November 4, 2022

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US Marathon Oil Looks For New Upstream Partner in Equatorial Guinea

US independent producer Marathon Oil looks to start negotiations next year over new contracts for its equity volumes from Equatorial Guinea’s Alba gas field, which feeds the country’s sole LNG export plant, as its current contract with UK major Shell ends at the end of 2023.

Marathon holds a 63% operated working interest in the Alba field, and the full output of the field is lifted by Shell, after liquefaction at the Punta Europa plant, under a 3.4 million ton per year merchant contract, which is indexed to the US Henry Hub price.

However, as this contract will end in December 2023, Marathon plans to enter into negotiations with interested market participants next year for the remaining Alba production and move from a Henry Hub-indexed contract to a global LNG-indexed contract, said Mike Henderson, executive vice president of operations at Marathon Oil on the company’s third-quarter results call on Nov. 3.

By moving from Henry Hub-indexation to global LNG price-indexation, Marathon expects a financial uplift, based on the arbitrage between the European benchmark TTF hub prices — widely used as a global LNG reference price — and Henry Hub prices, despite the fact that output from the Alba field is in decline, said Henderson.

Maintaining Baseload

Although the 3.7 million ton/yr Punta Europa plant, located in Equatorial Guinea’s Bioko Island, was designed for expansion, Marathon’s priority is to load the current train through the next decade.

The US producer has a 60% stake in EG LNG, the operator of the LNG plant, along with local state-owned gas company Sonagas (37.9%) and Japanese trading firm Marubeni (around 2%).

While production from the Alba field is falling, the plan to keep Punta Europa’s liquefaction train fully loaded in the years ahead was boosted in February 2021, when gas from the offshore Alen gas project began to flow to the facility.

Stakeholders of the Alen project include US major Chevron and commodity trading houses Glencore and Gunvor and through the project’s tolling structure these companies have been able to lift LNG from Punta Europa in proportion to their ownership percentage.

Although, volumes from Alen are not part of Marathon’s equity molecules, the US independent benefits from plant tariffs and a TTF-linked profit sharing agreement with the Alen shareholders.

Strong LNG Exports

The high global price environment so far this year has incentivized Equatorial Guinean LNG exports, primarily to the Americas and Europe (see graph).

The West African country has exported 3.1 million tons of LNG so far this year, according to data by Kpler, up from 2.99 million tons during the whole of last year.

So far this year, 1.19 million tons ended up in the Americas and 890,000 tons in Europe, representing an 850,000 ton and 150,000 ton increase, respectively, compared to the full-year 2021.

At the same time, exports to Asia, which traditionally has been by far the largest buyer of Equatorial Guinean LNG, have dropped from 1.56 million tons during the first 10 months of last year to 930,000 tons this year.

Created with Highcharts 9.0.0(million tons)EQUATORIAL GUINEA LNG EXPORTSAsiaAmericasEuropeAfrica2018201920202021202201234Source: Kpler

Daniel Stemler, Madrid

IEA: Europe Could Face Gas Supply Gap Next Summer

The International Energy Agency (IEA) has warned that Europe could face a critical shortage of gas next summer when it needs to refill storage facilities in preparation for the winter of 2023-24.

EU gas stocks amounted to 95.4 billion cubic meters or 95% of storage capacity as of Nov. 2, according to Gas Infrastructure Europe. That was around 5 Bcm (or 5%) above the five-year average for the time of year, the IEA said in a new report.

However, the Paris-based agency warned against complacency, noting that the EU consumes gas at a rate of 5 Bcm every two days during periods of cold weather.

It also noted that efforts to fill storage this year were helped by two factors that may not occur again next year: Russian pipeline gas deliveries were close to "normal" levels for much of the first half of the year while China's LNG imports were relatively low.

The IEA it calculated that Europe could face a supply shortage of up to 30 Bcm during next summer's storage injection season if Russian pipeline gas supplies are cut off completely and if Chinese LNG demand returns to normal levels.

"This is why governments need to be taking immediate action to speed up improvements in energy efficiency and accelerate the deployment of renewables and heat pumps — and other steps to structurally reduce gas demand," said IEA Executive Director Fatih Birol.

European storage facilities could be anywhere between 5% and 35% full by the end of the heating season next March, assuming minimal or zero pipeline gas imports from Russia and average European LNG imports of 13 Bcm per month, the report said.

Depending on how things play out, the EU could need 60 Bcm to 90 Bcm of gas to replenish storage to 95% of capacity by the start of the 2023-24 heating season.

Global LNG supply is expected to increase by 20 Bcm in 2023, but that will not be enough to offset a sharp reduction or complete halt in supplies of Russian gas.

Moreover, if the Chinese economy is boosted by the lifting of tough Covid-19 restrictions, China could capture over 85% of the expected increase in global LNG supplies next year, if its annual imports return to their 2021 level of 108 Bcm.

The IEA expects Russian pipeline gas volumes to Europe to fall by 55% to around 60 Bcm this year. "But in 2023, they will in all probability drop to less than half that amount — and could cease completely," the report said.

Meanwhile, gas demand in the EU and the UK fell by around 10% or 40 Bcm in the first 10 months of 2022, compared with the same period of 2021.

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

Australia Weighs Cap on Wholesale Gas Prices

Australia's Labor government says a cap on domestic wholesale gas prices is a possible policy option as it looks at ways to rein in soaring energy costs in the country's populous East Coast states.

"People can nominate lots of solutions," Resources Minister Madeleine King told reporters on the sidelines of the International Mining and Resources Conference. "Pricing is absolutely one of them."

The Australian Petroleum Production and Exploration Association (APPEA) has rejected the idea of a price cap saying it would undermine the confidence of companies that invest in developing domestic gas supplies.

"It [a cap on gas prices] will actually increase demand while creating structural shortages in supply, which just creates further difficulties and problems long-term," APPEA Chief Executive Samantha McCulloch told Australia's ABC News.

There has been growing talk about a possible price cap in recent days, with the Energy Users Association of Australia (EUAA), calling for a price cap of A$10 per gigajoule (about US$6 per million Btu).

The EUAA, which represents industrial gas users, says suppliers have recently been offering gas to its members at prices of A$30-35/GJ.

Market Intervention

The Labor government has been looking at market intervention to avoid gas shortages and high prices ahead of the southern hemisphere's winter next year, and its recently published budget for 2023 contained several reform proposals.

Under one of the budget proposals, the resources minister will receive expert advice each quarter, paving the way for possible activation of the country's gas security mechanism, if there is a risk of gas shortages.

Current regulations allow the government to activate the Australian Domestic Gas Security Mechanism (ADGSM) only once a year.

The ADGSM allows the federal government to restrict Australia's LNG exports to ensure that enough gas is available for domestic use, but activating it would likely jolt Asia's spot LNG market which is already experiencing tight supplies.

Australia's three East Coast LNG exporters have warned in the past that the country's reputation as a reliable, low-cost LNG supplier would be threatened if the mechanism is used to curtail exports.

The East Coast is home to the Australia Pacific LNG plant (operator ConocoPhillips), Gladstone LNG (Santos) and Queensland Curtis LNG (Shell).

The government has said it will hold consultations with gas suppliers in the coming months, before the proposed reforms take effect in mid-2023.

Flawed Price Discovery

The government also wants to improve price transparency and has asked the Australian Competition and Consumer Commission (ACCC) to make proposals to strengthen the industry's voluntary code of conduct by making it mandatory.

Introduced last year, the code of conduct is an industry-led initiative aimed at leveling the playing field for negotiations between gas producers and consumers by creating greater transparency around pricing.

"Unfortunately, in this country because of many years of inaction and an opaque market it is still hard to discover what the actual prices are being offered. Different ministers are getting different stories," King told Sky News.

The three East Coast LNG producers have long been blamed for creating gas shortages and driving up prices.

But King also pointed at retail suppliers, saying "there's questions about what prices they are charging as the sort of middlemen, if you like, in this gas market."

King's comment appears to align with APPEA's call for commercial and industrial gas customers to be included in the industry's code of conduct to ensure full price transparency.

The three LNG producers have always rejected allegations of market manipulation.
Marc Roussot, Singapore

India's Gail Forced to Buy Costly Spot LNG as Russian Supplies Hit

Gail India on Friday said that it has been forced to buy costly spot LNG cargoes as its long-term supply contract with Gazprom’s former German unit has been disrupted in the wake of the Russia-Ukraine war.

India, the world's fourth-largest LNG importer in 2021, is now running in 7th place for 2022, according to Kpler, amid the high costs.

Gazprom Disruption

The New Delhi based company has not received 17 cargoes, so far, equal to about 8.5-9 million standard cubic meters a day, as supplies from Gazprom Marketing and Trading Singapore (GMTS) have been disrupted since May, Director Finance Rakesh Kumar Jain said during an analyst conference call.

Gail is facing disruption in its long-term contract for 2.5 million tons per year (9 MMcm/d) with Gazprom’s former subsidiary GMTS whose parent Gazprom Germania has been taken over by Germany.

The contract accounted for about one-fifth of Gail’s total LNG portfolio of 14 million tons/yr.

Term Declines, Spot Rises

India’s LNG imports for the first half of the current financial year, April-September, have declined 11.3% on year to 80 MMcm/d due to disruptions in Gail’s term contract and as buyers have been staying away from an unaffordable spot market, according to government data.

After a multi-year rise in LNG imports, India last year saw the first LNG import decline in a decade, and the country is not currently on pace to even match last year's level (see graph).

Despite a decline in volumes, India's LNG import bill rose 14% on year during April-September to $6.6 billion, according to India's federal oil ministry.

Gail sourced about one, to one and a half, spot cargoes in the last quarter to meet its contractual obligations to buyers and will be buying similar levels in the current quarter.

“We are committed to honor contractual commitment,” Jain said. The company was supplying as much volume as would prevent it from any contract default, Jain added.

Created with Highcharts 9.0.0(million tons)INDIA'S LNG IMPORTS20122013201420152016201720182019202020212022051015202530Source: Kpler

Fertilizer and Petrochemical

Jain said Gail had trimmed about 2.7 MMcm/d in supplies to fertilizer plants, trimmed similar levels to other industries and 3 MMcm/d for its own petrochemical plant which is now operating at just 40% capacity.

Gail has also had to cut supplies to consumers.

However, with the easing of the LNG markets as spot prices have declined to about $21/MMBtu-$25/MMBtu from $40-$50/MMBtu in August, Gail could consider increasing supplies to its petrochemical plant, Jain added.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact
Rakesh Sharma, New Delhi

Tellurian Struggles Onward

Tellurian this week reported an increase in its onshore natural gas production — a 25% increase in natural gas production and a 32% increase in natural gas sales — but no specific progress on its proposed 27.6 million ton per year US-based Driftwood LNG plant.

"Bechtel is continuing construction [under a limited notice to proceed] on the Driftwood terminal, and Tellurian is fully engaged in our efforts to secure strategic equity partners," said Tellurian President and CEO Octavio Simoes, who met last month with representatives of several Indian LNG buyers.

Simoes added that "the underlying market fundamentals strongly support our strategy of seeking the differential value between domestic and international natural gas prices for our shareholders.”

Yet market pricing moved against Tellurian between the company's July report and the current November report — Asia's gas price benchmark (JKM) sank from $38/MMBtu to $32/MMBtu, and Europe's gas price benchmark (TTF) fell from $47/MMBtu to $41/MMBtu, according to the reports. At the same time, Driftwood's self-reported variable cost rose from $4/MMBtu to $6.50/MMBtu, thus reducing the price gap upon which the company has pinned its hopes.

Tellurian's latest presentation has also removed a 2026 forecast to produce first LNG, as well as the assertion that the project is "fully subscribed" in the wake of the expiration of several offtake agreements.

In addition, progress upstream doesn't look sufficient yet for what is slated to be an integrated project that will control the entire value chain from wellhead to ship.

The latest presentation cites company-owned upstream growth to over 125 MMcf/d, or approximately 45.6 Bcf/yr, but that falls well short of the 550 Bcf/yr feedgas requirement indicated in the presentation for the 11 million ton first phase at Driftwood.

Meanwhile, US LNG incumbents Cheniere and Sempra continue to move forward on new liquefaction projects, and expansions of existing projects, potentially limiting the customer base for greenfield developers like Tellurian.
Michael Sultan, Washington


Data Snapshot

LNG Netbacks at Key Receiving Terminals

LNG Exporter Netbacks Between Key Receiving Ports
($/MMBtu)AlgeriaAustralia WestAustralia EastMalaysiaNigeriaNorwayOmanPeruQatarRussiaTrinidadUS GulfUS East Coast
Dahej, India21.9122.7421.5922.8120.6020.4524.0518.9923.8121.7619.9819.2220.12
Sodegaura, Japan20.8824.3324.3524.7120.4110.8323.2417.1622.9025.6018.6316.1021.09
Zeebrugge, Belgium13.849.688.4710.0012.5213.3911.748.4911.418.6312.7410.1512.99
Huelva, Spain29.1925.0123.7925.3327.7827.0927.0623.5726.7423.9427.8224.9527.85
Isle of Grain, UK9.945.814.616.118.719.488.174.657.544.778.866.309.09
Everett, US-1.03-5.27-4.39-4.95-1.85-2.420.01-2.86-3.51-6.35-0.45----
Created with Highcharts 9.0.0($/MMBtu)QATAR TO NORTHEAST ASIANetbackNetback30. May13. Jun27. Jun11. Jul25. Jul8. Aug22. Aug5. Sep19. Sep3. Oct17. Oct31. Oct10203040506070Energy Intelligence

LNG Market Indicators

Spot LNG Pricing
Latest WGIDailyDaily Chg.Chg. From Latest WGI
NE Asia30.0026.590.59-3.41
SW Europe27.5529.96-1.672.41
Futures Pricing
($/MMBtu)Chg.LatestPreviousWeek Ago
Henry Hub, US (futures)0.436.405.985.68
NBP, UK (futures)-3.1731.6134.7827.52
European Spot Pricing
Chg.LatestPreviousWeek Ago
Dutch TTF-5.5417.2222.769.87
Zeebrugge (Belgium)-2.0110.5512.558.54
German NCG-5.1418.2523.3910.95
NBP (UK)-1.6811.1712.848.82
US Markets
US Spot Prices
Sabine Pass, Louisiana-0.654.004.654.92
Corpus Christi, Texas-0.453.804.254.55
Cove Point, Maryland-0.440.701.143.23
Elba Island, Georgia--------
Nymex Henry Hub Futures
Near Month0.436.405.985.68
Second Mth0.426.756.335.95
Third Mth0.396.536.145.79
Created with Highcharts 9.0.0($/MMBtu)GLOBAL GAS PRICINGUS NymexDutch TTFNE AsiaNov '21Dec '21Jan '22Feb '22Mar '22Apr '22May '22Jun '22Jul '22Aug '22Sep '22Oct '22Nov '220255075100125Energy Intelligence