September 8, 2022

WWW.ENERGYINTEL.COM

Novatek Focuses on East Amid Payment Problems in Europe

Problems with bank payments for LNG supplies in Europe are forcing Russia’s Novatek to search for more LNG buyers in the East, CEO Leonid Mikhelson said this week.

“It is getting increasingly harder to work with Europe in terms of the banking sector,” Mikhelson told a briefing on the sidelines of the Eastern Economic Forum in Vladivostok.

Due to international sanctions against the Russian financial system in response to the Kremlin’s invasion of Ukraine, banks are understood to often fail to complete transactions from buyers.

“The buyer pays, but the banks do not transfer [the money] for gas. The bankers transfer each payment through some other banks. They harm themselves,” Mikhelson said.

Asia Focus

Novatek will strive to sell as much as possible in Asia from its 60% equity offtake position at the Arctic LNG 2 project, scheduled to start its three 6.6 million ton per year trains in late 2023, 2024 and in 2026, Mikhelson said.

The company has already signed long-term contracts for some 3 million to 4 million tons/yr of Arctic LNG 2 volumes, out of almost 12 million tons/yr it will offtake from the plant, Mikhelson said.

Novatek sees China as the key target market, but is also negotiating in Vietnam and is considering supplies to India, Mikhelson said.

Other Arctic LNG 2 shareholders — France’s TotalEnergies, China National Petroleum Corp. (CNPC), China National Offshore Oil Corp. (CNOOC) and the Japan Arctic LNG consortium of Mitsui and Jogmec — will offtake and market 10% of the plant’s production, or almost 2 million tons/yr, each.

The shareholders will offtake their LNG from the Murmansk and Kamchatka transshipment terminals.

Contracts Harder to Sign

It is difficult to strike new long-term contracts amid the current high spot prices, Mikhelson said.

Producers seek to have a contract price close to the current market prices, but buyers cannot agree to that, he said.

As a producer, Novatek believes the current high prices are bad for the market, because “the world energy industry cannot work with such prices,” Mikhelson said.

He doesn’t expect any sharp decline in prices at least until the middle of 2025, when new LNG capacity can help ease the tight market.

Yamal Contracts/Spot

Novatek’s Yamal LNG plant in the Arctic, which operates above its 17.4 million ton/year capacity, now sells around 80% under long-term contracts, mostly destined for Asia, while 20% is sold on spot, according to Mikhelson.

Spot cargoes often go to Europe, attracted by higher margins on the tight market with unprecedentedly high prices. Yamal sells spot cargoes via shareholders — Novatek sells 60% of spot cargoes, while TotalEnergies and China National Petroleum Corp. (CNPC) each sell 20%.

Long-term contract cargoes from Yamal are now priced 2.5 to 3 times lower than spot, Mikhelson said.

GM&T Contract

Yamal LNG has redistributed the volumes it can no longer supply under the 2.9 million ton/yr long-term contract with Gazprom Marketing & Trading (GM&T). GM&T was formerly owned by state-run Gazprom but blacklisted by Moscow after it was taken over by Berlin in April alongside several other foreign trading and distribution subsidiaries of Gazprom.

“In accordance with the credit documentation, the existing shareholders — we, Chinese companies — have increased our contracts with Yamal LNG by 500,000 tons/yr each while the rest is so far sold on spot,” Mikhelson said.

That should mean that Novatek’s direct long-term offtake contract at Yamal is now for some 3 million tons/yr, instead of around 2.5 million tons/yr, while CNPC’s contract has increased to 3.5 million tons/yr. It is not clear whether TotalEnergies also increased its 4 million tons/yr direct contract with Yamal LNG.

The Kremlin issued a waiver in May to allow Yamal to keep supplying GM&T for 90 days, which expired in late August.

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

UK to Freeze Retail Energy Bills for Two Years

UK Prime Minister Liz Truss has announced a two-year freeze on household energy bills and measures to boost domestic oil and gas production as Europe grapples with its worst energy crisis since the 1970s.

She said on Thursday that under her government's "energy price guarantee" the typical UK household will pay no more than £2,500 per year (about $2,900) for gas and electricity over the next two years starting Oct. 1.

Regulator Ofgem had recently announced that that the price cap for the average annual UK energy bill was set to rise to £3,549 on Oct. 1 from £1,971.

Truss — who succeeded Boris Johnson as prime minister just a few days ago — said the lower price cap will be funded through increased public borrowing, rather than a windfall profits tax on energy companies.

Chancellor Kwasi Kwarteng will provide details of the expected costs in a fiscal statement later this month, but UK press reports pointed to an estimated cost of around £100 billion ($115 billion).

There will also be a reduced six-month cap on energy bills for businesses, schools and hospitals, which will be reviewed after three months.

The government said it will launch a new oil and gas licensing round as early as next week — with over 100 new licenses being offered — to help boost the UK's declining domestic oil and gas output.

It also announced the lifting of a 2019 moratorium on hydraulic fracturing of shale gas formations (fracking).

The Treasury and the Bank of England will also provide short-term financial support — reportedly up to £40 billion — to energy companies that have been hammered by soaring wholesale gas and power prices.

'Extraordinary Challenges'

Truss said Russia's war in Ukraine had exposed flaws in UK energy security and driven prices higher. "Extraordinary challenges call for extraordinary measures," she said.

Earlier this week, industry group Offshore Energies UK urged the government to take measures to accelerate investment in North Sea gas, oil and wind power to reduce dependence on imported energy.

Truss had previously indicated that she would make more oil and gas licenses available, but any new licenses issued will have to be checked to ensure that they are compatible with the UK's commitment to achieve net-zero emissions by 2050.

The government suggested on Wednesday that the lifting of the moratorium on shale gas drilling and fracking could lead to new gas production within six months.

However, very few countries have significant oil and gas production from fracked shale formations. The exceptions include the US, China and Argentina.

Previous efforts to test the UK's shale gas potential were hampered by local opposition and the moratorium.

Chemicals giant Ineos — one of the few large companies to show much interest in UK shale gas — said on Thursday that it was renewing its offer to the government to drill a shale gas test well.

"We have promised to invest the first 6% of the value of the gas back into the local communities," said Ineos director Tom Crotty. The company holds interests in shale gas licenses in central and northern England.

A government survey of public opinion released in December showed that only 4% of the UK population strongly supported fracking/shale gas, while 54% strongly supported renewable energy.

The government made clear on Thursday that shale gas development would only proceed in areas where there is public support for it.

Greenpeace UK oil and gas campaigner Georgia Whitaker said the lifting of the moratorium breached an election pledge that "fracking would not happen unless the science changed, which it most emphatically has not."
Jason Eden, London

Proposed EU Gas Price Cap Struggles for Support

Proposals that would cap the price of natural gas imports into the EU are struggling to gain support from member states, but diplomats are lining up behind a handful of other measures aimed at stabilizing the continent's energy markets.

European Commission President Ursula von der Leyen included options to cap the price of Russian gas imports and LNG imported from any source in a range of measures to be discussed at an emergency meeting of energy ministers on Friday.

After previously shrugging off the potential impacts of curbs on Russian energy imports, countries are now very concerned about how they might further fuel the soaring cost of living throughout the 27-nation bloc.

One EU diplomat acknowledged that high energy prices had "a very destructive potential."

"You can feel it everywhere, not only economically but also socially and politically," he said.

The proposals to cap gas prices have drawn lots of media attention but they may be the least likely options to be forwarded for further consideration after Friday's meeting.

"There are more member states that are not in favor of such a measure than there would be in favor," one EU diplomat said of the proposal to cap the price of Russian gas imports.

Putin's Warning

Countries that are still receiving Russian gas seem to be taking seriously a threat by President Vladimir Putin to stop all Russian gas exports to Europe if the EU tries to cap the price of Russian gas.

"At that point, Europe will have less gas to get through the winter," Jonathan Stern, professor at the Oxford Institute of Energy Studies told Energy Intelligence.

“And the question is — is that a good idea given the problems we are already facing with the amount of gas that we have already got."

While Russia now accounts for less than 10% of the EU's total supplies, its gas remains important in many countries that do not have access to LNG.

Capping LNG prices — or setting them at levels just above those at Asian hubs, as proposed in one EU document — could be equally problematic.

EU countries understand they are competing for gas supplies in a global market and that mechanisms to artificially depress prices could backfire and result in less gas arriving at European LNG import terminals.

One EU diplomat predicted that ministers would not recommend for immediate adoption any of the various proposals to cap natural gas prices.

Some Measures Find Favor

However, looking beyond those proposals, there seems to be a growing consensus around a few of the measures that do not represent such drastic market interventions.

For example, officials hope to replicate the success of a framework passed in July to reduce gas demand by 15%, with a similar measure to reduce electricity demand.

Such voluntary or controlled conservation measures are now seen as vital to address the high prices for power and gas that have been spurring involuntary demand destruction from households that are unable to pay their bills or from industrial customers that find it uneconomic to keep their factories running.

Diplomats also expressed support for measures to help member states bolster the liquidity of utility companies that need to procure and trade gas and electricity at sky-high wholesale market prices.

Finally, there appears to be agreement on an initiative to cap the revenues of power producers with low costs — for example, those with wind or solar generation assets — and use those funds to help struggling consumers.

However, thinking around a proposed "solidarity contribution" that fossil fuel companies would pay from their own windfall profits seems to be less advanced.

One EU source said this "was proposed as food for thought" and had not been central to discussions thus far.

However, that does not necessarily mean that the idea of tapping oil and gas profits to help defray the high energy costs borne by households, businesses and electricity providers does not appeal to some countries.

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


Data Snapshot

LNG Netbacks at Key Receiving Terminals

LNG Exporter Netbacks Between Key Receiving Ports
($/MMBtu)AlgeriaAustralia WestAustralia EastMalaysiaNigeriaNorwayOmanPeruQatarRussiaTrinidadUS GulfUS East Coast
Dahej, India61.0861.5761.1361.5660.7160.5262.0860.1461.9861.1960.3560.0660.42
Sodegaura, Japan61.6763.1763.1863.2961.6357.9962.7560.4762.6263.6760.8359.9361.82
Zeebrugge, Belgium41.1139.5439.1839.6140.6340.9640.2639.1740.1339.1940.7439.8740.83
Huelva, Spain68.4666.6466.1966.7367.8667.6267.4666.1267.3366.2367.9266.7867.93
Isle of Grain, UK38.3936.8536.4936.9137.9438.2437.6536.4937.4336.5038.0337.1738.11
Everett, US6.375.125.415.166.126.020.015.765.584.846.53----
Created with Highcharts 9.0.0($/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 Asia0.0064.450.1764.45
SW Europe0.0069.1611.5369.16
Futures Pricing
($/MMBtu)Chg.LatestPreviousWeek Ago
Henry Hub, US (futures)0.077.927.849.26
NBP, UK (futures)+0.7947.3846.5955.78
European Spot Pricing
Chg.LatestPreviousWeek Ago
Dutch TTF0.6761.6961.0266.20
Zeebrugge (Belgium)----26.3141.12
German NCG-1.8361.8763.7067.09
NBP (UK)11.5339.2127.6839.32
US Markets
US Spot Prices
Sabine Pass, Louisiana-0.048.088.12--
Corpus Christi, Texas-0.097.617.708.98
Cove Point, Maryland-0.177.317.488.24
Elba Island, Georgia--------
Nymex Henry Hub Futures
Near Month0.077.927.849.26
Second Mth0.077.977.909.33
Third Mth0.078.108.049.48
Created with Highcharts 9.0.0($/MMBtu)GLOBAL GAS PRICINGUS NymexDutch TTFNE AsiaOct '21Nov '21Dec '21Jan '22Feb '22Mar '22Apr '22May '22Jun '22Jul '22Aug '22Sep '220255075100125Energy Intelligence