Canada Set To Miss Out On A Massive LNG Opportunity
Shortly after Russia invaded Ukraine in late February, dozens of Eurozone countries pledged to heavily cut Russian natural gas imports or halt them completely as soon as they could afford to. These countries took several aggressive measures to replenish their natural gas stockpiles ahead of the winter season, including reaching a political agreement to cut gas use by 15% through next winter. It’s, therefore, little wonder that Germany–the country’s worst hit by the Russian energy crisis– is currently on a mad dash to secure alternate sources of gas before the onset of winter. But here’s the biggest irony of them all: Germany and Europe are more likely to secure future gas supplies from Mozambique, one of the world’s poorest nations with scant infrastructure, riddled with terrorism and located 8,140km away from Germany, than Canada, one of the biggest producers of the stuff, with more than a dozen potential LNG sites and a ‘mere’ 6,400km away. Indeed, this might turn out to be one of the biggest missed opportunities in Canadian history considering that at current prices, just one Canadian port exporting superchilled gas could be adding nine figures to the Canadian GDP each day. Love-Hate Relationship Canada is the planet’s fifth largest producer of natural gas and ranks 15th in the world for proven natural gas reserves. The country’s biggest problem simply is lack of infrastructure–and political goodwill. It’s somewhat shocking to learn that Canada does not own a single LNG export terminal, with virtually all the country’s natural gas exports delivered to the United States via pipeline. It’s not for lack of trying though. In recent years, Natural Resources Canada says it has received proposals for 18 LNG export projects, including five on the East Coast. Currently, just one terminal is under construction, with a second not quite poised to break ground. In sharp contrast, Mozambique is gearing up for a $100B LNG windfall, with the country poised to ship its first cargo of liquefied natural gas (LNG) overseas at a time when prices have soared to record highs with Europe desperately trying to cut energy ties with Russia. According to ship-tracking data compiled by Bloomberg, the BP-operated LNG tanker British Mentor was slated to arrive this week at a new floating terminal that Italian energy giant Eni S.p.A. is completing off Mozambique’s northern coastline. Eni has said that commissioning activities at the Coral-Sul FLNG vessel were progressing well, with first exports to be communicated in due course. The Italian company is already planning a second floating export platform in the southern African country that could be completed in less than four years. All that progress despite the fact that Mozambique has been plagued by terrorism, civil strife and rampant systemic corruption for decades, to a point where it has been unable to exploit its vast fossil fuel reserves leading to its status as the world’s third poorest nation. You can blame this state of affairs on Canada’s love-hate relationship with fossil fuels. Despite the Canada–United States Free Trade Agreement in 1988, a sense of ambivalence towards fossil fuels prevails to this day. In the current geopolitical climate, oil and gas are both hated and adored. Hated because of their outsized role as the number one climate change pariah. Adored as an alternative source of natural gas, especially since Russia’s invasion of Ukraine and the attendant threat that Moscow might cut off gas supplies to Europe. Back in March, Canadian Natural Resources Minister Jonathan Wilkinson announced that Canada has the capacity to increase oil & gas exports by up to 300,000 barrels per day (bpd) by the end of this year to help improve global energy security. He also added that Canada is looking at ways it may be able to displace Russian gas with liquified natural gas (LNG) after requests for help from Europe. Currently, a Shell-led consortium is building a large LNG facility on the west coast at Kitimat which is due for completion around 2025, but the country exports zero LNG. But it need not be this way. Canada’s energy regulatory framework is notorious for scaring away oil and gas projects, and in February turned down a $10-billion LNG export facility planned for Saguenay, Quebec largely on the grounds that it would increase greenhouse-gas emissions. All five of the now-languishing East Coast projects were in the planning stages as early as 2015 but have been held back by a hostile and byzantine regulatory climate. At this stage, it’s not 100% clear whether Canada is ready to relax its attitude towards fossil fuels. Recently, Prime Minister Justin Trudeau went on record saying that exporting LNG from Canada’s east coast to Germany could ease Europe’s gas crunch: “It’s doable, we have infrastructure around that,” he said at a joint press conference with German Chancellor Olaf Scholz though he failed to offer a timeline when asked for one. However, as Politico notes, doable doesn’t necessarily mean realistic, especially given that Europe wants to slash Russian gas purchases by two-thirds by the end of the year. In the same vein, Trudeau conceded that weak business cases have kept proposed export facilities from moving forward: “Right now our best capacity is to continue to contribute to the global market to displace gas and energy that then Germany and Europe can locate from other sources,” Trudeau has conceded. Recent comments by Canadian gas producers are also quite telling. In an interview this week, Enbridge Inc. (NYSE: ENB) CEO Al Monaco hinted at Canada’s infamous industry red tape when he said the country needs to “get out of our own way when it comes to energy and building infrastructure.” Perhaps not even sky-high natural gas and LNG prices are enough to persuade Trudeau’s administration to change its stance on oil and gas. But as they say, you never really know, considering that the U.S. only began exporting LNG in 2016, and has managed to become the world’s leading LNG exporter in such a short space of time.
Oil Prices Under Pressure As China Expands Covid Lockdowns
China has locked down the city of Chengdu, beginning today, as the latest demonstration of its zero-Covid strategy. With a population of 21 million, Chengdu is the biggest city to be locked down in China after Shanghai, Bloomberg reports. All lockdowns in China this year have caused oil prices to fall thanks to the well-documented effect of lockdowns on oil demand. The effect has tended to be temporary, however. When coupled with other bearish indications, however, the news of the lockdown is likely to have a marked negative effect on oil prices. Indeed, oil fell today in Asian trade because of the news of the latest lockdown in China. In addition, Reuters released a poll suggesting supply was on the rise, with OPEC expected to have pumped an average of 29.6 million bpd last month – the highest since April 2020. U.S. crude oil output is also on the rise, Reuters reported, likely reaching 11.82 million bpd in June. This would also be the highest since April 2020. Economic growth worries are also contributing to the bearish sentiment that has taken over the oil market in recent days. With central banks appearing to be determined to continue with the monetary tightening, such worries are more than justified. As a result, Brent crude had dropped to $95.11 per barrel at the time of writing, with West Texas Intermediate at $89 per barrel. Prices could fall further later today as G7’s finance ministers are gathering to discuss their idea of imposing a price cap on Russian oil sold on international markets. The idea being discussed is the refusal to insure Russian oil shipments unless the oil is being sold below a certain price threshold. G7 dominates the insurance market with a 90 percent share. Russia has indicated it would not accept a price cap.
Russia Exported Record Amounts Of Crude In August
Six months into Russia’s war on Ukraine, Russia’s oil output has continued to exceed expectations. According to data from the Institute of International Finance (IIF), Russian oil shipments hit their highest ever August level this month, with Greek-owned tankers playing the biggest role in helping Russia’s oil get to international markets. IIF chief economist Robin Brooks has tweeted that the capacity of oil tankers departing Russian ports–a proxy for exports–came in at just under 160 million barrels in August, more than in any August in any prior year. “Russia exports most of its crude via foreign-owned oil tankers. Volume of those shipments in August 2022 exceeds any prior year, thanks to Greek-owned oil tankers who shifted capacity to transport Russian oil,” Brooks has told Business Insider. A couple of months ago, Refinitiv Eikon via Reuters reported that Greece has emerged as a new hub for Russian oil via ship-to-ship (STS) loadings. Trading Russian crude and oil products remain legal for now because EU members cannot seem to agree on the methodology of a complete ban. For all the tough talk about abandoning Russian energy commodities, Russia is still managing to sell a good amount of its oil and gas, thanks to the fact that some of the world’s biggest commodity traders have little compunction against financing Putin’s war machine. According to ship tracking and port data, Switzerland’s Vitol, Glencore, and Gunvor as well as Singapore’s Trafigura, have all continued to lift large volumes of Russian crude and products, including diesel. Vitol has pledged to stop buying Russian crude by the end of this year, but that’s still a long way from today. Trafigura said it would stop buying crude from Russia’s state-run Rosneft by May 15th, but is free to buy cargoes of Russian crude from other suppliers. Glencore has said it wouldn’t enter any “new” trading business with Russia. Meanwhile, India and China are making up for much of the losses for Russia. A lot of the blame falls on Switzerland. The lion’s share of Russian raw materials is traded via Switzerland and its nearly 1,000 commodity firms.
China Is Quietly Reselling Its Excess Russian LNG To Europe
One month ago, we were surprised to read how, despite a suppressed appetite for energy amid its housing crash and economic downturn (for which “zero covid” has emerged as a convenient scapegoat for emperor Xi), China has been soaking up more Russian natural gas so far this year, while imports from most other sources declined. In July, the SCMP reported that according to Chinese customs data, in the first six months of the year, China bought a total of 2.35 million tonnes of liquefied natural gas (LNG) – valued at US$2.16 billion. The import volume increased by 28.7% year on year, with the value surging by 182%. It meant Russia surpassed Indonesia and the United States to become China’s fourth-largest supplier of LNG so far this year. This, of course, is not to be confused with pipeline gas, where Russian producer Gazprom recently announced that its daily supplies to China via the Power of Siberia pipeline had reached a new all-time high (Russia is China’s second-largest pipeline natural gas supplier after Turkmenistan), and earlier revealed that the supply of Russian pipeline gas to China had increased by 63.4% in the first half of 2022. What was behind this bizarre surge in Russian LNG imports, analysts speculated? After all, while China imports over half of the natural gas it consumes, with around two-thirds in the form of LNG, demand this year had fallen sharply amid economic headwinds and widespread shutdowns. In other words, why the surge in Russian LNG when i) domestic demand is just not there and ii) at the expense of everyone else? “The increase in Russian LNG could be a displacement of cargoes going to Japan or South Korea because of sanctions, or weaker demand there,” said Michal Meidan, director of the China Energy Programme at the Oxford Institute for Energy Studies. One thing that was clear: China wanted to keep its arms-length gas dealing with Russia as unclear as possible, which is why the General Administration of Customs of China stopped publicizing the breakdown in trade volume for pipeline natural gas since the beginning of the year, with spokesman Li Kuiwen confirming that the move was to “protect the legitimate business rights and interests of the relevant importers and exporters”. Well, we now know the answer: China has been quietly reselling Russian LNG to the one place that desperately needs it more than anything. Europe… and of course, it is charging a kidney’s worth of markups in the process. As the FT reported recently, “Europe’s fears of gas shortages heading into winter may have been circumvented, thanks to an unexpected white knight: China.” The Nikkei-owned publication further notes that “the world’s largest buyer of liquefied natural gas is reselling some of its surplus LNG cargoes due to weak energy demand at home. This has provided the spot market with an ample supply that Europe has tapped, despite the higher prices.” What the FT ignores, is that it’s not “surplus” – after all, if it was Chinese imports of Russian LNG would collapse. No – the correct word to describe the LNG that China sells to Europe is Russian. Going back to the story, the details are intuitive: with Russian pipeline gas to Europe effectively shuttered… … Europe’s imports of LNG have soared 60% year on year in the first six months of 2022, according to research firm Kpler. Some more details: China’s JOVO Group, a big LNG trader, recently disclosed that it had resold an LNG cargo to a European buyer. A futures trader in Shanghai told Nikkei that the profit made from such a transaction could be in the tens of millions of dollars or even reach $100mn. China’s biggest oil refiner Sinopec Group also acknowledged on an earnings call in April that it has been channelling excess LNG into the international market. Local media have said that Sinopec alone has sold 45 cargoes of LNG, or about 3.15mn tonnes. The total amount of Chinese LNG that has been resold is probably more than 4mn tonnes, equivalent to 7 per cent of Europe’s gas imports in the half year to the end of June. Make no mistake: all of this “excess” LNG was soured in part or in whole in Russia, but since it has been “tolled” in China, it is no longer Russian. It is instead – drumroll – Chinese LNG. The good news is that the 53 million tonnes that the bloc purchased surpasses imports by China and Japan and has brought Europe’s gas-storage occupancy rate up to 77%.If this continues, Europe is likely to reach its stated goal of filling 80% of its gas storage facilities by November (at which point it will start draining the reserves at a breakneck pace to keep warm during the winter). But while China’s economic slump has brought much-needed relief to Europe, it comes with a major footnote. As soon as economic activity bounces back in China, the situation will quickly reverse, and Beijing will no longer re-export Russia LNG to keep Europe warm. Hilariously, it also means that instead of being dependent on Russia for gas, Europe is now becoming dependent on Beijing instead for its energy – which is still Russian gas, only this time imported from China – which makes a mockery of US geopolitical ambitions to defend a liberal international order with its own energy exports. Worse, while Europe could buy Russian LNG for price X, it instead has to pay 2X, 3X or more, just to virtue signal to the world that it won’t fund Putin’s regime, when in reality is is paying extra to both Xi and to Putin, who is collecting a premium price thanks to the overall market scarcity. Without expressly stating it, the FT does imply that Europe is buying Russian LNG by way of China: If Russia ends up exporting more gas to China as a means to punish Europe, China will have more capacity to resell its surplus gas to the spot market — indirectly