EU, Russia, and LNG bet

TL;DR Russian natural gas no-mo. LNG go-go. I recently took up interest in the European Green Deal and decarbonization goals. This was put in new light by the Russian invasion of Ukraine, which will bring additional traction to those goals. My thesis is that the Russian gas has become unpaletable, which will keep LNG prices and profits high for years. The caveat is that I am neither a petrochemical nor a shipping expert. I value contrarian or value-add conformist opinions all the same. 90% of EU total natural gas (NG) consumption comes from imports, 40% from Russia, which supplied around 155 bcm (billion cubic metre) for the year 2021. Considering recent events, the Commission is pushing for independence from Russian gas in 8 years. Is that possible? Maybe, if both pillars go well: diversifying gas supplies, and reducing fossil fuel dependence. The fossil fuel reduction plan calls for extra effort on top of the 30% gas consumption reduction (-100 bcm) planned until 2030 in the Fit for 55 program. These extra measures are set to decrease consumption further to -155 bcm, essentially eliminating the need for Russian gas with adequately diversified supplies. On the short term, there are regulatory and political plans to immediately cut Russian imports by two-thirds (overly optimistic) or by a third (more realistic), by the end of 2022. This article focuses on the market impact of these short-term measures in terms of how this quantity can be secured. A future article will look at the long-term measures, like the decarbonization programs in the European Green Deal. Cutting Russian imports by 50 bcm this year is by no means easy and can be done from two main sources: LNG and pipeline diversification. LNG is already being imported, 79 bcm just in 2021 with ample regasification capacity (200 bcm). Not all this capacity can be used though, due to interconnection bottlenecks. According to the IEA, the EU could theoretically increase LNG imports by 60 bcm, but this is limited by the tight LNG market supply. With a lot of diplomacy, a 20 bcm LNG import increase can be done. Non-Russian pipeline sources, like Azerbaijan and Norway can complement this with a 10 bcm pipeline import increase. Most of the rest of the cuts are projected to come from new and optimized existing wind, solar, biomethane, and nuclear, which would dispense 19 bcm consumption for energy generation. Additional demand cuts can be obtained by energy efficiency measures like heat pumps and insulation. Since gas consumption is not constant throughout the year, mostly underground gas storage is being used throughout Europe. Cutting Russian imports over the winter months is only possible if enough gas is stored in easily accessible storage. To this effect there are immediate plans to mandate a 90% fill level in existing storage by October 1st. Coordinated refilling throughout the Union, under joint procurement. The urgency is quite remarkable: “Member States should act as if the legislation was already in place and take measures to ensure refilling of storage in time for next winter”. This measure will keep demand and prices high throughout 2022. LNG needs to be transported by specialized ships to the regasification terminals. Therefore, LNG ships will be heading towards Europe for years. Are there enough to cover the extra demand? Supply is inelastic, ships are continuously on order and being scrapped. The average LNG vessel has a capacity of 150000 cm, which after regasification equals to 90 mcm of NG. Indeed, the US shipped 22 bcm to the EU in 2021 with 248 vessel-trips. With 28 days round-trip across the Atlantic, the 20 bcm increase can be done with 20 extra ships doing just that. There were 615 LNG vessels in the global fleet in 2021, 137 more on order to be delivered in 2-3 years. I believe there is room for higher target increases, towards 50 bcm. The EU will take what it can get to the detriment of other consumers in Asia, keeping prices high. On March 17th the Biden administration authorized additional exports of LNG, meaning every operating US LNG export project can now export to Europe. The only barriers remaining are production and transport capacity related. The mid-term prospects are positive too. According to Clarksons broking, LNG is currently in the recovering market cycle, and LNG demand in B Tonne-Miles is projected to grow 17.5% until 2023. So, demand is there, where is the supply coming from? Most of the LNG will be coming to Europe from Qatar, USA, Egypt, and West Africa. Including pipeline diversification, we can add Norway to the list, which is the second-largest (L)NG supplier of Europe. Qatar exports 77.1 Mt of LNG per annum. Around two-thirds of that is carried by Qatar Gas Transport Nakilat (QGTS). Good bet, but hard to invest in the Qatar Exchange. The US is the second biggest LNG exporter, although they are expected to surpass Qatar in 2022. They export 70 Mt of LNG per annum. Around 41 Mt was produced by Cheniere (LNG), the largest US exporter. Competitors are integrated majors like ExxonMobil (XOM) with 86 Mt, Total (TTE) with 42 Mt, Chevron (CVX) with 12 Mt, and Shell (SHEL/SHELL) with 31 Mt, which operate all around the world. Norwegian Equinor (EQNR) is enviable in that it supplies Europe with both pipeline and LNG with 57.4 bcm NG (41.9 Mt LNG for comparison). A growth LNG stock is Tellurian (TELL), with some NG wells, but no LNG capacity yet. Building of the Driftwood LNG terminal is slated to start in April, with the company having enough capital for the first year only. First delivery 2026 only. Among the shippers, Flex LNG (FLNG) looks solid: 7 P/E, 10% div yield, 93% of 2022 capacity already covered in backlog. ____ https://energy.ec.europa.eu/system/files/2022-03/REPowerEU_Communication_with_Annexes_EN.pdf https://energy.ec.europa.eu/system/files/2022-02/EU-US_LNG_2022_2.pdf IEA (2022), A 10-Point Plan to Reduce the European Union’s Reliance on Russian Natural Gas, IEA, Paris https://www.iea.org/reports/a-10-point-plan-to-reduce-the-european-unions-reliance-on-russian-natural-gas https://www.spglobal.com/commodity-insights/en/market-insights/latest-news/shipping/031021-spotlight-lng-charter-rates-drop-to-record-lows-support-strong-us-lng-dispatches-this-spring https://s25.q4cdn.com/348445879/files/doc_presentations/2021/4Q21-IR-Presentation_English.pdf https://www.clarksons.com/media/1298664/2021_prelims_presentation_-_final.pdf https://www.reuters.com/world/us/biden-administration-approves-more-exports-major-us-lng-terminals-2022-03-16/ https://thesis.eur.nl/pub/41240/Panagiotidis-D.-A-global-perspective-of-Liquefied-Natural-Gas-vessels-capacity.pdf https://www.shell.com/investors/results-and-reporting/quarterly-results/_jcr_content/par/grid/p0/textimage.stream/1643817914851/039c2c77aa5f8a12047adeb58d471ffff52f35a0/q4-2021-qra-document.pdf https://www.equinor.com/content/dam/statoil/documents/annual-reports/2021/equinor-2021-annual-report-and-form-20-f.pdf

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EU, Russia, and LNG bet

bullish

TL;DR Russian natural gas no-mo. LNG go-go.

I recently took up interest in the European Green Deal and decarbonization goals. This was put in new light by the Russian invasion of Ukraine, which will bring additional traction to those goals. My thesis is that the Russian gas has become unpaletable, which will keep LNG prices and profits high for years. The caveat is that I am neither a petrochemical nor a shipping expert. I value contrarian or value-add conformist opinions all the same.

90% of EU total natural gas (NG) consumption comes from imports, 40% from Russia, which supplied around 155 bcm (billion cubic metre) for the year 2021.

Considering recent events, the Commission is pushing for independence from Russian gas in 8 years. Is that possible? Maybe, if both pillars go well: diversifying gas supplies, and reducing fossil fuel dependence.

The fossil fuel reduction plan calls for extra effort on top of the 30% gas consumption reduction (-100 bcm) planned until 2030 in the Fit for 55 program. These extra measures are set to decrease consumption further to -155 bcm, essentially eliminating the need for Russian gas with adequately diversified supplies.

On the short term, there are regulatory and political plans to immediately cut Russian imports by two-thirds (overly optimistic) or by a third (more realistic), by the end of 2022. This article focuses on the market impact of these short-term measures in terms of how this quantity can be secured. A future article will look at the long-term measures, like the decarbonization programs in the European Green Deal.

Cutting Russian imports by 50 bcm this year is by no means easy and can be done from two main sources: LNG and pipeline diversification. LNG is already being imported, 79 bcm just in 2021 with ample regasification capacity (200 bcm). Not all this capacity can be used though, due to interconnection bottlenecks. According to the IEA, the EU could theoretically increase LNG imports by 60 bcm, but this is limited by the tight LNG market supply. With a lot of diplomacy, a 20 bcm LNG import increase can be done. Non-Russian pipeline sources, like Azerbaijan and Norway can complement this with a 10 bcm pipeline import increase. Most of the rest of the cuts are projected to come from new and optimized existing wind, solar, biomethane, and nuclear, which would dispense 19 bcm consumption for energy generation. Additional demand cuts can be obtained by energy efficiency measures like heat pumps and insulation.

Since gas consumption is not constant throughout the year, mostly underground gas storage is being used throughout Europe. Cutting Russian imports over the winter months is only possible if enough gas is stored in easily accessible storage. To this effect there are immediate plans to mandate a 90% fill level in existing storage by October 1st. Coordinated refilling throughout the Union, under joint procurement. The urgency is quite remarkable: “Member States should act as if the legislation was already in place and take measures to ensure refilling of storage in time for next winter”. This measure will keep demand and prices high throughout 2022.

LNG needs to be transported by specialized ships to the regasification terminals. Therefore, LNG ships will be heading towards Europe for years. Are there enough to cover the extra demand? Supply is inelastic, ships are continuously on order and being scrapped. The average LNG vessel has a capacity of 150000 cm, which after regasification equals to 90 mcm of NG. Indeed, the US shipped 22 bcm to the EU in 2021 with 248 vessel-trips. With 28 days round-trip across the Atlantic, the 20 bcm increase can be done with 20 extra ships doing just that. There were 615 LNG vessels in the global fleet in 2021, 137 more on order to be delivered in 2-3 years. I believe there is room for higher target increases, towards 50 bcm. The EU will take what it can get to the detriment of other consumers in Asia, keeping prices high.

On March 17th the Biden administration authorized additional exports of LNG, meaning every operating US LNG export project can now export to Europe. The only barriers remaining are production and transport capacity related.

The mid-term prospects are positive too. According to Clarksons broking, LNG is currently in the recovering market cycle, and LNG demand in B Tonne-Miles is projected to grow 17.5% until 2023.

So, demand is there, where is the supply coming from? Most of the LNG will be coming to Europe from Qatar, USA, Egypt, and West Africa. Including pipeline diversification, we can add Norway to the list, which is the second-largest (L)NG supplier of Europe.

Qatar exports 77.1 Mt of LNG per annum. Around two-thirds of that is carried by Qatar Gas Transport Nakilat (QGTS). Good bet, but hard to invest in the Qatar Exchange.

The US is the second biggest LNG exporter, although they are expected to surpass Qatar in 2022. They export 70 Mt of LNG per annum. Around 41 Mt was produced by Cheniere (LNG), the largest US exporter. Competitors are integrated majors like ExxonMobil (XOM) with 86 Mt, Total (TTE) with 42 Mt, Chevron (CVX) with 12 Mt, and Shell (SHEL/SHELL) with 31 Mt, which operate all around the world.

Norwegian Equinor (EQNR) is enviable in that it supplies Europe with both pipeline and LNG with 57.4 bcm NG (41.9 Mt LNG for comparison).

A growth LNG stock is Tellurian (TELL), with some NG wells, but no LNG capacity yet. Building of the Driftwood LNG terminal is slated to start in April, with the company having enough capital for the first year only. First delivery 2026 only.

Among the shippers, Flex LNG (FLNG) looks solid: 7 P/E, 10% div yield, 93% of 2022 capacity already covered in backlog.

____

https://energy.ec.europa.eu/system/files/2022-03/REPowerEU_Communication_with_Annexes_EN.pdf

https://energy.ec.europa.eu/system/files/2022-02/EU-US_LNG_2022_2.pdf

IEA (2022), A 10-Point Plan to Reduce the European Union's Reliance on Russian Natural Gas, IEA, Paris https://www.iea.org/reports/a-10-point-plan-to-reduce-the-european-unions-reliance-on-russian-natural-gas

https://www.spglobal.com/commodity-insights/en/market-insights/latest-news/shipping/031021-spotlight-lng-charter-rates-drop-to-record-lows-support-strong-us-lng-dispatches-this-spring

https://s25.q4cdn.com/348445879/files/doc_presentations/2021/4Q21-IR-Presentation_English.pdf

https://www.clarksons.com/media/1298664/2021_prelims_presentation_-_final.pdf

https://www.reuters.com/world/us/biden-administration-approves-more-exports-major-us-lng-terminals-2022-03-16/

https://thesis.eur.nl/pub/41240/Panagiotidis-D.-A-global-perspective-of-Liquefied-Natural-Gas-vessels-capacity.pdf

https://www.shell.com/investors/results-and-reporting/quarterly-results/_jcr_content/par/grid/p0/textimage.stream/1643817914851/039c2c77aa5f8a12047adeb58d471ffff52f35a0/q4-2021-qra-document.pdf

https://www.equinor.com/content/dam/statoil/documents/annual-reports/2021/equinor-2021-annual-report-and-form-20-f.pdf

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