China Is Aggressively Buying Up Cheap Russian LNG
Russia is selling liquefied natural gas from the Sakhalin-2 project in the Far East to China at a 50-percent discount and still making a profit on it, Bloomberg has reported, citing unnamed traders. “Russian supply is still making its way into the market, just with a reorganization of trade flows via market participants who don’t take issue with accepting Russian cargoes,” Saul Kavonic, an energy analyst at Credit Suisse, told Bloomberg. The other two big buyers of Sakhalin-2 LNG, Japan, and South Korea, according to Bloomberg, stopped buying the commodity after Russia’s invasion of Ukraine. Japan, however, continues to receive Russian LNG from Sakhalin-2 under other contracts. “It appears China is happy to take Russian LNG cargoes at discounts, swapping out alternative supply that can then be directed to Europe at higher prices.” Despite the discount, LNG prices this year have soared so high that the operator of Sakhlin-2 is still making a profit. This operator, by the way, is a new state-owned entity that replaced the previous consortium. The two Japanese partners in the original consortium were allowed to keep their stakes in the new entity as well. Shell abandoned its 27.5-percent stake in the project. Bloomberg reports that data shows China’s imports of Russian liquefied natural gas rose to the highest since at least 2019 in August while shipments from the United States have been on the decline as they get diverted to Europe, which is ready to pay a premium for the supply. Speaking of Europe, Poland this week suggested the European Union introduce a price cap on all gas imports, including LNG, as the costs of this alternative gas supply contribute to the energy price inflation cross the bloc. For now, the European Commission, however, has only proposed a gas price cap on Russian imports following the same logic as the one employed by the G7 in imposing an oil price cap on Russian exports.
Russia Is Now Producing LNG Near The Shuttered Nord Stream Pipeline
Gazprom has launched liquefied natural gas (LNG) production at a facility close to the starting point of the now-shut Nord Stream gas pipeline to Germany, the Russian company’s deputy CEO Vitaly Markelov said on Tuesday. The Portovaya plant close to Nord Stream’s compressor station of the same name, where Russia typically starts gas supply via the pipeline, has already produced 30,000 tons of LNG and has two operational lines, Russian news agency Interfax quoted Markelov as telling the Eastern Economic Forum in Vladivostok. “A tanker will arrive now to ensure LNG supply to customers. Considering the global markets, our LNG will be in demand,” Markelov said. LNG production from the Portovaya plant will go to Kaliningrad, the Russian enclave on the Baltic Sea surrounded by Lithuania and Poland, and to expand Gazprom’s LNG portfolio, according to Interfax. Apart from the Portovaya compressor station and the turbine repairs saga, the area close to the plant and the start of Nord Stream came to notoriety in recent weeks with reports that Russia is flaring natural gas at the plant near the Finnish border while drastically cutting gas flows via the Nord Stream pipeline to Germany. The plant northwest of St. Petersburg is flaring an estimated around $10 million worth of natural gas per day – gas that would have gone to Germany otherwise, a Rystad Energy analysis shared with BBC News showed last month. The Portovaya plant is near the compressor station of the same name where the Nord Stream route to Germany begins. Since June, Russia has significantly cut flows via Nord Stream, first to 40% of the pipeline’s capacity and then to just 20% of Nord Stream capacity after a ten-day regular maintenance period ended on July 22. Last week, after a three-day halt to the flows, Gazprom said that the Nord Stream gas pipeline to Germany would remain closed indefinitely, and blamed on Monday the Western sanctions for this situation.
An Iran Nuclear Deal Could Send Oil Prices To $65, But Is It Worth It?
After years of back and forth, with talks intensifying in recent months, a new Iran nuclear deal now appears to be a distinct possibility. While this could be great news for a world facing oil and gas shortages, some critics point to the geopolitical dangers associated with such a deal. Nevertheless, Iran has been preparing its oil industry for a swift recovery once an agreement is reached, following months of oil production increases. With oil prices rising exponentially this year, and several countries worldwide facing oil and gas shortages, the U.S. and other major powers are looking to ensure oil supply while shifting their reliance on Russia. This is one factor that has caused the U.S. to reconsider its stance on a new nuclear agreement, which would allow Iran to recommence largescale oil exports. Reports earlier this week suggested that a new nuclear deal between the U.S. and Iran was imminent, with positive feedback from Iranian negotiators following recent talks. “We are not far from an agreement,” the de facto spokesman for Iran’s nuclear-negotiating team Mohammad Marandi told Al Jazeera in mid-August, suggesting the remaining issues would not be difficult to resolve. Former President Donald Trump exited the previous agreement in 2018, which prompted sanctions on Iran’s oil and rapidly halted much of the country’s exports. While Iran initially adhered to these sanctions, with its oil output falling dramatically from 2018 to 2020, over the last year the country’s oil earnings have soared. Thanks to the use of ghost ships and under-the-table agreements, Iran has been building its relations with several trade partners worldwide, most notably fellow-sanctionee Venezuela. And, in recent months, more countries have openly ignored U.S. sanctions in the face of energy insecurity, leading to a 580 percent increase in Iran’s oil and condensates income from March to July compared with the same period last year. The reinvigoration of Iran’s oil industry could bring massive changes to the world’s oil outlook. Tamas Varga, an analyst at PVM Oil Associates in London suggested “OPEC could easily produce 30.5 million bpd (barrels per day) if Iran comes back and those barrels are not accommodated.” He added, “Under this scenario, my model shows Brent dipping to $65″ per barrel in the second half of 2023. This would be a dramatic price decrease from $94 a barrel this week. The reintroduction of Iranian oil to the market would also help divert reliance from any one oil power, with sanctions on Russian oil forcing the U.S. to turn to Saudi Arabia for greater oil supplies in recent months. The release of Iranian oil would make oil prices more competitive and would mean that Saudi Arabia and Iraq are not the two dominant oil powers in the Middle Eastern region. Iran has been gradually building up its oil supplies in recent months, ready for export should an agreement be reached. There are around 93 million barrels of Iranian crude and condensate on ships in the Persian Gulf according to the ship-tracking firm Kpler, although other estimates suggest it may be nearer 60 to 70 million barrels. There are further onshore oil supplies of around 48 million barrels, according to Kpler. Iran is in a strong position to step into a market that is desperate to replace Russian oil supplies, ready to reclaim its title as an oil giant. But despite solid steps toward a nuclear deal and the resumption of Iranian oil exports, not everyone is so sure this is a good idea. Trump’s former national security advisor, John Bolton, believes the lifting of sanctions may encourage Iran to partner with Russia. He stated, “I think the immediate consequence, obviously, will be the unfreezing of billions of dollars of Iranian assets, which will go back under their control, with their discretion to spend it on their nuclear program, their support for international terrorism in the Middle East and beyond.” He added, “It’s really a stunning mistake by the Biden administration.” This line of reasoning has been repeated within Israel, which has stepped up its rhetoric against the deal as its election season heats up. Israeli Prime Minister Yair Lapid expressed his views by saying “This deal isn’t a good deal. It was not a good deal when it was signed back in 2015. Today, the dangers it entails are even greater,”. Israel’s increased pressure on the U.S. may be one of the reasons optimism around the nuclear deal has waned recently. While this is an extreme response to the nuclear deal, it may be partly true considering a recent report from the International Atomic Energy Agency suggesting that Iran is continuing to enrich its uranium. The report stated, “On 28 August 2022, the Agency verified at FEP that Iran was feeding UF6 enriched up to 2% U-235 into the IR-6 cascade … for the production of UF6 enriched up to 5% U-235.” However, critics may need not worry as hopes of a new deal were temporarily thwarted just this Friday as the U.S. responded to the latest Iranian proposal saying it was “not constructive”. A spokesperson from the state department explained “We can confirm that we have received Iran’s response through the EU,” adding, “We are studying it and will respond through the EU, but unfortunately it is not constructive.” As the U.S. edges ever closer to a new nuclear deal with Iran, with the hope of reinitiating crude imports from the oil-rich nation, critiques suggest that it will be vitally important to establish good relations with Iran if the U.S. hopes to benefit from its oil output. With worries that Iran might turn towards Russia, many countries may look to establish clear partnerships with the sanctioned country even before a nuclear deal is agreed upon.
Putin Threatens To Halt All Gas To Europe If Prices Are Capped
Russian President Vladimir Putin has threatened to retaliate against any move by the European Union to cap the price of Russian gas by halting flows completely and suggesting a deal allowing Ukrainian grain to be exported to world markets could be disrupted. Addressing an economic conference in the Russian Far East late on Wednesday, Putin referred to the EU’s proposed cap on Russian gas prices as “yet another stupidity, another non-market decision that has no future”. The Russian president said such a move by Europe could result in more price hikes. Putin also noted that Russian piped gas is “many times more competitive than the liquefied natural gas shipped across the ocean”, in reference to the higher price Europe is paying to stock up on American LNG as a replacement. He vowed to ignore “political decisions that contradict contracts”. “We won’t be supplying anything if it runs counter to our interests,” state-run Tass news agency reported him as saying. “Those who are imposing whatsoever on us are not in a position to tell us what they want. Let them think about it.” EU ministers are set to discuss gas cap measures on Friday. Putin also threatened to disrupt the UN-brokered deal that has seen Turkey mediate shipments of Ukrainian grain from Odesa to world markets via Istanbul, suggesting that only wealthy countries are receiving this grain. Ukraine and Russia cut a deal with Turkey and the UN in July in order to avert a global food crisis due to large volumes of Ukrainian grain blocked from leaving ports. Putin called the grain deal “another outrageous deceit” and vowed to “have a word with the Turkish President”, saying Russia and other poorer countries were not benefiting from the deal. The Russian president said that for the time being, Moscow would continue with the deal but suggested he would be looking for concessions.
Explained: India’s dependency on Russian crude may rise despite G7 pressure
Amid the rise in global crude oil prices, India had been importing crude oil from Russia. Considering Russian President Vladimir Putin saying it will stop delivering oil and gas supplies to countries that introduce price caps, things may not be that hard for India specifically. Recently, the European Union has also called on India and China to take part in the G-7 initiative to reduce the profits that Russia makes from selling oil. Though it is still not clear how the G-7 will implement its price-capping plan. The G-7 is comprised of the US, Canada, France, Germany, Italy, UK and Japan. Earlier on 6 September, Indian Petroleum and Natural Gas Minister Hardeep Singh Puri said most of his country’s crude oil supplies in the near future will come from the Gulf countries. Though between April to May this year, India’s imports from Russian oil rose by 4.7 times, or more than 400,000 barrels per day, however, it fell in July. After Saudi Arabia lowered the official selling price in June and July compared with May, the crude oil imports rose in July by more than 25%. With this, Saudi Arabia stayed at the No. 3 spot among India’s suppliers. With sanctions were imposed by Western companies against Moscow for what it calls a ‘special military operation’ in Ukraine, Indian refiners have been snapping up relatively cheap Russian oil. Despite, India’s oil imports declined by 7.3% in July from the June levels, Moscow remained the country’s second biggest oil supplier after Iraq. With all being said, Putin on 7 September made it clear that it is not using energy as a “weapon” against Western nations. The clarification from the president has come days after Russia had halted natural gas deliveries via Nord Stream 1, which is a 1,222 km long key pipeline to Europe. “They say that Russia uses energy as a weapon. More nonsense! What weapon do we use? We supply as much as required according to requests from importers,” Vladimir Putin told the Eastern Economic Forum in the Pacific port city of Vladivostok. On the issue of if India will still continue purchases of Russian oil in future, Hardeep Singh Puri said he would not rule out whether the imports will rise or fall. “When prices are high, the logistical factors are applied. We have a duty to our consumers,” he had said. Responding back on the query of moral responsibility, Puri firmly said that India will continue to buy from Russia or wherever. “I said the Europeans buy more in one afternoon than I do in a quarter. I’d be surprised if that is not the condition still. But yes we will buy from Russia, we will buy from wherever,” Puri said. On the conflict issue, Puri replied, “No, there’s no conflict. I have a moral duty to my consumer. Do I as a democratically elected government want a situation where the petrol pump runs dry? Look at what is happening in countries around India.” So looking deep into if India will continue its oil imports from Russia, the answer is probably a big yes, however, the quantity will depend on the global crude oil prices and not Western sanctions on Russia post Ukraine invasion.
India’s gas sector dichotomy: Pushing for more use, while subsidies rise and infrastructure remains idle
India’s attraction for natural gas is burning bright again. The government reiterated its target of raising the share of natural gas in the energy mix to 15%, six years after its initial announcement. Not much has changed on the demand front — gas was 6% of the energy mix in 2016, rising to 6.3% today, despite an expanding gas grid, and city gas distribution (CGD) network. On the other hand, prices have skyrocketed globally. As such, the push for more gas use does not bode well for the economy. Low price competitiveness Gas’ poor price competitiveness has led to its static energy mix share. The gas price surge since October 2021 has worsened the situation. The Japan Korea Marker (JKM), a benchmark for Asian spot liquefied natural gas (LNG) prices, increased by 373% from January 2021 to July 2022, while domestic gas prices soared 240% for regular fields between April 2021 and 2022. Ongoing supply shortages will further raise prices. Russian company Gazprom’s recent supply cut ahead of the European winter season led to gas supply rationing for India’s industrial use, and fertiliser sector. The switch to alternative fuels is also affecting demand. Gas consumption fell by 2.5% in the first quarter of 2022-23 on a year-on-year basis, while that of petroleum products increased 16.8%. In April and May, gas consumption by the power, refinery, and petrochemicals sectors declined. The CGD and fertiliser sectors’ consumption increased marginally. The CGD sector can pass on increases to consumers. The compressed natural gas (CNG) and piped natural gas (PNG) rates, for instance, increased to Rs 80/kg and Rs 48.5/standard cubic meter (scm) in July, respectively, from Rs 66/kg and Rs 39.5/scm in January. These rates will go up even further as the price of blended domestic and imported gas supplied to the CGD sector increased 18% earlier this month. Gas’ price advantage over other fuels is clearly over. Low demand, underutilised infrastructure The vicious cycle of high price/low supply followed by low demand has resulted in heavily underutilised gas infrastructure. Coal and renewables have already pipped gas-based power production due to limited domestic resources and imported rates going through the roof. India has more than 14 gigawatts (GW) of stranded gas-based power plants, while the remaining operate below efficiency. LNG terminal utilisation rates topped at 64% in the last three years, indicating vastly underused, expensive infrastructure. Similarly, despite a ‘no cut’ priority, the CGD sector has received less gas than it needed, resulting in the distribution network’s lower utilisation. Last fiscal, the CGD sector saw a 15% shortfall in domestic gas supply. Increased subsidy burden High prices have also led to many direct and indirect subsidies for gas-dependent sectors. High gas prices increased fertiliser subsidies, which crossed Rs1 trillion two years ago. The subsidy could touch Rs2 trillion in the ongoing fiscal as gas prices continue to rise. Further, the government is reviving liquefied petroleum gas (LPG) subsidies to counter rising prices and falling consumption. A Rs200/cylinder ($2.5/cylinder) LPG subsidy will cost the exchequer Rs 400 billion ($5.1bn) in FY2022/23, including under-recoveries for the last fiscal. This subsidy would further dent PNG’s price competitiveness. PNG is already costlier than LPG. Annual consumption for LPG generally averages at eight cylinders while PNG is 170 scm. The monthly average cost at the ongoing rates of Rs 1,052 per cylinder ($13.4/cylinder) for LPG and Rs52.5/scm ($0.66/scm) for PNG works out to be Rs694 for LPG and Rs740 for PNG. India must make the right bets Softening of gas prices is not in sight. Global futures indicate that prices will remain upwards of $35/MMBtu till 2023 and could touch $50/MMBtu this winter. This exposes India to energy security and balance of payment risks. Globally, countries such as Germany and the Netherlands are cutting their gas dependence by shifting to electric heat pumps, gas from biomass for boilers, and exploring hydrogen as an option. India must learn and evaluate its strategy, especially with the updated Nationally Determined Contribution (NDC) committing the country to meeting 50% of energy requirements from renewables by 2030. Perhaps, the gas contribution can be use-specific until new technologies scale. For instance, gas-based power plants could help balance the grid until large-scale battery storage is viable. The government must intensify efforts for faster adoption of nascent technologies, such as green hydrogen for the fertiliser sector and biogas for the transport sector. India has an opportunity to invest in renewables to achieve 450GW of renewable energy by 2030 instead of adding more gas infrastructure that could find itself stranded.
Trade of Far East Russia’s Sokol crude resurfaces after 4 months
Trade in the Far East Russian Sokol crude grade has resurfaced in September after nearly four months’ absence after spot liquidity for the once-popular medium sweet grade disappeared as buyers shunned imports from Russia and a key operator of the oil field pulled out. A September-loading cargo of the grade is set to be shipped to India, with state-owned Bharat Petroleum Corp. Ltd., or BPCL, heard to have fixed a vessel to lift 700,000 barrels for its Mumbai refinery, according to traders and ship tracking data. Once rare, shipments of Far East Russian crude to India have become a common feature in the market, given that other North Asian refiners continue to abstain from buying Russian crude, while Chinese demand continues to be tepid. India is now also a major buyer of Russian grades such as Urals that have been diverted away from Europe due to sanctions. This is the first Sokol cargo in recent months, according to traders. Price levels for the cargoes weren’t immediately available but were heard to be heavily discounted to make the shipment economical to India. A Singapore-based crude oil trader pegged Sokol crude value for November-loading barrels at a discount of around $5/b to Platts Dubai on a delivered North Asia basis. The valuation estimates are largely driven by trade in Far East Russian ESPO crude, a much larger stream of crude that continues to see an active spot market for cargoes heading mainly to China but also increasingly to India. “Compared with ESPO, Sokol’s quality is better and [sometimes] their buyers can be the same. Sokol’s production hasn’t really resumed, still [at a] very low production level,” said the trader. BPCL was heard to have chartered the vessel Yuri Senkevich, owned by Russia’s largest shipping company, Sovcomflot, to ship Sokol cargo from South Korea to India for $3.3 million, according to sources. BPCL declined to comment on the matter. limited supply Availability of Sokol has shrunk sharply with output at Sakhalin-1 plunging to 10,000 barrels/day from the normal 220,000 barrels/d, according to sources. Since May, only a single shipment carrying Sokol crude was observed to have left De Kastri terminal on eastern Russia’s Sakhalin Island on May 4, the loading port for Sokol crude. The shipment was destined for Dalian, China on May 13, ship tracking data showed. ExxonMobil’s Russian subsidiary Exxon Neftegas, which was the operator for the Sakhalin-1 field, declared force majeure for its Sakhalin 1 project in end-April due to “recent events that hinder, delay or prevent Exxon Neftegas Ltd. from complying with its obligations under the agreements and from conducting operations at the required level of international standards for marine and petroleum industries,” a spokesperson told S&P Global Commodity Insights. In March, India’s stated-owned Oil and Natural Gas Corporation, or ONGC, failed to sell its May-loading Sokol crude cargo after buyers turned cautious toward buying Russian oil shortly after the Russia-Ukraine war broke out. There have been no spot sell tenders heard for Sokol crude since then, according to sources. ONGC could not be reached for immediate comments. Nevertheless, some buyers in Asia have also found comfort with light sour and sweet crudes from other origins, which could substitute Sokol crude as their refinery feedstock.
Impact of rising global gas prices on India Inc.
Gas prices in the international markets have been soaring, but Indian consumers still remain relatively less impacted. This is because, in India, gas prices are controlled and fixed by the Government once every six months – April 1 and October 1. Gas prices in the US have surged by over 130%, in Europe, it has increased by more than 120%, and in the Asian market, the spot prices have surged over 80%. However, in India, the gas prices for H1FY23 have remained at $6.1/mmBtu. The prices of gas used in vehicles (CNG) and for domestic household (PNG-H) use are administered by the Government. For industrial and commercial users, the gas is sourced from the open markets. However, in the latter’s case, Indian gas companies already have contracted gas, the prices of which are lower compared to the current spot prices. Now from October 1, gas prices are expected to be revised. The new prices will be set based on the pricing formula which considers market-linked prices in the US, Canada, Europe, and Russia. Now, given the rise in international gas prices, even in India, analysts expect gas prices to rise by around 56%-64%. From $6.1/mmBtu in H1FY23, gas prices are expected to rise to $9.5-10/mmBtu for H2FY23. However, there is a possibility that the Government of India might look to cap the prices to promote gas usage in the country and to safeguard consumers against inflation. If the prices of administered gas rise, then the same will benefit oil explorers like ONGC, Oil India, RIL, and Vedanta, but could have a negative impact on the margins of city gas distribution companies like MGL, IGL, Gujarat Gas, and Adani Total Gas. Most likely, CGDs won’t be able to pass on the entire rise in this gas cost to consumers, which will impact their margins. However, if gas prices are capped, then it will be positive for CGDs and sentimentally negative for oil explorers as their realisations and profits will be capped. Generally, assuming, that the administered gas prices in India remain stable, higher international gas prices, negatively impact companies like GSPL and Petronet LNG. Whenever gas prices rise the demand for imported gas in India falls. This leads to lower gas transmission around the country and hence negatively impacts gas transmission companies like GSPL. For Petronet LNG, lower gas demand means lower regasification volumes. For GAIL, the impact of higher gas prices is mixed. On one hand, higher gas prices help the company earn higher profits in the gas trading segment, but negatively impact its gas transmission volumes. For oil explorers, there is no immediate impact. For CGDs, higher international gas prices marginally increase their blended cost of gas as some portion of their requirement still needs to be sourced from the open market. According to the latest government notification, 6% of the gas requirement for CNG and PNG-H needs to be sourced from the open market.