity in the system, said Herberg. On the downside, the average 82-percent utilization rate of all terminals as of mid 2018 is a sign that the system will be running “pretty close to flat out” with the larger volumes expected in 2020, he said. Although the international LNG market is expected to be well supplied over the next two years, any glitch in China’s system could lead to sudden shortages. “It’s still a pretty rickety LNG and gas supply logistics system bumping up against stunning increases in LNG use,” Herberg said by email. “Lots can go wrong, especially if there’s a very cold winter in 2019 or 2020,” he said. “The system will be running so tight that things will get very difficult, and serious regional supply shortages would inevitably occur.” ‘Industry and market indigestion’ Vessel traffic at China’s
Bad bets on oil, gas spark wave of energy-fund closures
Energy fund managers took heavy losses last year with wrong-way bets on the prices of oil and natural gas, leading to a wave of closures in the volatile fund sector. The number of active energy-focused funds fell to just 738 in 2018 through September from about 836 in 2016, according to the latest available data from hedge funds industry tracker Eurekahedge. That’s the lowest number of active funds since 2010. The number of funds solely focused on oil or gas has tumbled to 179 in 2018 from 194 in 2016. Funds that have suspended operations included high-profile names such as Jamison Capital’s macro fund, T. Boone Pickens’ BP Capital and Andy Hall’s main hedge fund at Astenbeck Capital Management, along with smaller niche funds such as Casement Capital. “There is a massive decline in the number of funds, and no replacements,” said David Mooney, founder of Casement Capital. “There has been a near ‘extinction event’ in commodities hedge funds.” “We had about 16 large hedge funds trading natural gas in Houston a few years ago,” he said. “That number is now reduced to a small number of managers.” Some funds saw investors pull out because they increasingly view energy as an unsafe spot for their money. Casement suspended operations after difficulties raising investor interest, two industry sources said. The firm was supported by Lighthouse Partners, according to a regulatory filing. Lighthouse declined to comment, and Mooney would not elaborate on the reasons for Casement’s decision to close. “All hedge funds, including commodities, that are being scrutinized for near-term performance are coming under pressure,” said Jonathan Goldberg, founder of one of the best-known energy-focused hedge funds, BBL Commodities. Closures of energy-focused hedge funds have outpaced launches in the last three years, according to data from Eurekahedge. “It becomes self-reinforcing,” Goldberg said in an interview. “If people lose money and are seeing negative feedback for it, they cut risk and it becomes harder and harder to manage the business.” Macro hedge funds – those with strategies based on broad global macroeconomic trends, such as a bet that oil prices will rise – were among the hardest hit, falling 3.6 percent in 2018. That’s the weakest annual performance since 2011, when such funds fell 4.2 percent, according to the Hedge Fund Research (HFRI) Macro index, a key industry index. Through mid-December, commodity trading advisors (CTAs) were down by 7.1 percent, according to a late December estimate by Credit Suisse. In December, Goldberg said he would wind down BBL Commodities’ flagship fund and focus instead on longer-term trading opportunities. Goldberg’s BBL Commodities Value Fund lost 14.2 percent in July, Reuters reported. Goldberg said in December that returns had been “limited” recently. BAD BETS ON OIL, GAS Funds took heavy losses this past year when oil prices took an unexpected dive beginning in October amid growing worries about oversupply and weakening demand. U.S. oilfields hit an all-time production record last year at more than 11.5 million barrels a day. A sharp rise in natural gas prices in late 2018, on concerns of tight supplies and cold weather, also added to the pain because many funds had paired bets on lower natural gas and higher crude. Fluctuations in prices typically create opportunities for fund managers to book a profit, but the moves of oil and gas prices followed a prolonged period of subdued volatility in energy markets and caught fund managers off guard. Oil prices had rallied through most of the year, and hedge funds built increasingly large bets on the rally continuing. Money managers began the year with a record number of bullish open positions in U.S. crude and largely maintained them near those levels until mid-year. That changed late last year, when the U.S. granted waivers to big purchasers of Iran’s oil after reinstating sanctions on the nation, and as the United States, Russia and Saudi Arabia all produced at record levels, feeding worries about a supply glut. The market sunk in a series of volatile trading days as funds rushed to unload positions. INVESTOR PRESSURE Hedge fund investors said they do not see the situation for niche funds improving. Among those that have been having the most difficulty are natural gas funds, said one recruiter who works with several funds and banks in the commodities industry. In November, U.S. natural gas futures experienced their most volatile streak in nine years. Velite Capital, which emerged earlier this decade as one of the most profitable natural gas hedge funds, founded by star trader David Coolidge, began winding down in August. Madava Asset Management, meanwhile, shut after investor Blackstone Group requested to pull funds, according to a Wall Street Journal report. Timoneer Energy, a hedge fund specializing in natural gas futures and options, also wound down last year, sources said. The firm was set up in 2015 by a portfolio manager and three analysts from Velite. Several former members of the fund did not respond to a request for comment. Two years ago, energy executives John James and Sachin Goel planned to launch natural gas-focused hedge fund Mercasa Energy, backed by an initial commitment of $10 million from investor Titan Advisors, which has some $4.5 billion in assets under management. But the fund was not able to secure additional investments, and by early 2018, Mercasa had shut. Titan Advisors declined to comment. Ernest Scalamandre, founder of AC Investment Management, an investment firm focused on commodities, said he expects funds dedicated to oil and natural gas to remain challenged. “I don’t envision the fundamentals changing all that much for gas and or crude,” he said.
Russia is unable to cut oil production sharply: Minister
Russia is not able to cut its oil production sharply, though it would try to do it faster, Russian Energy Minister Alexander Novak was quoted as saying by Interfax news wire on Thursday. He said there are technological limitations for reducing oil output in Russia. Earlier this week, Saudi Arabia’s Energy Minister Khalid al-Falih said Russia was cutting its oil production more slowly than expected.
S.Korea’s 2018 LNG imports to hit record high over 42 mln T
South Korea’s imports of liquefied natural gas (LNG) are set to reach an all-time high over 42 million tonnes in 2018 thanks to robust power generation demand, but next year’s shipments are likely to ebb on increased coal and nuclear power. South Korea, the world’s No.3 LNG importer after Japan and China, typically takes between 33 million and 37 million tonnes of LNG a year, mainly for heating, power generation and cooking. This year, a volume of 42.8 million tonnes of LNG is the expected intake, up 13.8 percent from 37.6 million tonnes last year, according to ship-tracking data from Refinitiv Eikon. That would top 2013 LNG import levels of nearly 40 million tonnes, the country’s customs data showed. That was the year South Korea faced a series of nuclear reactor shutdowns due to a safety scandal over faulty parts, which led to an increase in gas power generation. “Gas usage for power generation sharply rose this year because the country’s nuclear utilization rate was the lowest so other power sources like gas had to fill the void,” said Shin Ji-yoon, an analyst at KTB Investment & Securities in Seoul. In the six months of the year, an average of almost half of the country’s 24 nuclear reactors were offline for planned maintenance, according to Reuters calculations based on data from state-run Korea Hydro & Nuclear Power Co. As of now, six reactors are shut down. South Korea’s nuclear utilization rates dropped to just 63.6 percent for the first three quarters of 2018, the lowest rate ever, according to the Korea Hydro & Nuclear Power data. LNG VOLUMES EXPECTED TO BE LOWER IN 2019 Coal and nuclear together produce about 70 percent of South Korea’s total electricity needs, although the country is trying to lower its dependence on those two fuels to shift its energy policy towards cleaner and safer energy in the long term. This year, gas power’s share of the country’s power supply mix outstripped nuclear-produced electricity over January-October, according to calculations on data from Korea Electric Power Corp (KEPCO).
Oil May Never Return To The Triple-Digits
Despite the wild ride of oil prices in 2018—in which gains earlier in the year were wiped out in massive sell-offs in the fourth quarter—energy and banking professionals expect Brent Crude oil prices not to deviate too much from current levels in the next five years. The median forecast of more than 1,000 energy market professionals surveyed earlier this month expects oil prices to average between $65 and $70 a barrel in the years 2019 through 2023, the annual Reuters survey showed. For this year, the highest number of energy industry, banking, hedge fund, and physical commodities professionals, among others, expect Brent Crude prices to average $65 a barrel, unchanged from the surveys of the past three years. The over 1,000 survey respondents, 26 percent of whom are directly involved in oil and gas production, see Brent averaging $65 in 2020, too, although $70 oil is a very close second call, according to the ‘Oil price outlook survey 2019-2023’ results compiled by Reuters market analyst John Kemp. In 2021 through 2023, the average Brent price is expected at $70 a barrel. Compared to the surveys from previous years, far fewer energy professionals believe that oil prices will return to triple-digit territory in the short to medium term. Record high U.S. crude oil production has somewhat abated concerns that a supply crunch is coming in the early 2020s because of the underinvestment in conventional oil during and after the 2014-2015 oil price crash. According to the latest Reuters survey, only 3 percent of respondents see Brent Crude prices averaging above $90 next year. To compare, in the 2016 survey, a total of 13 percent of energy professionals expected oil prices to average $90 a barrel or more in 2020. In this year’s survey, the average price projection for 2023 is $70 and most of the responses ranged between $60 and $80. This forecast suggests that fewer energy professionals now fear that there will not be enough oil supply on the market over the next five years. As a whole, the energy professionals surveyed by Reuters expect Brent Crude prices will not deviate too much from the current $60 a barrel over the next five years, averaging $65 in 2019 and 2020, and $70 between 2021 and 2023. For 2019, investment banks have oil price forecasts similar to the results in the Reuters survey. After the price slump in the fourth quarter of 2018, Wall Street’s major investment banks revised down their projections, but most of them predict prices in 2019 at between $60 and $72.60 a barrel. WTI Crude price forecasts for this year range from $49 at Citi to $66.40 at JP Morgan Chase, with most estimates falling in the $55-66 range. Of course, investment banks are warning that there is high uncertainty over where oil prices will go this year. Bearish unknowns include the pace of demand growth in view of the still unresolved U.S.-China trade war (that may not be resolved at all after the trade-war truce ends in March), the rate of global economic growth, and the pace of Chinese oil demand growth. Bullish factors include OPEC and allies’ deal succeeding again in drawing down inventories, and the U.S. not renewing waivers for Iranian oil customers when the current waivers expire in early May 2019. Most recently, Goldman Sachs slashed its Brent price forecast to average US$62.50 a barrel this year, down from an earlier projection of US$70, due to abundant supply. WTI will average US$55.50 a barrel in 2019, compared with an earlier estimate of US$64.50 a barrel, according to Goldman Sachs. Bank of America Merrill Lynch kept its $70 price forecast for Brent this year, expecting OPEC+ cuts to reverse the oversupply from the fourth quarter of 2018 into a “slight deficit” in 2019. BofAML, however, cited one key uncertainty about oil prices this year—a slowdown in global economic growth to 2 percent from 3.5 percent could result in Brent plummeting to as low as $35 a barrel. While in the base-case scenario, energy professionals and investment banks don’t see 2019 oil prices deviating too much from current levels, they warn that the key bearish concern in the oil market over the past few months—a possible global growth slowdown—could put downward pressure on the price of oil.
GAIL plans to terminate Rs 270 crore IL&FS contract
GAIL is planning to terminate Rs 270 crore pipe laying contracts it awarded IL&FS last year as the financially-troubled contractor is unable to make progress, delaying the Prime Minister’s pet pipeline project that would take natural gas to much of eastern India via his constituency Varanasi, sources said. GAIL is building the 2,655-km natural gas pipeline, called Pradhan Mantri Urja Ganga, which crosses Uttar Pradesh, Bihar, Jharkhand, West Bengal and Odisha and connects several key cities on the way. The pipeline, whose completion is crucial to the planned revival of three fertilizer units in Uttar Pradesh, Bihar and Jharkhand, will also introduce millions of homes, vehicles, shops and factories to the cleaner fuel. IL&FS Engineering and Construction Company Ltd, a unit of the troubled IL&FS, had won two contracts last year to lay pipelines: 160 km in the Dobhi-Durgapur stretch and 100 km in the Bokaro-Angul stretch of the Urja Ganga project. Other contractors have the mandate for the remainder of two stretches, which are together about 850 km long. The 260-km pipeline contract is worth about Rs 270 crore. Gail had aimed to ready the two stretches by the end of 2019 but IL&FS’ sluggishness could become a hurdle. GAIL is planning to take away the two contracts from IL&FS and award these to others for speedy completion of the project, a source said, adding that fresh tenders for the two stretches will be issued by the end of next month. “Due to its financial crisis, IL&FS is unable to pay its subcontractors and suppliers. So, these sub-contractors have stopped working and vendors have stopped supplies. This can delay the entire project,” the source said. Some IL&FS executives linked to the two contracts have also quit, sources said. IL&FS declined to comment for the story. The problem began in November, and GAIL has since written multiple letters to IL&FS and held meetings with its executives to sort this out. GAIL has now concluded that new contractors will have to be brought in to meet project deadlines, sources said IL&FS Loses Zojila Tunnel Contract New Delhi: tate-owned NHIDCL has terminated the contract awarded to troubled IL&FS group for building the strategic Zojila tunnel to provide all-weather connectivity between Srinagar, Kargil and Leh. IL&FS Transportation in a filing said the contract was terminated on January 15. The National Highways & Infrastructure Development Corporation Ltd (NHIDCL) is likely to invite fresh bids for the tunnel project in Jammu & Kashmir, according to officials. “The contract awarded for construction, operation and maintenance of 2-Lane Bi-Directional Zojila Tunnel awarded by NHIDCL in the state of Jammu & Kashmir has been terminated effective January 15, 2019,” IL&FS Transportation said in a BSE filing.