Weekly Overview: Energy Supply, Investments. and the view from Gazprom

At the half-way point of the year, European prices are beginning to show some resilience. The average UK system price at the National Balancing Point was up 13% in June compared with May, owing in part to Norwegian production problems.

The International Energy Agency said in its mid-June report that it had been a “turbulent six months.” Less oil has been stock-piled than it originally expected and since January its forecast surplus of 1.5mn b/d of supply in the first half of the year is looking to be almost half that, at the end of the period.

Brent crude oil prices rallied to a 2016 high above $51/barrel in June, stoked by continuing outages in Nigeria and Libya and fires in Canada. May marked the third straight month of average price rises in Brent and WTI futures. But on July 7 Shell ended a two-month-long force majeure on Bonny Light exports, meaning more crude was on the way again.

Possibly coincidentally, but reflecting the bullish mood nevertheless, the past week saw some big upstream investment decisions: UK major BP approved the third train of Tangguh LNG on July 1: as costs continue to fall the cost is likely to be at the lower end of the widely-reported but unconfirmed $8bn-$10bn range. Most of the output of the 3.8mn metric tons/year train is being sold in Indonesia, the remaining quarter is going to Kansai Electric.

More spectacularly the Tengiz Chevroil expansion programme for Kazakhstan got the go-ahead too this week, perhaps signalling hope that the costs were now locked in, while the oil price could still rise. The project, expected to cost $40bn in 2014, is now put at $36.8bn.

Supply and demand

US Henry Hub gas prices have also been strong, rising by almost 50% between the end of February and the beginning of July as summer got off to a scorching start. They are now nudging the $3/mn Btu mark, and making the export of LNG to Europe’s liquid markets less appealing than ever.

There are other factors to consider than just the difference between the two market prices: the buyer might be able to use slightly cheaper US LNG to back out more expensive gas, or to fill an unscheduled supply gap, or to burn in power plants to sell power in a captive market. These factors could mitigate the effect of an adverse arbitrage if the buyer also had already paid for liquefaction and had a tanker on stand-by.

But generally the strong US prices might explain why only the second LNG cargo from the US to come to Europe in four months is poised, reportedly, to arrive in Spain later this month: a country not well connected to the rest of the EU or even one enjoying much spot market liquidity compared with its neighbours to the north.

A new import terminal in one of its neighbours, at Dunkirk in northern France is readying for its commissioning cargo from Nigeria, scheduled to arrive July 8. State EDF’s partners in mainland Europe's biggest terminal, the 13bn m³/yr facility called Dunquerque LNG, are Belgian grid and terminal operator Fluxys (25%) and fellow French Total (10%); but when it is commissioned the operator will be Gaz-Opale, a company 51% owned by Dunkerque LNG and 49% by Fluxys.

And this week saw the Swiss-registered subsidiary of Novatek experimenting with spot LNG trade, buying a cargo from Atlantic LNG in Trinidad for delivery to the port of Quintero in Chile: at 19 knots, a 10-day voyage through the Panama Canal. Its statement suggested it was limbering up for next year, when its Yamal LNG project, in which Total is also a partner, will start exports. Most of the plant's output is aimed at Asia, but the terminal in Russia’s far north will send LNG westwards in winter using ice-class tankers. The transhipment to cheaper vessels will happen at Zeebrugge, not Dunkirk, Fluxys and Yamal agreed in March 2015.

Miller talks up Gazprom's achievements

In Russia, Gazprom’s CEO Alexei Miller took the opportunity of the shareholders’ general meeting on June 30 to highlight some of the company’s achievements at home – building gas-fired power generation projects, improving storage capacity, expansive gasification programmes and installing natural gas vehicle infrastructure – that might have gone unnoticed in the West, which has generally been more interested in what Gazprom might be doing abroad.

Some of his other remarks were warning shots to other companies eying the European market: he said that “if it were necessary, we can build up our production in a short time. This is one of Gazprom’s competitive advantages in the domestic and foreign markets,” referring to the giant Bovanenkovo field in Yamal, whose development has been put on hold while European demand catches up.

Observers say that while gas-fired power generation has not delivered to the extent gas marketers had hoped, there are encouraging signs here and there: for example July 1 saw the start of the consultation into the cap on output at the Groningen field, which could reduce the giant field to 23bn m³/yr in all but the coldest years, with a knock-on effect for gas import demand.

Last year, Miller said, gas production continued to decline in Europe, while the demand for imported gas kept growing. In 2015, Gazprom supplied 159.4bn m³ to Europe, which was up 8% on 2014.

“In 2015, we took efforts to strengthen this advantage by expanding and modernizing our production capacities. Special emphasis was placed on the fields offshore the Yamal Peninsula and in northern seas. Gazprom’s gas production centers in Western Siberia are evidently shifting north, moving deeper into the Arctic Circle.

Last year, the field produced 61.9bn m³, which was 19bn m³ more than in 2014. The goal is to bring it to 115bn m³/yr – “enough to cover gas demand in Austria, Belgium, France, Romania and Spain put together.”

Concurrently the company has developed the corridor for gas delivery from the Yamal gas production centre to western and central Russian regions, as well as for the future Nord Stream 2 gas pipeline. This was another theme: Russia is no stranger to the white-hot heat of technology.

As the rouble is so weak and imports prohibitive, the trunkline “will use cutting-edge technologies that dramatically reduce gas transmission costs,” and Gazprom is using “unique Russian-made pipes with a diameter of 1,420mm and a working pressure of 120 atmospheres.” Higher pressure means fewer compressors. He said the section of pipeline linking the field to the junction at Ukhta would be completed this year.

William Powell