August 19, 2022


Putin Pledges Support for Arctic LNG 2 Tanker Construction

Russian President Vladimir Putin has promised to support the Zvezda shipyard in Russia’s Far East so it can build enough LNG tankers for Novatek’s 19.8 million ton per year Arctic LNG 2 project.

“We must do everything, the government must help Zvezda meet the client’s expectations in full, because if Novatek fulfills its plan to build a new LNG production facility, it will need to ship the product," Putin said at a meeting on the development of the shipbuilding industry Thursday.

The Zvezda has contracts to build 15 Arc7 ice-class tankers for Arctic LNG 2, but the Western sanctions against Russia over the war in Ukraine and the withdrawal of some South Korean partners might complicate the shipyard’s operations.

Russia is sticking to its LNG expansion ambitions despite the technology sanctions and has recently also promised financial support for the developers of the domestic liquefaction technology to keep the expansion on track.

Sanctions Bite

Former Deputy Prime Minister Yuri Borisov in May said Zvezda will have to review its production schedules because some Korean partners have quit projects with the shipyard. He did not name the partners.

For construction of the Arc7 tankers for Arctic LNG 2, Zvezda has teamed up with South Korea’s Samsung Heavy Industries, which hasn’t announced any plans to exit.

Another six Arc7 tankers for Arctic LNG 2 were ordered from the South Korean shipyard Daewoo Shipbuilding and Marine Engineering (DSME). DSME canceled contracts for three of those tankers because of the sanctions imposed on the Russian shipping company Sovcomflot, which ordered them. Those contracts will be handed to another company, Novatek CEO Leonid Mikhelson said in June.

Novatek Needs 21 Tankers

Novatek needs all 21 tankers ordered for Arctic LNG 2, Mikhelson said at the Thursday meeting chaired by Putin. Arctic LNG 2 will produce 21 million tons/yr, which is more than its nameplate capacity, according to Mikhelson.

“We need it exactly that way: one million tons/yr [of LNG] – one tanker,” he said.

The project is designed to supply 80% of its LNG to Asia and 20% to the West, he reiterated. But if there are fewer tankers than planned, then a bigger portion of LNG will go West because of the shorter distance. “That is absolutely not right and poses additional risks,” he said.

Russia’s state-run pipeline gas exporter Gazprom has often criticized Novatek for posing “unnecessary” competition on its traditional markets of Europe.

But Novatek is holding to plans to launch all three 6.6 million ton/yr trains, although only the first train looks likely to start operations next year as planned.

The second and third trains face bigger risks due to the sanctions and withdrawal of key equipment suppliers and construction contractors, but Novatek believes it can find ways to complete construction anyway. The second and third trains are scheduled for 2024 and 2025.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact >
Staff Reports

China Demand Slump Could Hit North American LNG Projects Hard

A buckling of Chinese LNG demand under historically high prices could be a gut punch for existing and planned North American export projects, particularly on the US Gulf Coast.

“The LNG export industry has tended to view Asian markets as a massive pool of opportunity,” said Sam Reynolds, author of the IEEFA report The Economic Case for LNG in Asia is Crumbling. “But unaffordable prices are causing the demand pool to dry up, undermining the viability of LNG as a cheap, reliable ‘bridge fuel’ for emerging Asian markets. High, volatile prices are alienating the same markets that the LNG industry was counting on for growth," he told Energy Intelligence.

This could spell trouble for North American LNG exporters, who often tout that cheap supply costs will keep the sector competitive. In fact, Reynolds said operators along the US Gulf Coast may have higher break evens for LNG deliveries to Asia than its chief competitors in Australia and the Middle East.

The cost of delivered cargoes is the top priority for emerging Asian markets, including Pakistan, Bangladesh, India and most critically China.

“There, buyers are going to be hard-pressed to decide between US contracts — now increasingly tied to volatile Henry Hub prices, which are being driven higher by the ongoing LNG buildout on the Gulf — and oil-indexed contracts from Qatar and elsewhere,” Reynolds said. “Higher transportation costs from the Gulf will likely factor into those decisions.”

Declines Already Evident

No developing market is more important to North American LNG operators than China, whose LNG imports have fallen 20.3% year to date.

Moreover, year-over-year Chinese pipeline imports have risen 10.8% through July, customs data show, and plans are in place to expand pipeline capacity from Russia and Turkmenistan by 100 billion cubic meters per year (9.5 Bcf/d), permanently eroding future need for LNG imports.

Unaffordable LNG prices have also led Asia's emerging markets led by China to slash spot market purchases while maximizing long-term contract volumes.

That also helps explain why Chinese utilities have been at the forefront of new deals underpinning growth in the US LNG sector while US focus has been on slaking European demand.

Regardless, stratospheric LNG costs will prove untenable for those sellers looking to Asia, Reynolds warned. “Should global LNG prices remain elevated and volatile over the next several years, downward pressures on Asian LNG demand are likely to accelerate, which may ultimately limit opportunities for term deals between North American exporters and emerging Asian importers over the long term.”

New LNG export projects in Mexico and British Columbia "will be most exposed to a potential slowdown in the growth of LNG demand given their reliance on Asian buyers,” he added. “Since Asian LNG demand may not grow as rapidly as investors expect, over-dependence on Asian offtakers is proving to be an increasingly risky strategy for export projects.”

Tom Haywood, Houston

Croatia To Double Regas Capacity At Krk LNG Terminal

Croatia will more than double the regasification capacity of its Krk LNG terminal, while also building a new gas pipeline in the western part of the country, as it looks to boost gas supply security.

The Croatian government announced Thursday that it will boost the capacity of the Krk floating storage and regasification unit (FSRU) to 6.1 billion cubic meters per year (Bcm/yr) from the current 2.9 Bcm/yr. This follows the expansion of the terminal’s capacity from 2.6 Bcm/yr earlier this year.

The government also decided to build a pipeline between Zlobin and Bosiljevo in western Croatia.

The combined investment in these two projects amounts to €180 million, of which €155 million will be destined for the pipeline construction and €25 million for the LNG terminal expansion, according to the government’s statement.

Besides state funding, support from the EU is expected to help finance these developments, said Davor Filipovic, Croatia’s economy and sustainable development minister.

Apart from the supply security considerations, Croatia views these projects as key elements to position itself “as a leader in the new distribution of tickets when we talk about energy in this part of Europe,” Filipovic added.

Regional Hub?

For his part, Prime Minister Andrej Plenkovic said that through these two projects, Croatia is becoming a regional energy hub “when it comes to the high-quality use of terminals for LNG.”

Indeed, Croatia’s regional hub ambitions have been reinforced this year, with most Central European countries heavily betting on LNG to reduce their dependence on Russian gas supplies in the wake of the Ukraine invasion.

Hungary’s state-owned gas trader MVM CEEnergy is currently the largest capacity holder at Krk, and in recent months Slovak state gas company SPP has secured LNG supplies for delivery to the Croatian terminal. Meanwhile, neighboring Slovenia is looking to bring Qatari LNG supplies into Krk.

The expansion will enable the Krk LNG terminal to reach its originally planned regasification capacity, which was widely seen as too high during the project’s planning phase.

The facility was originally planned as an onshore terminal with up to 6 Bcm/yr of capacity. However, it failed to attract sufficient market interest during various open seasons, which forced the terminal operator, LNG Croatia, to move the project offshore and reduce its capacity.

Daniel Stemler, Madrid

In Brief

European Gas Prices Soar Ahead of Nord Stream Maintenance

European natural gas prices surged to new highs on Friday as Russian gas giant Gazprom said it would halt gas exports to Germany via the Nord Stream pipeline for three days of maintenance work starting Aug. 31.

Gazprom — controlled by the Russian government — said the outage was necessary to carry out maintenance work on the only one of six turbines that can still be used at the pipeline's Portovaya compressor station in Russia.

European gas prices had already shot up this summer as Gazprom sharply reduced Nord Stream flows to Germany against the backdrop of a deterioration in relations between Europe and Russia over the latter's invasion of Ukraine.

The front-month September Dutch TTF gas futures contract soared to an intraday high of €261 per megawatt hour ($77.3 million Btu) in late trading on Friday before easing slightly to close at €257.4/MWh for a gain of 6.8% versus Thursday.

Europe — and Germany in particular — became highly dependent on Russian gas over a period of several decades. In recent months European countries have scrambled to secure supplies from other countries and stockpile enough gas for the coming winter.

While Gazprom has sharply reduced its pipeline gas exports to Europe, it has benefited from the strong prices seen since Russia invaded Ukraine in late February.

Staff Reports

Timor-Leste Eyes China’s Support for Greater Sunrise

Timor-Leste President Jose Ramos-Horta said his nation could seek to attract Chinese investors if partners in the Greater Sunrise offshore natural gas project do not back piping the gas to Timor-Leste’s shores.

“Timor-Leste would be in a financial cliff if Greater Sunrise is not operating within the next 10 years," Ramos-Horta told Guardian Australia. "So, very soon, [Timor-Leste’s] leadership has to make decisions … if necessary, a trip to China.”

East Timor has long favored building an onshore liquefaction plant in the country to boost the economy. It has recently released studies looking at the technical details as well as costs and benefits of the proposal.

In turn, minority partner Woodside prefers either a floating concept or sending the gas to backfill existing LNG facilities in Australia.

The company is also waiting for the Australian and the East Timorese governments to iron out differences in tax treatment for the Sunrise project to move forward.

Woodside has a 33.44% stake in Greater Sunrise, while Timor GAP — the Timor-Leste national oil company — holds a stake of 56.56%, after buying out ConocoPhillips and Shell. Japan’s Osaka Gas holds a 10% stake.

The Sunrise and Troubadour gas and condensate fields, known as the Greater Sunrise Fields, are located in the Timor Sea and hold around 5.13 trillion cubic feet of contingent gas resources and 225.9 million barrels of condensate.
Marc Roussot, Singapore

Data Snapshot

LNG Netbacks at Key Receiving Terminals

LNG Exporter Netbacks Between Key Receiving Ports
($/MMBtu)AlgeriaAustralia WestAustralia EastMalaysiaNigeriaNorwayOmanPeruQatarRussiaTrinidadUS GulfUS East Coast
Dahej, India48.4048.8548.4748.8448.0847.9049.3147.5849.2248.5147.7547.4847.82
Sodegaura, Japan49.1050.4550.4750.5649.0745.7750.0948.0349.9650.9048.3447.5349.24
Zeebrugge, Belgium44.0842.5242.1642.5943.6043.9343.2342.1543.1042.1643.7242.8443.80
Huelva, Spain52.1750.5650.1850.6451.6451.4451.2950.1051.1650.1951.7050.7151.71
Isle of Grain, UK41.8740.3339.9840.3941.4241.7241.1439.9740.9139.9841.5240.6641.60
Everett, US7.175.956.235.996.936.830.016.576.405.687.33----
Created with Highcharts 9.0.0($/MMBtu)QATAR TO NORTHEAST ASIANetbackNetback14. Mar28. Mar11. Apr25. Apr9. May23. May6. Jun20. Jun4. Jul18. Jul1. Aug15. Aug102030405060Energy Intelligence

LNG Market Indicators

Spot LNG Pricing
Latest WGIDailyDaily Chg.Chg. From Latest WGI
NE Asia0.0051.660.0251.66
SW Europe0.0052.85-2.5252.85
Futures Pricing
($/MMBtu)Chg.LatestPreviousWeek Ago
Henry Hub, US (futures)0.159.349.198.77
NBP, UK (futures)+0.5854.5353.9546.83
European Spot Pricing
Chg.LatestPreviousWeek Ago
Dutch TTF2.5072.0569.5560.29
Zeebrugge (Belgium)----40.36--
German NCG2.6371.7169.0859.79
NBP (UK)-2.1342.7144.8442.59
US Markets
US Spot Prices
Sabine Pass, Louisiana-
Corpus Christi, Texas8.528.520.008.34
Cove Point, Maryland-0.318.088.39--
Elba Island, Georgia--------
Nymex Henry Hub Futures
Near Month0.159.349.198.77
Second Mth0.159.329.178.74
Third Mth0.149.399.248.82
Created with Highcharts 9.0.0($/MMBtu)GLOBAL GAS PRICINGUS NymexDutch TTFNE AsiaSep '21Oct '21Nov '21Dec '21Jan '22Feb '22Mar '22Apr '22May '22Jun '22Jul '22Aug '22020406080Energy Intelligence