August 22, 2022

WWW.ENERGYINTEL.COM

Japanese Buyers Likely to Sign Contracts With New Sakhalin-2 Operator

Some Japanese buyers at the Sakhalin-2 project have reportedly re-signed term supply contracts with the new operator Sakhalinskaya Energiya, or Sakhalin Energy.

Jera and Tokyo Gas have signed new contracts ahead of winter, according to Japanese newspaper Nikkei. The new operator has offered the same terms, such as price and volume, as the old contracts buyers had signed with the previous Bermuda-registered operator Sakhalin Energy Investment Co.

The new operator was established on Aug. 5 following a Russian presidential decree for the government to take over control of the project.

Citing confidentiality reasons, Japanese buyers declined to comment if they have signed contracts with the new operator. Earlier, buyers were heard to have been asked to pay to a Moscow branch of an unnamed European bank and are still allowed to pay in US dollars.

A total of eight Japanese power and gas utilities — Jera, Tokyo Gas, Osaka Gas, Hiroshima Gas, Toho Gas, Tohoku Electric, Kyushu Electric and Saibu Gas — have contracted to buy a combined 5 million tons per year from the 9.6 million ton per year project in Russia’s Far East. These supplies are currently priced much more competitively than today’s high LNG spot prices above $50 per million Btu, which means buyers would want to cling to their term supplies amid tightening global supplies.

The Ukraine war has led to a deterioration of relations between Japan and Russia, but LNG cargoes continue to flow from Sakhalin-2 to Japan. Japan imported 4.1 million tons of LNG from the project in the first seven months of the year, compared with 3.8 million tons a year ago, according to Kpler shipping data.

Created with Highcharts 9.0.0(million tons)SAKHALIN-2 LNG EXPORTS TO JAPAN200820102012201420162018202020220246810Source: Kpler

Japan's Equity Investment in Sakhalin-2

Japanese trading houses Mitsui and Mitsubishi are asked to inform Sakhalinskaya Energiya on whether they want to retain their respective 12.5% and 10% stakes in the Sakhalin-2 project within one month since the new operator was set up, which means by Sept. 4. Their decisions would be subject to approval by Moscow.

The Japanese government is urging Mitsui and Mitsubishi to maintain their stakes to ensure Japan’s energy security. Russia accounts for 9%-10% of Japan’s total LNG imports.

Mitsui is expected to keep its stake under the new operator as the latter has not changed any contract terms which would disadvantage the Japanese firm, according to Nikkei.

Japan’s new trade and industry minister Yasutoshi Nishimura met Mitsubishi executives last week. "I think (Mitsubishi) has accepted my request,” he said. The minister said Russia has not set any conditions which would make the signing of a new deal difficult.

Mitsubishi decided against investing in Novatek’s Arctic LNG-2 project despite showing initial interest. Mitsubishi and Mitsui were originally expected to acquire a combined 10% stake in Arctic LNG-2, but the stake was eventually held by a consortium consisting of Mitsui and Japan-backed Japan Oil, Gas and Metals National Corp. (Jogmec) when the project was sanctioned in 2019.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact
Clara Tan, Singapore

China to Have Very Low Gas Consumption Growth Rate This Year  

China is to have a very low growth rate of apparent natural gas consumption this year, due to weak domestic demand and high international spot LNG prices, according to a natural gas report released by the central government late last Friday.

China’s apparent gas consumption in 2022 will be 375 billion cubic meters to 380 Bcm, increasing 1%-3% year on year, according to the China Natural Gas Development Report, which is jointly released by the National Energy Administration, the State Council and the Ministry of Natural Resources.

China’s apparent gas consumption in 2021 was 369 Bcm, with an annual growth rate of 12.5%.

However, market players claim that even the report’s low prediction might be too optimistic.

“It is very possible to have consumption decline this year,” said a CNOOC LNG trader.

LNG Imports Decline

“Gas imports this year will slightly decline, and LNG imports probably will show the first decline in recent years,” said the report.

The country’s LNG imports have been falling for seven consecutive months this year. China’s Covid-19-zero policy, slowing economic growth and high LNG prices have led to a deceleration in the country’s LNG import growth. Last year, China became the world’s No.1 LNG market, but it is expected to lose this status to Japan this year.

Chinese buyers have largely stayed away from the spot market as Asian prices passed the $50 per million Btu level last week. Some Chinese importers have secured LNG supply through long-term contracts and resold their contracted volumes to take advantage of high spot prices for profit maximization.

Domestic Gas Output to Continue Increasing

China’s domestic gas production will continue an increasing trend this year, as it is Chinese President Xi Jinping’s direct order to increase domestic output for national energy security.

In 2022, it is estimated that the domestic production will be more than 220 Bcm, aiming to increase by 10 Bcm annually.

In 2021, China’s natural gas output was 207.6 Bcm, a year-on-year increase of 7.8% and an increase of more than 10 Bcm for five consecutive years, according to the report.

Expensive international LNG prices pushed China to reduce LNG imports and increase pipeline gas imports and domestic production. The trend will continue if international oil and gas prices remain high for the rest of this year.

Gas Demand

Gas demand for the rest of this year will be affected by the upcoming heating season from November to March, and by drastic price fluctuations in the global energy market, said the report.

By sectors, city gas consumption will grow steadily, with residential and heating gas being the main driving force.

The growth of gas power generation will slow down, mainly due to the slowdown in the growth of electricity consumption, the high base of last year and the relatively fast growth of power generation from renewable power.

Growth of industrial gas consumption will slow down, mainly due to the high price of spot LNG imports.

Chemical and fertilizer gas consumption will remain stable, said the report.

China’s natural gas consumption as a slice of total energy consumption increased to 8.9% in 2021.

China's Gas Demand
(Bcm)20222021
Apparent Consumption 375-380369
Domestic Production220208
ImportsNA168

China's Gas Consumption Mix in 2021
City Gas32%
Industrial Users 40
Electricity Generation18
Chemical Users10
Total 100%

Dawn Lee, Beijing

Gas Prices Surge on Upcoming Nord Stream Outage

European natural gas prices surged to new highs on Monday amid concerns that a three-day maintenance outage at the Nord Stream gas pipeline will place further strain on an extremely tight market.

The front-month September Dutch TTF gas futures contract closed just above €280 per megawatt hour ($82 million Btu) on Monday — a gain of 14.6% over Friday's close. Earlier in the session it reached an intraday high of €295/MWh.

Russia's Gazprom said on Friday that the Nord Stream pipeline that carries Russian gas to Germany will close down on Aug. 31 for three days of maintenance work.

It said the pipeline will have to halt all deliveries of gas for essential maintenance of the only one of six turbines that is still working at its Portovaya compressor station.

The pipeline had previously closed down for 10 days of maintenance in July and since the end of that month the volume of gas it carries has been limited to 33 million cubic meters per day, or just 20% of its normal capacity.

Gazprom has said it will resume gas flows at the same reduced rate on Sep. 3, assuming no problems are encountered during maintenance and routine checks.

But many traders are concerned that Nord Stream may not resume gas deliveries at all on Sep. 3 or find some pretext to keep disrupting pipeline flows as Europe and Russia remain at loggerheads over the war in Ukraine.

Expectations of intense competition between Europe and Asia for LNG cargoes has added to bullish market sentiment.

LNG prices in Asia reached the highest levels in five months last week as buyers sought to secure cargoes for the coming winter amid fears of a supply crunch.

Demand for LNG in Europe and Asia has also driven a rally in natural gas prices in the US, which is a major LNG exporter.

Demand Destruction

Traders say the sharp increase in European spot prices could result in another wave of demand destruction — buyers simply refusing to pay up for gas — something that was already seen during a run-up in prices in late 2021.

"End-users aren't agreeing to prices," one trader told Energy Intelligence.

The surge in Dutch TTF prices and the resulting demand destruction, coupled with the extremely limited availability of slots at most Western European LNG terminals could divert cargoes from Europe to Asia.

"Japan and South Korea have limited inventory and they would buy spot for winter," an Asian LNG trader told Energy Intelligence.

However, the same trader said that Japan has sufficient inventory for the rest of August and September to limit diversion away from the Atlantic Basin.

Germany: No Need to Panic

Meanwhile, Economy Minister Robert Habeck has said that despite low and intermittent deliveries of Russian gas, Germany does not need to panic about the prospect of a gas shortage this winter.

German media quoted Habeck as saying that if households and industry cut their consumption by 15%-20%, and additional gas keeps coming via pipelines from Norway and the Netherlands, as well as from new LNG import terminals being built in Germany, the country will be able to cope with the situation.

Habeck said Germany won't delay long-standing plans to phase out nuclear power because of the gas crisis, because the gas savings would be negligible. But he added that he was open to potentially extending the lifespan of one nuclear plant.

The minister also ruled out allowing Gazprom's Nord Stream 2 pipeline to start delivering gas, saying such a move would represent a capitulation to Russian President Vladimir Putin.

Berlin blocked the start-up of the Nord Stream 2 earlier this year in an early phase of the Ukraine crisis.

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

Created with Highcharts 9.0.0(MMcm/d)RUSSIAN GAS FLOWS VIA KEY ROUTES TO EUROPENord StreamUkrainian TransitTurk Stream to EuropeJul01'22Jul03'22Jul05'22Jul07'22Jul09'22Jul11'22Jul13'22Jul15'22Jul17'22Jul19'22Jul21'22Jul23'22Jul25'22Jul27'22Jul29'22Jul31'22Aug02'22Aug04'22Aug06'22Aug08'22Aug10'22Aug12'22Aug14'22Aug16'22Aug18'22Aug20'22020406080Source: Gazprom, GTSOU, Nord Stream AG, Entsog, Energy Intelligence

Daniel Stemler, Madrid and Staff Reports

Eni, Total Find More Gas off Cyprus

European majors Eni and TotalEnergies have made another large natural gas discovery offshore Cyprus, where development of a series of significant finds is complicated by overlapping claims to offshore acreage.

The partners estimate they have hit as much as 2.5 trillion cubic feet of natural gas in place with the Cronos-1 well on Block 6 about 160 kilmeters (99 miles) southwest of the Mediterranean island.

Operator Eni drilled the discovery well in 2,287 meters of water with the Tungsten Explorer drillship, hitting 260 meters (850 feet) of net pay in a carbonate reservoir "with excellent permeability."

Block 6 was already home to Eni and Total's 2018 Calypso discovery that is estimated to hold between 2 Tcf and 5 Tcf of natural gas.

"This successful exploration well at Cronos-1 is another illustration of the impact of our exploration strategy which is focused on discovering resources with low technical cost and low carbon emissions, to contribute to energy security, including to provide an additional source of gas supply to Europe," said Total's Kevin McLachlan.

Eni and Total are two of the largest leaseholders offshore Cyprus, where they often have joint holdings. Eni operates five blocks and has interests in two more. Total operates two blocks and has interests in five others.

The pair pledged to follow up Cronos with an appraisal well on Block 6 to determine the best way to develop the find, which Eni has pledged to "fast-track."

However, the technical aspects of the discovery are likely less tricky than the political ones.

Including Cronos, operators like Eni, Exxon Mobil and Chevron have discovered as much as 18 Tcf of gas offshore Cyprus and are considering a range of possible development schemes, including floating LNG and sending gas to Egypt by pipeline to take advantage of existing liquefaction capacity there.

However, competing claims between Cyprus, Turkey and Israel over portions of the fields have complicated negotiations between partners over how to bring the discoveries into production.

Previous drilling campaigns have prompted Turkey to assert territorial claims and seek access to potential gas resources.

This led to clashes offshore Cyprus in 2018 when Turkey prevented an Eni drillship from operating. The French navy intervened in support of Cyprus in 2019 and 2021.

Noah Brenner, London


Data Snapshot

LNG Netbacks at Key Receiving Terminals

LNG Exporter Netbacks Between Key Receiving Ports
($/MMBtu)AlgeriaAustralia WestAustralia EastMalaysiaNigeriaNorwayOmanPeruQatarRussiaTrinidadUS GulfUS East Coast
Dahej, India48.3948.8348.4648.8248.0847.9149.2747.6049.1948.5047.7647.5047.83
Sodegaura, Japan49.1150.4450.4550.5349.0945.9050.0848.0949.9650.8748.3847.5949.25
Zeebrugge, Belgium47.1645.6145.2545.6846.6847.0246.3245.2546.1945.2646.8045.9446.89
Huelva, Spain66.7164.9864.5665.0666.1465.9265.7564.5065.6364.5966.2065.1366.20
Isle of Grain, UK56.4054.7354.3454.8155.9156.2355.6054.3655.3654.3656.0155.0856.09
Everett, US7.956.777.046.807.727.620.017.377.206.508.11----
Created with Highcharts 9.0.0($/MMBtu)QATAR TO NORTHEAST ASIANetbackNetback21. Mar4. Apr18. Apr2. May16. May30. May13. Jun27. Jun11. Jul25. Jul8. Aug22. Aug102030405060Energy Intelligence

LNG Market Indicators

Spot LNG Pricing
Latest WGIDailyDaily Chg.Chg. From Latest WGI
NE Asia0.0051.62-0.0451.62
SW Europe0.0067.4014.5567.40
Futures Pricing
($/MMBtu)Chg.LatestPreviousWeek Ago
Henry Hub, US (futures)0.349.689.348.73
NBP, UK (futures)+7.7562.2854.5350.02
European Spot Pricing
Chg.LatestPreviousWeek Ago
Dutch TTF7.8779.2571.3864.53
Zeebrugge (Belgium)------40.44
German NCG11.0083.3872.3866.43
NBP (UK)14.5557.2642.7144.37
US Markets
US Spot Prices
Sabine Pass, Louisiana0.709.839.138.56
Corpus Christi, Texas0.629.148.528.29
Cove Point, Maryland0.848.928.087.61
Elba Island, Georgia--------
Nymex Henry Hub Futures
Near Month0.349.689.348.73
Second Mth0.339.659.328.71
Third Mth0.339.719.398.79
Created with Highcharts 9.0.0($/MMBtu)GLOBAL GAS PRICINGUS NymexDutch TTFNE AsiaSep '21Oct '21Nov '21Dec '21Jan '22Feb '22Mar '22Apr '22May '22Jun '22Jul '22Aug '22020406080100Energy Intelligence