Are Moscow And China Aiming To Corner The Gas Market?
Current natural gas market prices remain depressed compared to record prices in 2022. However, indications suggest that the current low prices may soon become a thing of the past, especially if China brings online its significant LNG regasification projects within the expected timeframe and continues to exert influence on global markets. European gas markets could potentially benefit from this development, although it will primarily be a boom for Chinese companies. This situation may not align with the preferences of Brussels, Berlin, or The Hague. Already in May Chinese natural gas imports (LNG and pipeline gas) increased by 17.3%. China’s General Administration of Customs reported that May natural gas imports hit 10.64 million tons, compared to 9.07 million tons May 2022. The customs agency also stated that China’s gas imports increased by 3.3% year-on-year to 46.29 million tons for Q1. The report indicated that China’s LNG imports increased also for the 3rd month in a row in April, hitting 4.77 million tons of LNG, an increase of 10.3% year-on-year. At the same time that there is a sign of growing natural gas demand by China, a report by GlobalData states that China will be dominating the LNG regasification capacity additions in Asia. GlobalData states that 34% of all Asian additions will be in China. In its report, ‘LNG Regasification Terminals Capacity and Capital Expenditure (CapEx) Forecast by Region, Key Countries, Companies and Projects (New Build, Expansion, Planned and Announced), 2023-2027’, China is slated to add around 5.7 TCF from already received project approvals, while 2.1 TCF in capacity is currently in conceptual phases. As GlobalData analyst Bhargavi Gandham stated “China is rapidly expanding its LNG regasification capacity due to several factors, such as to meet ever-growing natural gas demand, mitigate environmental pollution, diversify its energy resources, and meet its carbon neutral objectives.” At present, the Tangshan II and Zhoushan II projects lead in terms of the LNG regasification capacity additions in China, with a capacity of 584.4 BCF by 2027 each. Tangshan II is an onshore regasification terminal planned in the Hebei province of China. China’s demand increase may be gradual, but looking at current developments, Europe’s gas customers will need to step up their game very soon, or pay hefty prices for spot cargoes. Where China is looking long-term, committing to natural gas usage beyond 2045-2050, Europe is still hesitant to close long-term contracts as politicians feel it doesn’t suit their energy transition strategy. At the same time that China’s natural gas strategy is implemented and its gas-related infrastructure expanded, Beijing also is playing a much darker strategic game. Reports have emerged that China was informed about Russian invasion plans before Putin decided to invade Ukraine. Chinese President Xi Jinping has until now vehemently denied having knowledge about the invasion of Ukraine, but China’s energy dealings just before the invasion in February 2022 raises eyebrows. Chinese players, mainly LNG buyers have been extremely active in the six months before the invasion. International publication Foreign Policy (FP) reports, based on 600 LNG purchase transactions worldwide, that from September 1 2021 until February 2022, around 12 Chinese entities, such as state-owned companies China National Offshore Oil Corp. (CNOOC), Sinopec, and Sinochem, acquired 91% of all global LNG purchased worldwide under term deals (typically spanning four years or longer). Even after the Russian invasion started, Chinese parties continued to close deals. Until April 2022, 57% of all LNG purchase deals were signed by Chinese parties. Between September 1 2021 and April 1 2022, around 23 million tons of LNG imports per year were agreed on. This volume is remarkable, knowing that between 2006 and 2020 Chinese deals averaged around 5 million metric tons per year, or 15% of the global market. The 2021-2022 buying spree was conducted by 11 different companies, of which 10 are either national or local government Chinese government-owned. This Chinese onslaught has soaked up near-term LNG supplies, mostly from Qatar, Russia, and the U.S. These developments coincided with Gazprom, Russia’s state-owned gas producer’s strategy of cutting gas exports to Europe in 2021, while shutting off its European gas supplies after the invasion. This political cooperation between Moscow and Beijing is becoming clear. If the Chinese had not entered in full force in the 2021-2022 gas markets, Russian gas cuts to Europe would have had little effect, removing not only fears of supply shortages but also of an imminent energy crisis. The deep cooperation between China and Russia is clear, even before the Ukraine invasion. There is no irrefutable evidence, but all signs point to a Russian-Chinese cornering of the market, which was a pre-emptive strike on Europe’s energy sector. As of now, Europe appears to be complacent and lacking proactive measures to counter the increasing collaboration between Beijing and Moscow. The practice of employing energy as a weapon is by no means a new one. The recent example of growing cooperation between Beijing and the Gulf Cooperation Council (GCC) in Saudi Arabia underscores that energy resources are no longer readily available for Europeans at a low cost. China and Russia are once again tightening their grip, raising the possibility of an impending and tumultuous European winter.
Traders To Blame As European Gas Markets Descend Into Chaos
Earlier this month, natural gas prices in Europe rose twofold in the space of 10 days, with a single trading day seeing a jump of 27% two weeks ago. On June 15, prices jumped by 30%. A day later, they dropped almost as sharply as they had risen, shedding over 20%. All this happened before the latest events in Russia that rattled commodity markets. And it will be happening again. Because traders are crowding the natural gas space, eager to make some money like others did last year. Volatility has come back to natural gas markets. Bloomberg reported this week that the gas trading market in Europe is seeing an influx of traders who do not normally play on that market but were tempted by the record profits gas traders made last year. At the time, gas prices in Europe soared to record heights after the EU bombarded Russia with sanctions, and Russia responded by decimating flows along the Nord Stream pipeline. Europe rushed to buy liquefied natural gas on the spot market, promptly pushing prices to levels never before seen. Traders made millions. “Some people thought they could make a lot of money given where prices had been, but there was an exaggeration of what this really meant for the gas market,” Citi’s commodity chief Ed Morse told Bloomberg. “Natural gas markets have proven to be a trap for both experienced and inexperienced traders,” he also said. In addition to the trap that is the gas market, there appears to be actual concern among traders about the sufficiency of gas supply for Europe. Norway has been going through some extended outages due to field maintenance, and the Netherlands has reiterated it will close the Groningen gas field. Both of these suggest doubts over the security of supply going forward. “Reports of Groningen closing down adds to a host of other news that are bullish for gas prices,” ICIS analyst Tom Marzec-Manser told the Financial Times. “But the price swings are an indication that there is still a lot of uncertainty over Europe’s gas outlook, and market participants remain on the edge,” Marzec-Manser also said. The fundamental problem, however, is not the outages in Norway and the shutdown of Groningen. As last year proved, there is plenty of LNG to go around in Europe, for the right price. This year there will be LNG too. But there will not be space in Europe’s gas storage caverns because they are already rather full of gas from last year that was bought at exorbitant prices. Earlier this month, Reuters’ John Kemp reported that Europe’s gas storage was at 48% above the ten-year seasonal average, noting that additions to this storage were slowing down because of low prices that encouraged more immediate consumption. Despite the slower rate of additions, Kemp also pointed out, capacity should be full earlier than last year, and this means drawdowns will need to begin earlier than last year. This is when prices may whipsaw again: when both Europe and Asia prepare to enter winter heating season. This is also why volatility in gas prices remains so high. It’s not because nobody knows if there will be enough gas. It’s because if last year was any indication, there will always be enough gas—for those who can afford it. There are plenty of speculators eager to grab the opportunity to make a quick buck before Europe finally realizes it might be wise to bet on long-term supply rather than splurging on spot market cargos. And there is always the risk of an unforeseen event or even a foreseen one—such as Ukraine’s warning that it might shut down gas transit from Russia when its contract with Gazprom expires next year.
U.S. Shale Growth Stalls As Oil Prices Fall
Softer oil and natural gas prices and rising costs are squeezing the profit margins in the U.S. shale patch, where the business activity growth stalled in the second quarter of the year. While the Energy Information Administration (EIA) continues to expect record production from the shale plays, growth in output next month is set to be the slowest in six months. With oil and gas prices currently lower than at this time last year, drilling activity is slowing down and could further slow amid uncertainties about the economy and the Administration’s policies toward the industry. U.S. shale producers are no longer the world’s swing producers as they are not boosting drilling activity too much, even when oil prices surge. Companies are now focused on returning more cash to shareholders and see profitability squeezed between lower commodity prices and higher costs, and higher interest rates for access to capital. Zero Growth In Business Activity The business activity index in Texas, New Mexico, and Louisiana – home to the biggest shale plays, including the Permian – fell to zero in the second quarter of 2023, down from 2.1 in the first quarter, according to executives of 152 energy firms who responded to the quarterly Dallas Fed Energy Survey. The business activity index is the survey’s broadest measure of conditions facing Eleventh District energy firms, and it showed zero growth. The last time business activity in the Permian stalled this much was in 2020, when U.S. producers – and all other oil producers in the world – reduced output amid plunging demand with the lockdowns during the pandemic. This time, U.S. producers are holding back on drilling as costs continue to increase, although at a slower pace, while oil prices dropped from last year and from earlier this year and benchmark U.S. natural gas prices tumble. The shale companies are also conscious of shareholder demands to boost returns to investors and reduce debt before reinvesting profits into new drilling. The Biden Administration’s attitude to the industry isn’t helping, either. In comments to the Dallas Fed Energy Survey, executives continue to slam the U.S. Administration for its “war” on the industry. In the survey, exploration and production (E&P) and oilfield services firms reported rising costs for the 10th consecutive quarter. The cost increases slowed but remained above the series averages. Larger firms generally expect their drilling and completion costs to be lower at year-end 2023 than year-end 2022, but smaller firms see their drilling and completion costs at year-end to be above where those costs were at year-end 2022. Barely Breaking Even The U.S. benchmark, WTI Crude, was trading at $69 a barrel on Tuesday, suggesting that the average producer would turn a profit, but a small one, considering the cost inflation in the shale patch over the past year. “It seems as if the breakeven price for oil is in the mid-$70-per-barrel range at this point,” an executive at an E&P firm said in comments to the survey. “I would drill if costs were not so high.” The executive also noted that “Margins have been squeezed to the point that it is hard to commit to new projects, and all of the uncertain economic projections give no confidence as to what is going to happen going forward.” Earlier this month, the largest pure-play U.S. shale producer, Pioneer Natural Resources, noted that the shale firms have seen their margins squeezed over the past year. Higher labor and material costs are slowing U.S. shale production growth, Pioneer’s Executive Vice President Beth McDonald said, noting that oil would likely trade in the $70-$100 range over the next three to five years as supply growth remains limited and OPEC+ continues to restrict output. “That squeeze in the margin is really keeping U.S. E&Ps (exploration and production companies) from moving forward in a significant way” despite OPEC’s efforts to push up prices, McDonald told Reuters at an industry conference earlier this month. In the Dallas Fed Energy Survey carried out in June, an E&P executive commented, “Commodity pricing continues to soften, while operating costs have continued to increase and stay at elevated levels, which has led to a continued narrowing of profitability. Regulatory uncertainty remains an issue.” Rig Count Drops The slowdown in activity is immediately evident in the weekly rig count numbers put out by Baker Hughes. Last week, the total rig count fell again – for the eighth consecutive week – to 682. This was 71 rigs below this time last year. Over the past two months, the number of active drilling rigs in the United States has fallen by more than 70. U.S. crude oil production levels are now up by 200,000 barrels per day (bpd) versus a year ago. This growth is one-tenth of the 2 million bpd growth in U.S. crude output between 2018 and 2019. Slowing production growth from the U.S. shale patch could lead to higher oil prices down the road if the U.S. avoids a recession and global oil demand holds up to current expectations of more than 2 million bpd of growth this year.
Honeywell to bring new carbon capture, hydrogen tech to India
Industrial technology solutions leader Honeywell International has developed several energy transitions and sustainability solutions to reduce carbon emissions and these technologies will soon be made available in India, says Ashish Modi, President, Honeywell India. Hoenywell, with a revenue worth $35 billion, pioneered solutions in carbon capture, new-age batteries, avionics products, and next-generation refrigerants like hydrofluoroolefins (HFO). It has developed new battery solutions that can last for 12 hours, next-generation refrigerant HFOs, renewable solutions to recycle and produce plastic, catalysts to increase green hydrogen production and thereby reduce cost, etc. More than 60% of Honeywell’s 2021 sales came from ESG-oriented solutions. Honeywell has developed a new catalyst-coated membrane (CCMs) technology for Green Hydrogen production, which ensures higher electrolyzer efficiency and higher electric current density. The new catalyst is projected to provide a 25% reduction in electrolyzer stack cost. Currently, the company is in talks with electrolyser manufacturers, including in India, to use this technology, Ashish Modi told Fortune India in an exclusive interview. Also Read: Mission Green Hydrogen Honeywell’s green hydrogen technology uses a combination of processes such as pressure swing adsorption (PSA), membrane systems, and cryogenic fractionation to enable hydrogen producers to capture carbon cost-effectively during the hydrogen production process. This recovers 20% more hydrogen than conventional PSA technology, while also reducing energy consumption. Honeywell has also developed a Liquid Organic Hydrogen Carrier (LOHC), a lower-cost solution for long-distance transportation of green and blue hydrogen. Today, more than 15 million tons of CO2 are being captured each year by Honeywell’s CCUS processes, including an advanced solvent carbon capture (ASCC) technology. That is equivalent to the emissions of more than 3 million cars on the road. In the US, Honeywell and EnLink Midstream are working together to develop a carbon capture and transportation solution along the Mississippi River corridor with many large, concentrated sources of industrial CO2 emissions.
How cheaper crude oil from Russia has changed India’s fuel trade matrix
Sourcing cheaper crude oil from sanction-hit Russia has opened new doors for boosting exports for India while it seems to have alienated traditional buyers of processed petroleum products from the country. While countries like Singapore (-41.7 per cent), USA (-13.2 per cent), Australia (-58.8 per cent), South Korea (-23.9 per cent) and Malaysia (-52.8 per cent) have reduced their purchase of petroleum products from India in FY23, countries like the Netherlands (70.6 per cent), Israel (85 per cent), Brazil (114 per cent), South Africa (60.6 per cent) and Togo (32 per cent) have substantially increased their purchase of fuel products from India.