October 28, 2022

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ICE to Launch European LNG Futures Contracts in December

Intercontinental Exchange (ICE) is set to launch two LNG futures contracts for Northwest and Southwest Europe in early December, as the race between pricing agencies to become Europe’s LNG benchmark is heating up.

Both contracts will be cash settled and based on price assessments by Singapore-based pricing firm Spark Commodities, with expected launch on Dec. 5, subject to regulatory approval.

“The contracts are designed to help market participants trade and hedge the difference in price between LNG for delivery in Northwest and Southwest Europe, versus natural gas provided by pipeline to Europe, as well as LNG across the rest of the world,” according to ICE’s statement.

Gordon Bennett, managing director of utility markets at ICE said that European natural gas prices continue at high levels due to the supply-demand imbalance, resulting from the significant reduction in Russian gas supplies into Europe “and the downstream impact of physical capacity constraints across the European natural gas network.”

“Futures markets are providing important price signals to identify the location of these bottlenecks, allowing for capital to be allocated efficiently to address them by adding, for example, regasification capacity to import more LNG,” added Bennett.

Market Reaction

Market participants polled by Energy Intelligence were cautious with their assessment of this announcement, as the success of such futures contracts mostly depends on the market liquidity they can attract.

A Spain-based market source stressed that “it will take time” for these contracts to attract the necessary trading activity needed to potentially use them as benchmarks in the future.

Meanwhile, a London-based LNG trade source said that as the principal risk at the moment is the LNG spot spread to the benchmark TTF hub price, these futures contracts “could be valuable” to manage that risk. In other words, companies would be able to hedge their spot exposure through the contracts.

The Race Heats Up

The announcement of ICE comes just days after the CME launched its LNG North West Europe Marker futures contract, based on Platts’ d.e.s Northwest Europe physical price assessment, on Oct. 24.

“The race has started to be the new LNG price benchmark for EU,” the Spain-based market source said.

Indeed, ICE’s Bennett stressed that the exchange is prepared to assist with developing a European Union futures market based on the LNG benchmark, which is set to be developed by the EU’s Agency for the Cooperation of Energy Regulators.
Daniel Stemler, Madrid

Novatek to Decide on Sakhalin-2 in December

Novatek will decide in December whether to join the Sakhalin-2 upstream and LNG project in Russia’s Far East, CEO Leonid Mikhelson said Friday.

Privately owned Novatek is considered the likely, if not the only, candidate to replace Shell in the state Gazprom-controlled project, following the supermajor’s refusal to take a stake in the new operator established by Moscow earlier this year.

By joining Sakhalin-2, Novatek would strengthen its role as Russia’s LNG export champion and expand its LNG project geography to Russia’s Far East, the region closest to key target markets in Asia.

Audit Under Way

Novatek is now assessing the project in terms of economics, production and geology and plans to complete the audit by the end of November, Mikhelson told a briefing on the sidelines of the Eurasian Economic Forum in Baku. Earlier in October, he said Novatek hadn’t started the audit.

The Russian government will do its own audit around the same time to determine the price of the 27.5% minus one share stake that Shell did not take. Russia plans to close the sale in the beginning of January.

Price is key, according to Mikhelson, who said that if it’s too high, Novatek won’t buy the stake, even though Russia has set criteria for bidders that only Novatek can meet.

When asked how Novatek assesses the risk of Shell initiating a legal dispute over the transfer of its stake to the new operator, Russia-registered Sakhalin Energy LLC, Mikhelson said that “in all our businesses, we try to avoid all risks.”

Partnership With Gazprom

Sakhalin-2 might become the first LNG partnership between Novatek and Gazprom, which have been at odds over the lucrative resource base in the Arctic and over export strategies.

Novatek has upstream joint ventures with Gazprom’s oil arm Gazprom Neft, and Gazprom holds a 10% equity stake in Novatek, but their views on LNG have differed.

However, Gazprom might now place a bigger priority on LNG in its long-term export strategy amid the loss of the European market for its pipeline gas. Having Novatek as partner might then benefit Gazprom, experts suggest.

Tambei Uncertainty

Novatek has long sought to acquire Gazprom’s giant Tambei group of fields on Yamal Peninsula for its ambitious Arctic LNG expansion plans, while the state-run giant wants the fields to feed its petrochemical projects and supply gas via pipeline to the domestic market.

Mikhelson denied a recent report by business daily Kommersant that Moscow is considering withdrawing the upstream licenses for the Tambei fields and redistributing them at new auctions, which could open Novatek’s way to get at least some of them.

There was no such decision to consider the withdrawal of the licenses, Mikhelson told the briefing. There is only a presidential order to consider additional resource base for Novatek, he said.

Mikhelson recently said that there were no attractive undistributed licenses in the Arctic, while industry sources say its key target remains Tambei.

Free Up Gas For LNG

To free up more Arctic gas for LNG projects, Russia can increase production in the legacy Nadym-Pur-Taz region in West Siberia, focusing on pipeline gas supplies to the domestic and export markets, according to Mikhelson.

Nadym-Pur-Taz is facing natural production declines at mature fields, but most deeper deposits remain underdeveloped due to higher costs. To spur exploration and production from deeper Valanginian, Achimov and Jurassic deposits, Russia could auction licenses for these deposits rather than for the entire fields, according to Mikhelson.

Novatek’s Arcticgas JV with Gazprom Neft develops Achimov formations in Nadym-Pur-Taz and would be ready to take new licenses for deeper formations in the region, Mikhelson said.

The idea to auction upstream licenses for deposits rather than entire fields is not new and the authorities discussed it, but there is no decision yet, Mikhelson said.
Staff Reports

Equinor Prioritizes Gas Value Over Volume

Norway’s Equinor will tackle high volatility and price swings in European natural gas markets by using its flexibility to defer some gas volumes to periods where prices are higher and the gas is needed more.

Norway, which has displaced Russia as Europe's biggest supplier of pipeline gas, is providing record volumes to Europe.

Equinor’s new CFO Torgrim Reitan said the state-controlled company has capacity available to continue to produce at a very high level.

But “I want to make that clear that we will prioritize value over volume in optimizing our gas production, both related to price and also to where the gas is needed,” he said during Equinor's third-quarter earnings call.

Flexible Gas Output

Gas prices are fluctuating wildly, Reitan said, “and we will have days and … weeks with very low prices.” He insisted that Equinor "will not be a swing supplier … but we have flexibility.”

For example, the company has revised production permits to increase gas output from the Troll and Oseberg fields.

While Reitan did not give a price level at which Equinor would defer output, he noted that UK National Balancing Point prices had fallen significantly this week to around $6 per million Btu.

“Clearly that gives us opportunities to defer gas, and we are also in a period where there’s not a big need for additional gas to the UK,” he said.

Equinor beat analyst expectations on headline earnings in the third quarter, driven by record highs in upstream profits and gas production from Norway, plus strong trading results.

Gas Supplier

The company supplied 11% more gas to Europe year on year during the three months through September, partly due to the ramp-up of the Arctic Hammerfest LNG plant, which came back on line in June.

Last month, Equinor signed a long-term contract with Poland and has signed smaller bilateral deals as well, with different pricing structures that the company says could help stabilize prices.

"There's a broad range of discussions around bilateral contracts,” Reitan said, without going into specifics.

He said talk of gas-price caps or other European market interventions currently under discussion would not address the fundamental problem of insufficient supply.

Cost Pressures

Equinor is also closely monitoring industry-wide cost inflation and cost pressures.

“This is a growing concern. We see bottlenecks and delays, lower efficiency and risks of a drop in quality in the global supply chains,” Reitan said.

He warned that Equinor’s non-sanctioned portfolio is particularly exposed.

Oslo’s proposed change to temporary oil and gas tax rules reducing the uplift for capital expenditure will increase breakeven prices for development projects by $2 to $5 per barrel, he noted.

Offshore inflationary pressures are particularly acute, hitting engineering and construction yards in Asia; offshore wind activities; and rig markets.

“We will have to prioritize in our portfolio so we can execute our investment program with quality, on time and [within budget]," Reitan said. "The overall capacity in the supply chain will be a key element in that discussion.”

Onshore Renewables

Reitan said the company sees good opportunity for renewables profits from the onshore sector amid stiff competition for offshore wind. To that end, Equinor has started looking to build more of an onshore portfolio in places like Europe and Brazil — "short-cycle investments with quicker returns and lower capital intensity.”

Equinor’s power trading arm and route-to-market for renewables, Danske Commodities, will play a key role in supporting its onshore push, for example in Poland.

But Reitan said it will be making changes to the way it runs its renewables business in order for it to be competitive, “giving sufficient freedom for that business to develop as needed.”

Equinor Q3'22 Earnings Results
($ million)Q3'22Q3'21%Chg.Q2'22
Revenue43,63323,26488%36,459
Operating Cash Flow6,5788,039-188,520
Net Income9,3711,409>1006,762
Adjusted Income6,7152,777>1005,000
Exploration & Production Norway*21,0796,762>10014,330
Exploration & Production Intl.*942556691,111
Exploration & Production US*889288>100881
Marketing, Midstream & Processing*1,4522,197-341,310
Renewables*-46-28-63-42
Liquids Production ('000 b/d)1,0121,048-3973
Gas Production (MMcf/d)1,00994861,011
Oil and Gas Output ('000 boe/d)2,0211,99611,984
Ren. Power Generation (GWh)294304-3%325

Deb Kelly, London


Data Snapshot

LNG Netbacks at Key Receiving Terminals

LNG Exporter Netbacks Between Key Receiving Ports
($/MMBtu)AlgeriaAustralia WestAustralia EastMalaysiaNigeriaNorwayOmanPeruQatarRussiaTrinidadUS GulfUS East Coast
Dahej, India25.6426.4825.3126.5424.3124.1627.7922.6927.5525.4823.6922.9123.82
Sodegaura, Japan24.5828.0628.0828.4524.1114.4526.9620.8326.6229.3422.3119.7624.79
Zeebrugge, Belgium13.499.348.139.6612.1713.0411.408.1511.068.2812.409.8112.64
Huelva, Spain32.4728.2627.0228.5831.0430.3530.3226.8130.0027.1831.0928.1931.11
Isle of Grain, UK7.913.812.624.116.697.466.152.665.532.786.844.297.07
Everett, US1.39-2.87-1.99-2.550.57-0.000.01-0.45-1.10-3.961.98----
Created with Highcharts 9.0.0($/MMBtu)QATAR TO NORTHEAST ASIANetbackNetback23. May6. Jun20. Jun4. Jul18. Jul1. Aug15. Aug29. Aug12. Sep26. Sep10. Oct24. Oct10203040506070Energy Intelligence

LNG Market Indicators

Spot LNG Pricing
Latest WGIDailyDaily Chg.Chg. From Latest WGI
NE Asia30.0030.34-0.180.34
SW Europe27.5533.251.625.70
Futures Pricing
($/MMBtu)Chg.LatestPreviousWeek Ago
Henry Hub, US (futures)-0.195.685.884.96
NBP, UK (futures)+3.5328.5124.9723.61
European Spot Pricing
Chg.LatestPreviousWeek Ago
Dutch TTF-1.029.8810.8911.27
Zeebrugge (Belgium)--8.53----
German NCG-1.2610.9412.2115.97
NBP (UK)1.629.147.529.83
US Markets
US Spot Prices
Sabine Pass, Louisiana-0.384.925.304.42
Corpus Christi, Texas-0.204.554.754.10
Cove Point, Maryland-1.243.234.473.28
Elba Island, Georgia--------
Nymex Henry Hub Futures
Near Month-0.195.685.884.96
Second Mth-0.185.956.145.47
Third Mth-0.185.795.975.75
Created with Highcharts 9.0.0($/MMBtu)GLOBAL GAS PRICINGUS NymexDutch TTFNE AsiaNov '21Dec '21Jan '22Feb '22Mar '22Apr '22May '22Jun '22Jul '22Aug '22Sep '22Oct '220255075100125Energy Intelligence