[NGW Magazine] Editorial: Political risk

This article is featured in NGW Magazine Volume 2, Issue 12.

The Saudi-led isolation of Qatar did not send shockwaves through global gas markets: pipeline gas kept flowing from Qatar into Oman and the United Arab Emirates, and LNG deliveries were reported sailing as usual. At most, it has given buyers yet another bargaining chip as they consider how much Qatari LNG to buy when their contracts expire. Were Qatari gas actually to be shut in, the consequences would be great, owing to the quantities of LNG at stake, and the size and political clout of its investors and partners, particularly in energy: companies such as ExxonMobil, Shell, ConocoPhillips and Total. 

It is also therefore politically unthinkable – especially for Saudi Arabia which is planning an initial public offering for Saudi Aramco and where the budget is running a deficit thanks to low oil prices. Qatar’s by contrast is booming. During the blockade it announced a $14bn deal to buy US fighter jets. One unexpected and unnecessary casualty is US unity: the president, Donald Trump, tweeted his support for Saudi Arabia, soon after the more cautious State Department had urged talks between the states involved. 

Until a long-lasting solution is found, waterborne deliveries may be interrupted, Qatar’s long-term LNG customers in Japan can argue; and their purchasing costs will be unpredictable if they have to go into the spot market to make up any shortfall as force majeure typically covers blockades. They will face loss of either market share – in previous re-openers when markets were less liberal this was not so much of a concern – or profit, if they cannot match their rivals on price. This is similar to the argument used by European importers when negotiating purchases with Russia, when Ukraine was a bargaining chip. That allegedly value-reducing threat is likely to be all but removed with the opening of Nord Stream 2, just as it was with Blue Stream and Turkey in the 1990s, allowing Gazprom to ask for more; and Ukraine should not be overlooked among all the discussions about the politics of the line. 

No matter how much Ukraine is demonstrably embracing market reforms, its transit system is old and would need a few billion dollars to bring it back to scratch. It also needs compression gas whereas Nord Stream 2 is a higher-pressure system and has a lower carbon footprint. And as a sovereign country, Russia can decide what route to use to ship its gas to market – just as its avowed opponents are free not to buy it.

Indeed one such, Poland, which has so far relied mostly on Russian imports but has a contract with Qatar too, took delivery of US LNG this month: it was the second  US delivery to northern Europe since the start-up of Sabine Pass in February 2016. But, coming as it did hot on the heels of the first, to the cobwebby Gate terminal at Rotterdam, the significance seemed bigger than it might turn out to be. Both Norway and Russia are exporting at very high rates again this year, meaning there could be less room for LNG. Lithuania also has an LNG terminal but most of the country’s end-users prefer Russian gas as it is cheaper than LNG from Norway, the alternative. Ukraine by contrast is paying a high price as it is importing Russian gas that has crossed Ukraine, left the country, and come back in again through a different pipeline network and no doubt also with a small mark-up to justify the European Union-based sellers’ time. 

On the other hand, the country is earning very high income from transiting Russian gas, as the first five months of the year saw record throughput. Its gas trade division lost money last year – hryvnia 3.5bn ($134mn), with another hryvnia 1.6bn lost on storage; while gas transmission and distribution yielded a profit of hryvnia 26bn. But the Stockholm decision will have brought cheer, removing the existential threat of a $44bn payment that Gazprom had claimed was its due under the take or pay clause. 

The country is looking at ways to improve storage, including offering customers the ability to inject and withdraw gas imports that are to be exempt from customs duty for years rather than days. Offering, as it proposes, the unneeded 14bn m³ of capacity to third parties would solve a lot of eastern Europe’s flexibility problems, and save countries such as Bulgaria the cost of developing additional capacity of their own. It would also diminish the value of storage, such as it is, elsewhere in Europe: as NGW has reported, a number of operators are mothballing or permanently closing plant as it is, owing to the surplus of peak capacity. 

Ukrainian corporate life though remains baffling. Where it could be exporting gas, such are its reserves, Kiev is taxing upstream companies heavily, so that its regime remains one of Europe’s least competitive. This is no doubt a reflection of its short-term need to keep the country running on a day-to-day basis. Cutting royalties on production to nothing, but introducing a progressive tax on company profits could encourage producers to put more money into upstream.

And private shareholders’ plans to dismiss the board outright at one private producer JKX also seem designed to limit the country’s gas production potential, just as the new(ish) board gets to grips with hydraulic fracturing of Soviet-era wells, which JKX picked up from licensing agency NAK Nadra for nothing. Installed in early 2016 to deal with tax liabilities and declining production, the directors are headed for the exit at the end of the month, despite progress made in both directions, and no explanation provided by the oligarchs.