Friday, November 2, 2012
Copyright © 2012 Energy Intelligence Group. All rights reserved. Unauthorized access or electronic forwarding, even for internal use, is prohibited.

Market Insight

Post Hurricane Sandy

Editor’s Note:  Due to serious technical problems caused by Hurricane Sandy, the LNG Intelligence editions dated October 31 through November 5 were delayed. We apologize for the inconvenience. The commentary below is a summary for the week and is included with all four delayed editions.


Natural gas futures tumbled to their lowest level in more than a month Friday [Nov. 2], as traders focused on record inventories and looked past the falling temperatures likely to boost demand as winter approaches.

December Nymex gas was down 14.5¢, or 3.9%, at $3.554/MMBtu -- that's the lowest front-month settle for the fuel since Sept. 26.  Friday's retreat caps a steep decline in natural gas this week. The contract is down 4.6% this week, amid concerns about the impact of Hurricane Sandy on demand and rising stockpiles of natural gas.

"We've got a lot of gas in inventory, and it's not being used. It's still sitting there," said Tom Saal, senior vice president of energy trading at INTL Hencorp Futures in Miami.

Nymex natural gas ended nearly unchanged for several days as traders balanced rising gas-fired heating demand against the massive power outages caused by Hurricane Sandy. On Thursday, December Nymex gas settled 0.7¢ higher, at $3.699/MMBtu, the highest level since Nov. 8, 2011. The contract settled 0.1¢ higher at $3.692/MMBtu Wednesday, after an 11.2¢ plunge to $3.691/MMBtu on Tuesday.

Millions of utility customers remain without power in the wake of Hurricane Sandy, which pummeled the Eastern US Monday and Tuesday, and utilities say it could take a week or more to return power to customers. The storm likely curbed demand for natural gas because utilities have been increasingly turning to gas as a fuel source as the price of the fuel has fallen below that of coal.

Natural gas is used to generate more than 35% of the electricity used in New York and New Jersey, which bore the brunt of the storm, according to the Energy Department. "We're faced with the loss of demand in a well-supplied market," said Teri Viswanath, an energy analyst at BNP Paribas in New York.

"If we have a long period of time where people don't have power, that's going to cut into demand and really prevent the market from establishing a rally," said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut.

The storm could curb gas demand by 10 billion cubic feet this week, according to an estimate by Citi.

But the storm also brought with it a blast of cold air to those regions, which could kick up demand for natural gas used for heating. Also, outages at several nuclear plants could force gas-powered generators to pick up additional slack, analysts said.

"Sandy has really thrown a lot of sand into the gears," said Kyle Cooper, analyst at IAF Energy Advisors in Houston.

The US gas storage report amounted to a mere footnote this week.

The report showed gas inventories rose by 65 billion cubic feet to a highest-ever level for any week of 3.903 trillion cubic feet. Analysts and traders surveyed by Dow Jones Newswires expected the data to show 69 billion cubic feet added to storage during the week ended Oct. 26.  Stocks are now 3.6% above a year ago and 7.1% above the five-year average for the week.


Cypriot Imports

State-run Cypriot gas firm Defa is evaluating bids from 17 firms to supply the Mediterranean island with natural gas over a three- to five-year period .

“We are hoping to secure a supplier as soon as possible in order to reduce the high cost of electricity generation in the country,” said a Defa representative. The gas imports will serve as an interim solution until offshore gas from the Aphrodite field in Block 12 comes on stream in September 2018. The field is operated by US-based Noble Energy and is estimated to have gross reserves of between 5 trillion and 8 trillion cubic feet of gas (LNGI Oct.26'12).

According to Defa, the tender calls for gas supplies of between 0.4 billion and 1.2 billion cubic meters per year.

In late September, Defa requested that firms which had expressed interest in   supplying gas to Cyprus should consider three options: to ensure supply via permanently moored floating storage and regasification unit (FSRU) located offshore to Vassilikos on the southern half of the island and connected via a subsea pipeline; supplying gas using an LNG vessel with regasification capability via pipeline onshore or finally, to supply compressed natural gas to a decompression facility located onshore.

The Cypriot capital, Nicosia, is in the process of converting its power plants to run on natural gas rather than more expensive fuel oil. In July 2011, an explosion destroyed part of the power generation facility at Vassilikos (LNGI May14'12). This caused electricity costs to soar at a time when the country’s public finances were in a perilous state pending word of a possible bailout from the EU.

“We have converted two combined-cycle power plants at Vassilikos to run on natural gas -- both of which have combined capacity of 220 megawatts. Other plants we would hope to convert over a six-month period or within a year and a half at the latest,” said the Defa spokesperson. “The speed of the conversion will be linked to the price we can get for the gas, however. The supply contract could be oil-indexed but this will depend on the suppliers and will be subject to negotiation,” the spokesperson added.

Gas supplies will begin to arrive no later than 2015, according to Defa.

Nicosia has also sought natural gas supplies from Israel. A Cypriot team visited the country in early September to discuss the possibility of a bilateral supply agreement. Further talks are expected to be held by early November, according to sources at Defa (LNGI Sep.5'12).

Energy Intelligence

Moscow Looks East

Faced with mounting pressure from its traditional consumers in the European Union, Moscow has given Gazprom strict orders to accelerate the implementation of its so-called Eastern gas program, which should help Russia’s state natural gas giant realize its forecast that supplies eastward should soon exceed those to the west.

The issue of Gazprom’s eastern program was on the agenda of a meeting this week between Russian President Vladimir Putin and Gazprom head Alexei Miller (related). Putin reminded that the program was developed five years ago and that now is the right time to start the implementation of its second stage, which includes the development of the giant Chayandinskoye field in Yakutia and the Kovykta field in the Irkutsk region, as well as construction of two gas pipelines from the fields that will connect to the recently commissioned Sakhalin-Khabarovsk-Vladivostok (SKV) pipe.

Putin reiterated that gas from both the 1.3 trillion cubic meter Chayandinskoye field and the 2 Tcm Kovykta field should be mainly used for domestic needs. At the same time, he acknowledged that the fields' huge reserves also allow for setting up “an export center oriented to the Asia-Pacific region.” Gazprom immediately said it was considering pipeline options to send its gas to China,
Japan and South Korea, while Putin emphasized that LNG exports should be another focus area -- a point the Russian president has repeatedly made recently (LNGI Jun.5'12).

Miller reported that Gazprom has already prepared an investment justification for the development of the Chayandinskoye field, where projected output is estimated at 25 billion cubic meters per year. Development costs are estimated at 430 billion rubles ($13.6 billion). Gas from the field will be shipped via the 3,200 kilometer Yakutia-Khabarovsk-Vladivostok pipeline to feed it into SKV, running along the same corridor as the East Siberia-Pacific Ocean (Espo) oil pipeline.

The Yakutia-Khabarovsk-Vladivostok pipeline, estimated to cost some 770 billion rubles, should be commissioned in 2017, Miller promised. Soon after that, Gazprom should start developing Kovykta and building an 800 km line to connect this field to the system. The final aim will be to connect both fields to the SKV pipeline running eastward and to the unified gas transportation system running westward. This would connect fields in East Siberia and West Siberia into a single gas transportation system.

It is understood that the current plan could have a significant impact on Gazprom’s future gas exports. For starters, it may change the company's plans to deliver some 30 Bcm/yr to China via the so-called Western route, down the proposed Altai pipeline. It is believed that Gazprom would now pay more attention to the Eastern route, which envisages gas supplies from East Siberia
and Sakhalin (LNGI Oct.5'12).

Second, there would be an impact on plans for future LNG shipments. Gazprom earlier intended to supply new gas volumes from East Siberia to Asian customers either from a planned third train of 5 million tons per year at the existing Sakhalin-2 LNG plant or a new LNG facility in Vladivostok with capacity of 10 million tons/yr. It is now understood that Gazprom has finally chosen the second option. Gazprom Deputy Chief Executive Alexander Medvedev earlier said the planned facility in Vladivostok could be expanded to 25 million tons/yr . But analysts say the first option could also remain viable for the company, with potential supplies from the Sakhalin-1 and Sakhalin-3 projects.

However, the key question is the price at which Gazprom will agree to sell its gas to potential customers in Asia. According to Denis Borisov from the Nomos Bank, the new planned pipelines from the Chayandinskoye field can only be economically viable if Gazprom manages to negotiate the same price at which it sells gas to its European customers, which is close to $500 per thousand cubic meters (approximately $13.90/MMBtu). Observers believe that such a price could become too expensive for Asian buyers.

Energy Intelligence


Browse Moves Forward

Western Australia’s environment minister, Bill Marmion, has endorsed a controversial decision to approve Woodside’s plan to locate its Browse LNG Precinct at James Price Point (JPP). The original approval was granted this past summer by Western Australia’s Environmental Protection Authority (LNGI Sep.25'12).

However, Marmion made a few additional recommendations based on some of the 244 appeals that were submitted this summer -- many of which strongly opposed the project. The minister recommended improving the knowledge of local marine fauna off the Kimberley coastline, as well as better protecting it. The minister also called for better protection of ancient dinosaur tracks in a World Heritage site located close to the proposed LNG plant. Marmion also called for pollution risks from oil spills and air emissions to be better addressed.

Marmion also agreed to boost the involvement of traditional landowners and increase requirements for stakeholder and community consultations regarding the development of environmental management plans.

Woodside’s decision to locate its 12 million ton/yr Browse LNG plant at JPP has come under strong criticism from environmentalists and some traditional owners. The decision is said to have prompted some of Woodside’s joint-venture partners to consider alternatives, such as floating LNG (FLNG) designs -- or backfilling the existing North West Shelf LNG plant. 

Woodside welcomed the minister’s recommendations, which came a day after the company signed a memorandum of understanding (MOU) with Japan’s  export-import credit agency, the Japan Bank for International Cooperation (JBIC) (LNGI Oct.30'12). Under the MOU, Woodside and JBIC will hold periodic discussions relating to Woodside’s future LNG developments. JBIC -- which signed a similar agreement with BG in late September -- will consider providing financial support for any potential LNG developments.

The MOU comes just a few months after two Japanese companies -- Mitsui and Mitsubishi -- acquired a 14.7% stake in Browse for around $2 billion.

Energy Intelligence

Shtokman Construction

Construction at the Shtokman natural gas field in Russia's Arctic will be carried out according to plan with work beginning there by the end of 2017, President Vladimir Putin's spokesman said Wednesday, Interfax reported.

"Construction work on Shtokman will start towards the end of 2017, spokesman Dmitry Peskov is quoted as saying.

The project has suffered numerous delays and reached an apparent standstill after French oil major Total, which was working alongside Russia's Gazprom and Norway's Statoil to develop the field, said in August that the cost of development was too high (LNGI Jul.30'12).

Dow Jones Newswires

Yemen Repairs

Repairs to a natural-gas pipeline supplying Yemen's Balhaf export terminal in the Gulf of Aden, which was blown up late Tuesday, could take up to two weeks, while exports are still affected by the sabotage, a person familiar with the matter said Thursday.

Yemen LNG Co. said Wednesday that the country's only LNG pipeline supplying its plants was hit by an explosion due to sabotage, but it didn't say if the plants would be shut down or exports were being halted (LNGI Sep.26'12).

"The exports are affected but a technical team was sent to the location of the explosion Wednesday to repair the pipeline immediately," the person who asked not to be named said.

"But the repair works could take up to two weeks," the person added.

The attack, the seventh in a year, hit the 38 inch gas pipeline that links block 18 to the Balhaf terminal on the Gulf of Aden. It comes only a few weeks after the plants resumed operation following sabotage in September.

The 320-kilometer LNG terminal has been repeatedly attacked by suspected al Qaeda-linked militants. Similar explosions struck gas pipelines that also feed the Balhaf terminal in August, May and March, the latter forcing the suspension of gas exports for three weeks.

Yemen began exporting LNG from Balhaf in 2009. French group Total SA (TOT) has an almost 40% interest in the liquefaction plants.

The $4.5 billion Yemen LNG project has two production trains with a combined capacity of 6.7 million tons a year, supplying mainly to Asia, Europe, North America and South America.

Dow Jones Newswires

Indexation Critique

Natural gas should be priced in a flexible way and it is in the industry's own interest to diversify away from the historical link with oil prices, the European Union energy chief said Wednesday 

Guenther Oettinger's comments -- made at a conference with Russia's energy minister -- come as EU antitrust authorities investigate Gazprom's practice of linking the price of gas in long-term contracts with that of oil (LNGI Sep.6'12).

"It is in the gas industry's own interest to price gas in a flexible way and not just" with an oil link, Oettinger said.

Dow Jones Newswires

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Copyright © 2012 Energy Intelligence Group. All rights reserved. Unauthorized access or electronic forwarding, even for internal use, is prohibited.