August 25, 2022

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Japanese Duo to Seek Stakes in New Sakhalin Operator

Japanese trading firms Mitsui and Mitsubishi said they have decided to apply for stakes in the new operator of the Sakhalin-2 project in Russia’s Far East.

Mitsui and Mitsubishi have been asked to inform newly established Russian operator, Sakhalinskaya Energiya, or Sakhalin Energy, on whether they want to retain their respective 12.5% and 10% stakes in the Sakhalin-2 project. The deadline is within one month since the new operator was set up, which means by Sept. 4.

"A resolution was passed this morning regarding the submission of a consent to take a stake. The consent will be filed by the deadline," a Mitsubishi spokesperson said, referring to the Sept. 4 deadline.

A Mitsui spokesperson said the company has decided to retain its stake in the Sakhalin-2 project.

Their decisions, which would be subject to approval by Moscow, did not come as a major surprise. The Japanese government has asked both firms to consider keeping their positions in the project, which supplies around 5 million tons per year of LNG to Japan, in the name of energy security.

Japan is bucking a trend led by Western countries and energy firms by not boycotting Russia. Shell and Exxon Mobil said they would exit Russia, but it remains unclear how they would sell their assets. Shell, which used to hold a 27.5% stake in the Sakhalin-2 project, has said it is unlikely to seek a stake in the new operator.

Currently, state-owned Gazprom owns just over 50% of Sakhalin Energy with the remaining 49.99% held by the new operating company until existing shareholders seek a stake.

Japan's Dependence on Russia
YearJapan's Total LNG ImportsJapan's Russian LNG ImportsRussian Share of Japanese LNG Imports
201070.26.08.5%
201178.97.19.0%
201287.88.19.2%
201388.78.59.5%
201489.78.39.3%
201585.57.58.8%
201683.17.28.7%
201784.57.18.4%
201883.87.08.3%
201977.46.28.0%
202074.96.18.2%
202174.86.78.9%
202249.44.69.2%
Supply Disruption?

Meanwhile Japanese buyers have been asked to re-sign new contracts with the new operator. Jera and Tokyo Gas have reportedly signed new contracts with the new operator, while other buyers may have been taking a wait-and-see approach.

Bloomberg reported Thursday that the new operator, Sakhalin Energy, has cancelled a shipment to at least one Asian customer due to payment issues as well as delays signing revised contracts. This could mark Sakhalin-2’s first supply disruption to Japan since the Russian war in Ukraine broke out in February.

Under the new contracts, Japanese buyers are allowed to continue paying in US dollars to Gazprombank, according to Bloomberg. But Sakhalin Energy has also told its customers to use alternative currencies — including the ruble, euro, yen, or British pound — if payments in dollars, as set in contracts, cannot be processed because of sanctions issues.

Gazprombank, partly owned by Gazprom, has so far been spared from severe sanctions as European countries are using the third-largest bank in Russia to handle payments for their natural gas imports. To avoid sanctions, European buyers have opened two bank accounts at Gazprombank — one in euros and one in rubles — as demanded by Moscow.

Sakhalin Energy said on Aug.19 that it was fully operational in terms of production and business activities and would be fulfilling all existing obligations.

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/yr from the 9.6 million ton/yr project in Russia’s Far East.

These supplies are currently priced much more competitively than today’s high LNG spot prices above $60 per million Btu, which means buyers would want to cling to their term supplies amid tightening global supplies.

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

European Gas Prices Keep Rising Relentlessly

European natural gas prices continued their relentless climb to ever higher levels on Thursday, with no signs of relief on the horizon.

The front-month September Dutch TTF gas futures contract hit an intraday high of €323 per megawatt hour ($94 per million Btu) before ending the session at €310.5/MWh for a gain of almost 7%.

Thursday's gains were sparked by the announcement of unplanned outages at the Kvitebjorn and Gullfaks gas fields in Norway, amounting to a combined total of 14 million cubic meters per day until the end of August.

Those outages will be followed by a heavy schedule of planned maintenance in Norway next month that will further restrict European gas supplies.

Prices had already reached elevated levels after Russian gas giant Gazprom announced that it will close down the Nord Stream pipeline to Germany for three days of maintenance work from Aug. 31 through Sep. 2.

A six-week delay in the restart of the Freeport LNG terminal on the US Gulf Coast has also contributed to the upward pressure on prices.

Freeport had been expected to restart operations in early October after a June explosion, but that has now been pushed back to mid-November.

Europe has been scrambling to buy more LNG cargoes as it seeks to offset a sharp reduction in supplies from Russia and as it pursues a long-term goal of ending its dependence on Russian gas after Moscow's invasion of Ukraine.

"No Ceiling" for Prices

An LNG analyst at a trading house told Energy Intelligence that recent European gas prices include a "big risk premium" which can't be justified on the basis of current supply-demand fundamentals.

A European LNG trader said prices had mainly been driven higher by fears that Nord Stream won't come back on line after Sep. 2. And if that proves to be the case, then "there will be no price ceiling," the trader added.

Gazprom recently warned that European gas prices could exceed $4,000 per thousand cubic meters ($112/MMBtu) during the coming winter.

Russia's Promsvyazbank said that level could even be reached before the end of this summer, given the need to inject gas into storage ahead of the winter, and because of competition between Europe and Asia for LNG cargoes.

Analysts at Engie Energy Scan said that "as long as European gas stocks are not full … injection demand should continue to support prices, along with gas demand for power generation which remains resilient."

"In the meantime, only a decisive fundamental event or announcement could break the bullish momentum," they added.

EU storage facilities were 78% full as of this week, close to the 27-nation bloc's target of 80% by Nov. 1.

Industrial Demand Takes a Hit

Sky-high prices have hit demand for gas, with some industrial consumers opting to scale back production or shut down factories altogether.

Norsk Hydro's Slovalco aluminum plant in Slovakia will halt operations by the end of September because of high electricity prices.

Germany's BASF has halted some ammonia production in Europe and replaced it with imports from the US, while Arcelor Mittal is importing some steel components rather than producing them in Europe.

Traders have said that the surge in prices might prompt regulatory intervention by the EU in Europe's wholesale gas market, unless Gazprom takes steps to increase gas flows to Europe — a scenario that many view as unlikely.

"I can't go to my industrial clients and offer them gas at €300-plus," said a trader at an East European utility.

"You start to see why we might be going back and regulating everything, with the TTF price being capped. It probably won't happen, but these prices are not sustainable," the trader said.

Another gas trader at a major Central European energy company also said that there had been talk in the market of the EU potentially introducing a price cap.

Meanwhile, recently published data show that Germany — Europe's biggest economy and also its biggest buyer of Russian gas — reduced its gas consumption by 14.7% in the year to date, mostly because of mild spring weather and the response from consumers to high prices.


For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact
Jaime Concha, Copenhagen and Daniel Stemler, Madrid and Staff Reports

Lake Charles LNG Signs Up Shell as Offtaker

Energy Transfer LNG has signed up supermajor Shell to a 20-year sale and purchase agreement (SPA) for the offtake of 2.1 million tons per year from the Lake Charles LNG project, which is expected to start up in 2026.

The SPA is the sixth, and largest signed by Energy Transfer since contractual interest was revived in the long-dormant project about a month after Russia invaded Ukraine, setting off a worldwide scramble for LNG supplies to replace Russian piped gas.

Energy Transfer now has offtake agreements amounting to 7.9 million tons/yr, or nearly half of what is now expected to be a 16.45 million ton/yr project (see table).

Lake Charles intends to sell about 15 million tons/yr, or 90%, under firm contracts, according to a note from Tudor, Pickering Holt (TPH), which sees 12-14 million tons secured prior to a final investment decision (FID).

"At the lower end of the targeted range, [Energy Transfer] would need just two additional agreements of similar scale to clear their pre-FID hurdle, with an updated EPC contract the other primary gating event," TPH said.

Energy Transfer previously said that it would be targeting FID in the second half of this year.

Lake Charles LNG Offtake Deals
DateBuyerBuyer CountryVolume (million tons)Duration (years)Deliveries ExpectedPrice IndexFOB/DESType
Mar 29'22ENN Natural GasChina1.8202026HH plus fixed feeFOBNA
Mar 29'22ENN Energy HoldingsChina0.9202026HH plus fixed feeFOBNA
May 3'22Gunvor(trader)2.0202026NANANA
May 4'22SK Gas TradingSouth Korea0.4182026HH plus fixed feeFOBNA
Jun 6'22China Gas Hongda Energy TradingChina0.7252026HHFOBSPA
Aug 25'22Shell(trader)2.1202026NANA SPA
Total Volume and Average Duration7.920.5

The Lake Charles project already has four existing LNG storage tanks, two deep-water berths and other LNG infrastructure, which could make it one of the lowest cost liquefaction projects on the US Gulf Coast.

Yet the former LNG import plant had been largely dormant since receiving export approval from the US Department of Energy in 2013.

Shell's Expanding Reach

Shell is the largest LNG portfolio player worldwide and the largest holder of North American LNG offtake among the majors. Before 2020 it owned a 50% stake in the Lake Charles project.

Shell exited Lake Charles two years ago, with Energy Transfer taking over the role as lead project developer.

“We have had a long-standing relationship with Shell and its predecessor BG Group, as a customer of our regasification facility at Lake Charles. It is great to have Shell re-engaged in the project as a LNG offtake customer," said Tom Mason, president of Energy Transfer LNG.

At the time of Shell's exit, Energy Transfer talked of reducing capacity of the project to 11 million tons/yr. Shell's latest announcement puts the capacity back at 16.45 million tons/yr.

Shell's North American LNG Portfolio
ProjectEquity (%)Offtake (Mtpa)DurationCountry
Calcasieu Pass--22022-41USA
Cove Point--12018-37USA
Driftwood LNG--32026-36USA
Elba Island--2.52020-40USA
Lake Charles--2.12026-46USA
LNG Canada40%5.62024-Canada
Mexico Pacific--2.62026-46Mexico
Plaquemines--22024-44USA
Rio Grande--22026-46USA
Sabine Pass--5.52016-36USA
Sabine Pass--12018-37USA
Total--29.3----

Michael Sultan, Washington

Novatek to Increase Interim Dividends

Russia’s Novatek plans to pay 63% more in interim dividends this year than it paid in the first half of 2021, the privately owned LNG export champion said Thursday.

The company’s shareholders include France’s TotalEnergies with a 19.4% stake, but dividend payments to foreign shareholders are restricted by Moscow is response to international financial sanctions imposed over Russia’s Feb. 24 invasion of Ukraine.

Novatek’s board of directors has recommended paying 45 rubles per share (75¢/share), or a total of 136.63 billion rubles for the first six months of 2022, up from 27.67 rubles/share paid for the same period of last year.

The company did not disclose what portion of net profit this is, but its dividend policy is normally to pay at least 50% of adjusted net profit.

Novatek did not publish its financial results for the first half of this year, in line with Russia’s general policy to limit the publication of potentially sensitive information amid the sanctions. The company’s results should be improving this year thanks to the growth in global energy prices. Russia's LNG production has also kept rising.

For the full year 2021, Novatek paid 71.44 rubles/share in dividends, up from 35.56 rubles/share paid for 2020, also following a sharp growth in profits on higher LNG and other hydrocarbon prices.

Apart from TotalEnergies, Novatek’s key shareholders are CEO Leonid Mikhelson with nearly 25% and Russian-Finnish businessman Gennady Timchenko with 23%, a close ally of Russian leader Vladimir Putin, who had to resign from Novatek’s board of directors earlier this year after the EU blacklisted him.

Novatek’s global depositary receipts remain in circulation outside Russia, as the company was granted an exception from the government from the rule under which Russian companies must delist from foreign stock exchanges.
Staff Reports


In Brief

ONGC Seeks Higher Price for Offshore Gas

The world's fourth-largest LNG buyer is looking for alternatives.

Indian state-owned explorer Oil and Natural Gas Corp. seeks to sell part of the gas from its deepwater offshore block, off India's east coast, from Oct. 1 at a sharp premium over domestic gas prices, but the rate will be limited by the ceiling price set for difficult, deepwater acreage.

The state-owned company has invited bids for 0.75 million standard cubic meters a day of supplies for a period of one year from its KG-DWN-98/2 block at a reserve price of 14% dated Brent plus premium, which comes to $14/MMBtu considering crude at $100/bbl. The government has set a ceiling price of $9.92/MMBtu for gas produced from difficult deepwater and high pressure, high temperature areas for the six-month period that ends Sep. 30. However, the ceiling price is likely to jump sharply when the formula-based prices come up for revision on Oct. 1.

That will benefit ONGC as it seeks to start supplies from its block from Oct 1. ONGC's gas price will still be attractive for local consumers as spot LNG prices have hit the roof, pricing out Indian buyers from the market.

Northeast Asian spot LNG prices skyrocketed by $9 to a new record of $60/MMBtu, according to Energy Intelligence assessments for deliveries four to eight weeks ahead.

ONGC expects to produce 44,000 b/d of oil and 10 MMcm/d of gas from the block in the fiscal year that ends March 2024. The block sits next to Reliance Industries and BP PLC’s KG-DWN-98/3 block which is likely to hit its peak production of 28 MMcm/d in the next fiscal year that begins Apr. 1, 2023.
Rakesh Sharma, New Delhi


Data Snapshot

LNG Netbacks at Key Receiving Terminals

LNG Exporter Netbacks Between Key Receiving Ports
($/MMBtu)AlgeriaAustralia WestAustralia EastMalaysiaNigeriaNorwayOmanPeruQatarRussiaTrinidadUS GulfUS East Coast
Dahej, India56.5857.0456.6457.0356.2456.0757.5155.7357.4256.6955.9155.6355.97
Sodegaura, Japan57.2558.6458.6658.7557.2253.8558.2656.1658.1359.1056.4755.6457.39
Zeebrugge, Belgium74.1072.2571.7972.3573.5373.9273.0971.8372.9571.8473.6672.6173.76
Huelva, Spain75.0273.2172.7673.3074.4374.1974.0272.7073.8972.8074.4873.3674.49
Isle of Grain, UK61.0859.3658.9559.4460.5860.9160.2658.9860.0158.9860.6759.7160.76
Everett, US7.746.556.836.597.507.410.017.156.996.297.89----
Created with Highcharts 9.0.0($/MMBtu)QATAR TO NORTHEAST ASIANetbackNetback21. Mar4. Apr18. Apr2. May16. May30. May13. Jun27. Jun11. Jul25. Jul8. Aug22. Aug10203040506070Energy Intelligence

LNG Market Indicators

Spot LNG Pricing
Latest WGIDailyDaily Chg.Chg. From Latest WGI
NE Asia0.0059.87-0.2859.87
SW Europe0.0075.732.0675.73
Futures Pricing
($/MMBtu)Chg.LatestPreviousWeek Ago
Henry Hub, US (futures)0.049.389.339.19
NBP, UK (futures)+5.1969.7264.5453.82
European Spot Pricing
Chg.LatestPreviousWeek Ago
Dutch TTF4.5990.2485.6569.13
Zeebrugge (Belgium)--59.66--40.61
German NCG2.6490.5087.8669.49
NBP (UK)2.0761.9759.9044.74
US Markets
US Spot Prices
Sabine Pass, Louisiana0.039.319.289.42
Corpus Christi, Texas0.008.928.92--
Cove Point, Maryland-0.108.668.768.39
Elba Island, Georgia--------
Nymex Henry Hub Futures
Near Month0.049.389.339.19
Second Mth0.049.349.309.17
Third Mth0.059.429.379.24
Created with Highcharts 9.0.0($/MMBtu)GLOBAL GAS PRICINGUS NymexDutch TTFNE AsiaSep '21Oct '21Nov '21Dec '21Jan '22Feb '22Mar '22Apr '22May '22Jun '22Jul '22Aug '220255075100Energy Intelligence