Gas Line, Q2 2019

Gas Line is a quarterly publication that looks at major news stories in global gas—ranging from project development to markets and geopolitics. My goal is not to cover every story but to draw connections between stories across time and space in order to shed light on the major themes that will drive global gas markets in the years ahead. My main takeaways from this quarter:

The Glut Is (Finally) Here

The bottom line: For years, an impending boom in liquified natural gas (LNG) supply was expected to lower gas prices. Now the boom has finally arrived, and spot prices have fallen to multi-year lows in both Europe and Asia. This fall raises several questions. The first is whether low prices will lead to shut-ins, especially for LNG projects with high operating costs. The flip side to this question is whether demand will pick up, edged on by low prices: so far, this seems to have happened to some degree in Europe, but not at a large scale. Importantly, we have little experience at these price levels for prolonged periods—most of our assumptions on fuel switching are based on averages and can ignore more mundane or operational factors that impact a switch from something else to natural gas. An extended period of cheap gas might help illuminate whether those assumptions are correct or not.

The backstory: Gas prices crashed in Q2. The Title Transfer Facility in the Netherlands has fallen by about 60 percent since October 1, 2018 and is trading at its lowest point since 2010. Spot prices for LNG in Asia also reached a 10-year low this quarter. Meanwhile Henry Hub, in the United States, remains muted, trading within a narrow band of $2.3 and $2.7 per million British thermal units in Q2. All the while, average import prices for LNG in Asia, which still track oil, remain high, prolonging a bifurcated market between actual import prices for LNG and prices for spot LNG.

Higher prices were mostly due to growing LNG production. ICIS estimates that LNG supply rose 14 percent in Q1, while another source, Poten, puts the growth at 11 percent; either way, new projects are finally ramping up, and the growth in supply has continued into Q2 with several new projects in the commissioning phase. Demand in Asia was mostly flat, year-on-year, in Q1 2019, and so LNG was pushed into Europe (the initial signs for Q2 demand were also bearish). LNG into the European Union more than doubled in the first five months of 2019—just as Gazprom has upped its own exports into Europe. So far, this supply push is leading to a build-up in stocks, which reached their highest level since 2014 (in terms of how full storage is), evidence that whatever demand response there is, it is not enough to arrest the decline in prices.

The FID Wave Proceeding as Expected

The bottom line: For a while, it has been clear that 2019 would be a major year for sanctioning of new LNG projects—and that this wave would be more geographically diverse than previous ones. The first half of 2019 has confirmed this prediction, and 2019 will likely see the highest volume ever in new project sanctions. In part, this flurry offsets the slowdown that occurred in 2016 and 2017, and thus alleviates the forecasted imbalance between supply and demand in the early 2020s. But another outcome is also possible: driven by a counter-cyclical, strategic bet on gas, we could enter a period of prolonged lower prices as an unprecedented level of new supply hits the market at the same time.

The backstory: Two projects announced a final investment decision (FID) in Q2 2019: Cheniere’s expansion at Sabine Pass (Train 6), and the Anadarko-led Mozambique LNG project. Meanwhile, Venture Global has said it started construction at its Calcasieu Pass facility, while the company also announced an equity injection from Stonepeak Infrastructure Partners—wrapping up the final steps before a final investment decision. (The company also announced a capital injection for its other proposed project—Plaquemines LNG.)

Several projects targeting FID in 2019 or 2020 made progress as well. The Federal Energy Regulatory Commission (FERC) approved three projects in Q2: Driftwood, Port Arthur, and a third train at Freeport LNG. It also issued a series of final environmental impact statements (EIS), a sign that more approvals are coming. On the commercial front, Tellurian signed a major agreement with Total for its Driftwood project; Sempra sold LNG from its Port Arthur project to Saudi Aramco; Venture Global sold additional gas from its Plaquemines facility to Poland’s PGNiG; and NextDecade signed a long-term contract with Shell while finalizing an engineering, procurement, and construction (EPC) agreement with Bechtel for its Rio Grande project. (NextDecade also suffered the loss of its founder, Kathleen Eisbrenner, one of the few people to have truly transformed the global gas industry.)

Outside the United States, NOVATEK’s Arctic 2 project made several announcements: it signed two preliminary agreements to sell LNG to Repsol and Vitol, it announced that CNODC, CNOOC, and a consortium of Mitsui and Japan Oil, Gas and Metals National Corporation (JOGMEC) would enter the project with a 10 percent equity stake each, it signed an EPC contract with TechnipFMC for constructing the project, and it said that Total would participate in its two transshipment facilities in Murmansk and Kamchatka. NOVATEK also announced a partnership on arctic shipping (with Chinese partners) on LNG and gas marketing in China and a framework agreement on Vietnam. The company also inaugurated its first small-scale LNG facility, at Vysotsk, while talking up its ambitions to expand further into the LNG business with a third large-scale project. In short, NOVATEK is continuing to step up and execute on its ambition to become a top-tier LNG player.

Elsewhere, ExxonMobil announced that the government of Mozambique approved the development plan for its Rovuma LNG project, marking another step towards FID. In Qatar, Qatar Petroleum continued to advance its ambitious expansion program, issuing a major tender for 60 to 100 LNG vessels and another tender for LNG-related facilities. In Indonesia, the INPEX-led Abadi project agreed in principle on development terms with the government, although much remains before the project can get to FID (the targeted start date is now 2027). In Papua New Guinea, the finance minister resigned, citing his disagreement over a deal to expand the country’s LNG output, triggering a leadership challenge that ousted the prime minster and ultimately installed him, the former finance minister, as the new prime minster. What this all means for the country’s LNG business is still unclear.

On the import side, several projects made headway in Q2. In Australia, one of the projects looking to import LNG into the East Coast received an approval from the state government, while another pushed back its estimated start date. In Alaska, Marathon filed for a permit with FERC to import LNG in its Nikiski plant, the export facility that came online in 1969 but which has been mothballed since 2015. In Cyprus, the Natural Gas Company launched one more tender process for LNG supply and infrastructure—after several earlier attempts have failed. In Germany, one project began the pre-qualification process for selecting an EPC contractor. In Hong Kong, two power companies signed a deal to import LNG from Shell and a time charter for floating storage and regasification vessel with Mitsui O.S.K. Lines (MOL)—both major steps so that market can start LNG imports.

Gas (Further) Entangled by Politics

The bottom line: It is easy to look at the global gas market and see a gradual progression towards a more open, transparent, and commercially driven system. But this long-term trajectory is constantly tripped up politics—and especially by politics from and around Washington, D.C. U.S. foreign policy is a progressively more important driver (and risk) in global gas markets.

The backstory: In just one quarter, there was plenty of admixture between politics and natural gas. Early in the quarter, the Chinese company ENN announced it would withdraw its bid to purchase Toshiba’s assets in the Freeport LNG facility—citing uncertain approval by the Committee for Foreign Investment in the United States. Soon thereafter, the Chinese government raised its tariff on U.S. LNG, dealing another blow to a potentially important relationship that has never managed to materialize.

On the European front, bipartisan bills to sanction the Nord Stream 2 pipeline were introduced in the House and the Senate. Secretary of Energy Rick Perry, on a trip to attend the inauguration of Ukraine’s new president, said passage was imminent, although a month later, President Trump was less committal (his words were “we’re looking at it”). The close interplay between geopolitics and U.S. LNG was clear, however—when Polish president Andrzej Duda visited the White House, he announced not just an uptick is purchases of U.S. LNG but also a weapons deal and a U.S. troop increase in Poland. And it is not hard to suspect that, in some small part at least, political calculations factored into Saudi Aramco’s decision to make its first ever foray into the LNG business through a project in the United States.

Gas Pricing Keeps Getting More Opaque

The bottom line: There is a tendency to see gas pricing slowly moving towards a global, unified system. There is truth in that view, but only partially so. Companies are still tinkering with the pricing model, continuing to experiment with structures that can enable suppliers a return on investment and customers security of demand. If anything, the continued experimentation is proof enough that while oil indexation may be losing its appeal, what will replace it is unclear.

The backstory: In just a quarter, companies signed contracts that experimented with vastly different pricing structures. Tellurian signed two deals with Total; in one, Total will make an upfront investment in exchange for LNG on a variable cost basis (basically just pay operating expenses); in another, Tellurian will deliver LNG to Total at a price linked to the Japan Korea Marker. NextDecade signed a long-term contract with Shell where approximately 75 percent of the price is pegged to Brent. Shell did a deal with Tokyo Gas where the price is indexed to coal. And Cheniere signed a contract for Apache to deliver gas to Cheniere for export with the price linked to “international LNG indices.”

These innovations notwithstanding, Qatar Petroleum was still offering long-term LNG on a price linked to oil, although it was reportedly lowering its price. In Thailand, Malaysia’s PETRONAS reportedly won a tender to supply LNG on a medium-term basis by offering a price linked to Brent as well, close to the price that Qatar Petroleum is said to be offering. The persistence of oil linked pricing was noted also in the latest survey of gas prices, released by the International Gas Union (IGU). Per the IGU, less than half of the gas consumed in the world was priced based on gas-on-gas competition in 2018; around 20 percent was priced in some relation to oil, and regulated pricing accounted for almost 30 percent (a small balance, below 5 percent, is priced in others ways). But internationally traded gas is still split, almost evenly, between oil indexed and gas-on-gas pricing.

2018 Was a Good Year for Gas Demand (Sort Of)—Revisited

The bottom line: Gas demand growth depends on a few large consumers—and is driven largely by countries where prices are either very low (the United States) or kept artificially low due to government policy. Although gas demand grew strongly, that dependence creates important questions about the competitiveness of natural gas going forward.

The backstory: In the previous Gas Line, I explored the preliminary results for gas demand in 2018, concluding that the overwhelming reliance on the United States and China for growth complicated an otherwise strong headline story about global gas demand. The release of the BP Statistical Review of World Energy allows for a more thorough exploration of that same question—and, in short, lead to a slightly more positive read of 2018 than my initial assessment in April.

According to BP, gas demand rose by 5.3 percent in 2018. This is the second highest number in the last 30 years in both absolute and relative terms—second only to 2010, when gas demand recovered from the economic crisis. Five regions registered their highest gas demand ever; two, Europe and South America, consumed less gas today than at some point in the recent past. The story is similar when it comes to the share of gas in primary energy use: Europe, South America and the Commonwealth of Independent States are all slightly below their all-time peak; in all other regions, gas penetration is at its highest point ever.

Yet a closer look at individual countries reveals a weaker story. Since 2010, China and the United States have each accounted for 25 percent of the incremental growth in global gas demand. Together with the next three countries—Russia, Iran, and Saudi Arabia—these five countries accounted for 70 percent of the change in demand from 2010 to 2018. What is notable is that four of these five countries have gas prices that are, to some extent, subsidized, at least according to the International Energy Agency. In fact, around 65 percent of the growth in gas demand since 2010 has come from countries that subsidized gas in 2018 (even more if we include countries that phased out subsidies). In short, gas continues to have a competitiveness challenge.

On a more micro scale, the BP data show some interesting stories. One is rebounds—countries where production had been falling but is now rising: Algeria, Argentina, Trinidad, Egypt and, to an extent, Canada (the rebound started earlier). Given the centrality of hydrocarbons to the economy of these countries, the reversals will have broad impacts. Other counties stood out for a steady fall in output: in Mexico, gas production is down 29 percent versus the peak; in Thailand 13 percent; in Indonesia, 16 percent; in Bolivia, 21 percent; in the Netherlands, 63 percent. Each of these stories has broad impacts on individual countries and on trade flows.

Some Further Reading

• Thierry Bros, “Quarterly Gas Review,” Issue 6, June 2, 2019.
• BP, Statistical Review of World Energy, June 2019.
• European Commission, “Quarterly Report on European Gas Markets,” Fourth Quarter of 2018, April 2019.
• Equinor, “Energy Perspectives 2019,” June 2019.
• International Energy Agency (IEA), “Gas 2019: Analysis and forecasts to 2024,” June 2019.
• IEA, World Investment Report 2019, May 2019.
• International Gas Union (IGU), “2019 Wholesale Gas Price Survey,” May 2019.
• Ira Joseph, “The LNG sector is breaking taboos to stay competitive,” S&P Global Platts Insight, June 27, 2019.

Nikos Tsafos is a senior fellow with the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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