September 7, 2022

WWW.ENERGYINTEL.COM

Novatek Considers Joining Sakhalin-2

Novatek is interested in joining the Sakhalin-2 upstream and LNG project in Russia’s Far East, from which Shell recently decided to withdraw following the Kremlin-ordered change in operator.

“We are interested in considering this,” Novatek CEO Leonid Mikhelson told reporters at a briefing on the sidelines of the Eastern Economic Forum in Vladivostok on Wednesday.

Novatek will make a final decision after it completes an audit of the project, he said.

Moscow has four months to sell Shell’s 27.5% minus one share stake in Sakhalin-2. The energy ministry hopes Novatek will join the project, Minister Nikolai Shulginov told reporters at a separate briefing on the sidelines of the same forum in Vladivostok.

Shell last week notified the Russian government that it won’t take the stake in the new operator, Russia-registered Sakhalin Energy LLC, established in early August to replace Bermuda-registered Sakhalin Energy Investment Co. But Shell said it has reserved all legal rights.

Other foreign shareholders of Sakhalin-2, Japan’s Mitsui and Mitsubishi, agreed to keep their 12.5% and 10% respective stakes in the project. Russia’s state-run gas giant Gazprom will keep its controlling 50% plus one share stake as well.

Key Candidate

Novatek is regarded as a key candidate for Shell’s stake in the project. The government on Tuesday published criteria for the bidders and Novatek seems to be the only company able to meet the criteria.

According to the criteria, the bidder should be a Russian legal entity with the experience of producing 4 million metric tons per year of LNG and an accumulated output volume of not less than 40 million tons. It should have active 10-year charter agreements for LNG tankers for volumes of 4 million cubic meters, experience in international trading of not less than 40 million tons of LNG, and supply contracts for more than five years.

In a sign that Novatek might already be thinking of fitting Sakhalin-2 into its broader LNG supply schemes, Mikhelson suggested at a meeting chaired by Russian leader Vladimir Putin on Monday that Sakhalin-2 might supply LNG to the Kamchatka region in Russia’s Far East, which lacks pipeline gas to cover local demand.

Rivalry With Gazprom

Privately owned Novatek is Russia’s LNG export champion, whose ambitious LNG expansion plans have received generous regulatory, fiscal and financial support from the Kremlin.

Novatek is sticking to plans to launch its second-largest plant in the Russian Arctic, the 19.8 million ton per year Arctic LNG 2 in late 2023, but its future projects face the risk of EU technology sanctions imposed in April in response to Russia’s invasion of Ukraine.

If Novatek joins Sakhalin-2, it will partner in a large 11 million-plus tons/yr LNG project with Gazprom, which has often criticized Novatek for posing unnecessary competition to its pipeline gas in Europe, the market also supplied by Novatek’s Yamal LNG plant launched in the Arctic in late 2017.

Gazprom has also suggested that Russia’s ambitious long-term LNG expansion targets, largely based on Novatek’s expansion plans in the Arctic, should be revised in the new sanctions reality. Novatek believes the targets can be achieved if Russia relies on domestic equipment and technology.

The two companies have also competed for strategic Arctic gas reserves, which Novatek seeks to use for LNG expansion and Gazprom wants to reserve for supplies to the domestic market, as well as for petrochemical projects.
Staff Reports

US EPA Rejects Cheniere Emissions Exemption Request

The US Environmental Protection Agency (EPA) has denied a request from Cheniere Energy for an exemption from a recently revived rule on turbine emissions.

The turbines in question are used at both Cheniere LNG export terminals on the US Gulf Coast, Sabine Pass and Corpus Christi, so the denial potentially affects 45 million tons per year of export capacity — about half of overall US capacity — during a time when US LNG supplies are critical to world gas supply amid the Ukraine crisis.

Under the Clean Air Act, industrial facilities with stationary equipment are required to curb emissions of “hazardous air pollutants,” or those with known human health effects, such as known carcinogens or chemicals linked to reproductive toxicity. For emissions from combustion turbines, the EPA has identified formaldehyde, toluene, benzene and acetaldehyde as possible pollutants, although Cheniere argues that risks from turbine emissions are minimal.

Risk to World LNG Market?

Importantly for world markets, Cheniere doesn't expect a supply disruption resulting from the EPA decision.

"Although this decision may result in unwarranted expenditures, we believe that the steps needed to come into full compliance will not result in a material financial or operational impact and that we will be able to continue to reliably supply LNG to customers and countries around the world," Cheniere said in a statement following the EPA denial.

While regulatory risk is obviously not zero, it appears unlikely that the Biden administration would constrain US LNG export plants amid the critical gas demand situation in Europe and in light of the administration's previous pledge to help Europe.

Path Forward

“While we strongly disagree with EPA’s decision, we will work with our state and federal regulators to develop solutions that ensure compliance," Cheniere said in a statement, adding that "our conviction remains that these emissions do not pose a risk to public health, our workforce or the environment."

Prior to the EPA's denial of Cheniere's request, Jack Fusco, Cheniere's president and CEO said that whether or not an exemption were granted, a solution could be developed "that would enable compliance without a material financial or production impact."

The EPA also seemed to indicate a path forward in its statement.

"We know that Cheniere Energy is looking at options to comply with the formaldehyde limits in EPA’s hazardous air pollutant emission standards for combustion turbines. Though EPA is denying Cheniere’s request for a special subcategory to comply with the turbines rule, the Agency will continue to work with them and with other companies as needed to assure they meet Clean Air Act obligations," the EPA said.
Michael Sultan, Washington

EU to Propose Price Cap on Russian Gas Imports

The European Commission is proposing a price cap on EU imports of natural gas from Russia as well as a windfall profits tax on oil and gas companies as part of a new package of measures to tackle Europe's energy crisis.

Commission President Ursula von der Leyen told reporters on Wednesday that the proposed measures will be discussed at a meeting of EU energy ministers on Friday.

Von der Leyen did not use the term "windfall profits tax" but said fossil fuel producers have been making "massive profits" and that EU member states could use proceeds of a "solidarity contribution" to support vulnerable households and companies.

There has been growing momentum recently to impose price caps on Russian oil and gas, with the G7 group pledging to cap prices for Russian oil exports to reduce Moscow's energy revenues as its war in Ukraine drags on.

Russian President Vladimir Putin hit back on Wednesday, warning that Moscow would cut off energy exports to any countries that make political decisions that breach long-term supply contracts with Russia.

"Russia won't supply anything if that is not in its economic interests. We will supply neither gas, nor oil, nor coal, nor fuel oil," he told the Eastern Economic Forum in Vladivostok.

Von der Leyen said a potential price cap on imports of LNG into Europe is also "on the table."

The commission president said the EU wants to "stay competitive for LNG suppliers" but also wants to avoid paying "extraordinarily high" prices.

An informal EU document seen by Energy Intelligence floated the idea of pegging Europe's benchmark Dutch TTF gas price at a level just above Asia's de facto benchmark LNG price, the Japan Korea Marker.

Von der Leyen said that in addition to the "solidarity contribution" for oil and gas producers, the commission is proposing a cap on the revenues of low-cost electricity producers which have not been hit hard by soaring natural gas prices.

In both cases, the proceeds could be used to support vulnerable European households and businesses and to invest in "clean, home-grown energy," she said.

The commission is also proposing to facilitate "liquidity support" to distressed utility companies and a mandatory target to reduce electricity consumption during periods of peak demand.

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

Jaime Concha, Copenhagen

China's Gas Imports Declined Again in August

China’s natural gas imports, including pipeline gas imports and LNG imports, fell to 8.85 million tons in August, down 15.25% compared with the same period last year, General Administration of Customs data showed this week.

The decrease continues the trend reported last month as Covid-19 lockdowns take their toll on demand.

In the first eight months of this year, China’s natural gas imports reached 71.05 million tons, a drop of 10.2% compared with the same period last year, yet the total cost of those imports increased 44.4%, customs data showed.

China’s LNG buyers have reduced imports due to high international spot LNG prices. The country is now the world's second-largest LNG importer for year-to-date 2022, after having been the largest LNG importer in 2021, according to Kpler.

Stagnant Domestic Consumption

China’s natural gas imports have fallen in line with stagnant domestic consumption.

China's apparent natural gas consumption for January-July fell 0.7% year on year to 213.29 billion cubic meters, according to the National Development and Reform Commission (NDRC). However, China's apparent natural gas consumption for July rose 2.7% year-on-year to 29.82 billion cubic meters, the NDRC said. An increase in gas-fired generation in July was triggered by a severe heatwave in China this summer during which the country's hydropower generation was lower than usual.

What could also begin to prop up domestic gas consumption is the fact that the winter heating season has already started in some of China's northernmost cities. On Sep. 1, Genhe and E'er Guna, northernmost cities in Inner Mongolia, started central heating.

But LNG Terminal Construction Continues

Despite weaker domestic gas demand, state firm CNOOC reported progress in building new LNG terminals.

It has completed the lifting of roofs for three storage tanks at its Jiangsu Yancheng LNG terminal project, each with 270,000 cubic meters. A total of four 220,000 cubic meter storage tanks and six 270,000 cubic meter storage tanks are being built in the first phase of the project.

CNOOC says the project will have an annual LNG handling capacity of six million tons, equivalent to 8.5 billion cubic meters of gaseous natural gas, when it is fully operational by the end of 2023.

CNOOC added that it is also building 11 storage tanks, each with 270,000 cubic meters, in Zhuhai and Ningbo, and preliminary work is being accelerated for the second phase of the Jiangsu Yancheng project with 10 storage tanks, each with 270,000 cubic meters capacity. It is expected that by the end of 2025, 5.67 million cubic meters of new LNG storage capacity will be added, equivalent to over 3.5 billion cubic meters of gaseous natural gas.
Staff Reports, Beijing


Data Snapshot

LNG Netbacks at Key Receiving Terminals

LNG Exporter Netbacks Between Key Receiving Ports
($/MMBtu)AlgeriaAustralia WestAustralia EastMalaysiaNigeriaNorwayOmanPeruQatarRussiaTrinidadUS GulfUS East Coast
Dahej, India60.9161.3960.9661.3960.5460.3561.9059.9761.8161.0160.1859.8960.25
Sodegaura, Japan61.5062.9963.0163.1261.4657.8262.5860.3062.4463.4960.6659.7661.65
Zeebrugge, Belgium29.5428.1027.7928.1629.1029.4128.7627.7628.6427.7829.2128.4129.30
Huelva, Spain56.9355.2354.8255.3156.3756.1556.0054.7555.8754.8456.4355.3756.44
Isle of Grain, UK26.8525.4425.1325.4926.4426.7226.1825.1025.9725.1226.5325.7526.61
Everett, US6.565.315.595.356.316.210.015.955.775.026.72----
Created with Highcharts 9.0.0($/MMBtu)QATAR TO NORTHEAST ASIANetbackNetback4. Apr18. Apr2. May16. May30. May13. Jun27. Jun11. Jul25. Jul8. Aug22. Aug5. Sep10203040506070Energy Intelligence

LNG Market Indicators

Spot LNG Pricing
Latest WGIDailyDaily Chg.Chg. From Latest WGI
NE Asia0.0064.28-0.7264.28
SW Europe0.0057.619.2157.61
Futures Pricing
($/MMBtu)Chg.LatestPreviousWeek Ago
Henry Hub, US (futures)-0.307.848.159.13
NBP, UK (futures)-2.7846.5549.3252.86
European Spot Pricing
Chg.LatestPreviousWeek Ago
Dutch TTF-3.4361.0964.5267.84
Zeebrugge (Belgium)1.3026.2824.9842.67
German NCG1.2463.6362.3869.41
NBP (UK)9.2227.6518.4346.65
US Markets
US Spot Prices
Sabine Pass, Louisiana-0.368.128.488.94
Corpus Christi, Texas7.707.700.008.46
Cove Point, Maryland-0.377.487.858.38
Elba Island, Georgia--------
Nymex Henry Hub Futures
Near Month-0.307.848.159.13
Second Mth-0.317.908.219.19
Third Mth-0.338.048.379.33
Created with Highcharts 9.0.0($/MMBtu)GLOBAL GAS PRICINGUS NymexDutch TTFNE AsiaOct '21Nov '21Dec '21Jan '22Feb '22Mar '22Apr '22May '22Jun '22Jul '22Aug '22Sep '220255075100125Energy Intelligence