February 16, 2023

WWW.ENERGYINTEL.COM

Shell Sees China Playing Balancing Role in LNG

China could play a greater role in balancing the global LNG market, potentially taking over the function long performed by Europe, top LNG trader Shell said on Thursday.

China became the world’s biggest LNG importer in 2021, only to be overtaken by Japan last year as its recently abandoned "zero-Covid" policy hit gas demand. Shell expects Chinese imports to rise again this year, although not back up to 2021 levels (see graph).

“What we see is the potential for China to play a much more significant role in balancing the global LNG market,” Steve Hill, executive vice president, energy marketing at Shell, told reporters on a conference call.

Presenting the UK-based supermajor’s LNG Outlook 2023, Hill noted how the annual report has historically considered North Asia — with its lack of pipeline gas — to be the “premium” LNG market where the highest prices must be paid.

Europe, on the other hand, has been the “balancing market” — one not dependent on LNG but with the ability to absorb cargoes not needed elsewhere.

“That’s now changed because Europe structurally needs a lot more LNG” amid efforts to wean itself off Russian pipeline gas in the wake of the Ukraine conflict, Hill said.

Created with Highcharts 9.0.0(million tons)CHINA'S LNG IMPORTS20082009201020112012201320142015201620172018201920202021202220230102030405060708090Source: Kpler

Gas With Chinese Characteristics

With Europe now set to become a premium LNG market, the industry will still need to balance somehow, Hill said. China already possesses many of the characteristics Europe did — or is quickly developing them — to play the balancing role, he noted.

These include having its own domestic gas production, long-distance pipeline imports, LNG import infrastructure, gas storage and alternative fuel capability that allows China to adjust its energy mix.

“China is evolving from being a rapidly growing import market to playing a more flexible role,” Shell said in a statement.

Europe's LNG demand, on the other hand, is growing rapidly — and this is set to "intensify competition with Asia for the limited new supply available over the next two years and “may dominate LNG trade over the longer term,” it added.

Mind the Gap

Indeed, although Europe's gas demand is forecast to fall around 20% this decade, the continent will have a “structural gap of around 140 million tons of LNG going forward," Hill said.

That is because of an anticipated further drop in Europe's Russian pipeline gas imports — which slumped by 50% last year but still have as far to fall again — and lower indigenous production.

Europe, including the UK, imported 121 million tons of LNG in 2022, up 60% year on year.

The extra 15 million tons per year of LNG supply coming on line globally in 2023 is "helpful," as are high storage levels and recent mild weather, but will be outstripped by the loss in Russian volumes, Hill said.

“Europe doesn’t just have a near-term challenge — it has a structural challenge,” he added, envisaging a "very, very significant increase in LNG demand from Europe on an ongoing basis."

High Concentration

For additional LNG supply sources, European and other buyers will largely have to look to the US and Qatar, which Shell sees accounting for some 80% of new capacity coming on stream by the end of the decade.

Hill noted this meant long-term LNG contracts would be dominated by two countries with very different contracting models: one based on Henry Hub pricing and with a lot of flexibility in commercial terms; and the other with less flexibility and oil-indexed pricing.

“This creates quite an interesting set of market dynamics,” he said.

Although buyers can try to diversify, the situation "creates some significant challenges, because with the high volatility that we are seeing, the consequences of those choices can be quite material,” Hill explained.

In the US, LNG exports are set to account for about 20% of US gas production later this decade — and by 2030 more than 95% of US liquefaction capacity will be concentrated in just two states: Texas and Louisiana.

This will lead to a "far greater inter-relationship" between Henry Hub prices and the global LNG market, Hill said, with any events in the Texas-Louisiana area likely to be particularly impactful.

Indeed, global LNG prices have been highly sensitive to last year's shutdown of Freeport LNG in Texas and its recent restart.

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

Perenco Lights Up Gabon LNG

Anglo-French independent Perenco has given a green light to a $1 billion LNG export plant in Gabon.

Adding Gabon to the ranks of central Africa's LNG exporters sets up a nearly-contiguous set of Atlantic Basin exporters from Nigeria, through Cameroon, Equatorial Guinea, Gabon, Congo Brazzaville and Angola.

The Project

The Gabon project, which will produce 700,000 tons per year of LNG and 20,000 tons/yr of butane gas, will be located at Cape Lopez, one of the Opec country’s main oil terminals, which will be converted to also accommodate gas.

Construction is due to start this year, with first gas due onstream in 2026, during what is still likely to be a tight market.

Perenco has yet to confirm how and where it will market the LNG and whether it has an off-taker.

Cape Lopez

lng230216_Gabon_map.svg


Second Scheme

The project, which will require up to 180 million cubic feet per day, is Perenco’s second LNG scheme in central Africa.

The first, which started production in 2018, involved conversion of the old Hilli Episeyo LNG tanker into a four train 2.4 million ton/year floating LNG plant offshore Kribi, in neighboring Cameroon.

Secure Energy for Europe, Marketing and Trading, formerly Gazprom M&T, is the sole offtaker from the Cameroon FLNG project.

Both Gabon and Cameroon are mature producers. Gabon, which has the larger output, marketed around 454 million cubic meters of gas in 2021, according to Opec, and produced around 180,000 barrels per day of oil — down from 236,000 b/d a decade ago.

Gabon is the third LNG Project in Central Africa. Eni's 600,000 ton/yr Fast LNG is due to start up later this year in Congo Brazzaville. Eni will add another FLNG unit to it in 2025, which will boost capacity to 3 million tons/yr.

Perenco Turns to Gas

Perenco, which is owned by France’s Perrodo family, operates assets that span Africa, Asia, South America and Europe.

The low profile firm, which has operated in central Africa for 30 years, has made a business of enhancing output from mature and stranded fields while expanding the gas side of its portfolio.

“We have proved it for oil fields; we will now develop this approach for associated gas and marginal gas fields," Perenco’s CEO Benoit de la Fouchardiere told Energy Intelligence in an email. “By producing 100,000 b/d in the country (Gabon), Perenco does hold enough gas reserves to feed the local needs — which is the priority — and one train of LNG for at least 15 years.”

Christina Katsouris, London

Galp May Be Quitting Mozambique Gas Project

Portugal’s Galp is looking to sell its 10% stake in the deepwater Area 4 gas concession in Mozambique, which includes the $7 billion Coral South floating liquified natural gas (FLNG) project operated by Eni, and has hired Bank of America to sound out potential buyers, according to a report published Thursday by Portuguese daily Negocios.

Galp, which this week announced the sale of its assets in Angola to local operator Somoil for $830 million, also brokered by Bank of America (BoA), is keen to downsize its global upstream portfolio by selling off non-core assets. Neither Galp nor BoA would comment on the report.

The equity in Area 4 is likely to generate plenty of interest, especially since Coral South started production at the end of last year and is ramping up LNG output towards its 3.4 million ton per year capacity, all of which is committed to BP under a long-term contract. Area 4 in the Rovuma basin is one of the world’s most prolific deepwater reservoirs, with proven reserves of around 85 trillion cubic feet.

Eni and its partners in Area 4, which also include ExxonMobil, China’s CNPC, Korea’s Kogas and Mozambique’s state oil company ENH, are discussing a plan along with the government to have a second FLNG project near Coral South that would have a similar capacity but take a much shorter time to build, and at a lower cost. But an agreement remains elusive.

Area 4 also covers Rovuma LNG, a 15.2 million ton/yr, $23 billion mega project that is being led by Exxon but is still some way from reaching a final investment decision. Maputo wants the scheme to go ahead on the basis that it would provide hundreds of new jobs and boost the development of the conflict-riven region of Cabo Delgado in the northeast.

The value of Galp’s shareholding is likely to rise if and when the TotalEnergies-led Mozambique LNG project, which is also based in Cabo Delgado and has been under force majeure since April 2021 due to the violence in the region, restarts. Analysts are predicting a restart in the second or third quarter, following a recent visit to the region by Total boss, Patrick Pouyanne.
Paul Sampson, London

Centrica Backs Off Rough Gas Storage Expansion

Centrica will not double the capacity of the UK’s largest gas storage site before next winter, the company’s CEO Chris O’Shea confirmed on Thursday.

Centrica intends to operate its Rough gas storage site at its current capacity of 30 billion cubic feet next winter, O’Shea said during the company’s 2022 preliminary results call.

Centrica reopened the offshore storage site in October last year at the request of the government, and at the time said it could double the capacity of the facility for winter 2023-24, provided the government put a regulated return model in place.

“As we said back at our interim results in July, we need to spend around £150m to increase the storage capacity to around 60 Bcf for next winter,” O’Shea said in October last year during an investor call regarding reopening Rough.

“Any future investment is dependent on a regulated return model … We’re simply looking for a model, such as that which is used with existing strategic UK energy assets, like the interconnectors, to boost UK energy security,” O’Shea added.

A source close to the situation told Energy Intelligence that the government and Centrica had previously extended the deadline for negotiations, but the parties failed to broker a deal to underpin an expansion of Rough in time for next winter. The source added that it would be difficult to recoup the cost of the expansion project over 1-2 years.

Energy Intelligence approached the UK government earlier this month about talks with Centrica.

A UK government spokesperson told Energy Intelligence that the “future expansion of the site’s capacity is a matter for Centrica.”

Centrica did not receive any government funding to reopen the facility this winter, and the company said it invested £400 million of working capital in Rough last year. Some of the capital may have been used to purchase gas for Rough, with 16 Bcf of gas injected into Rough last year.

Energy Security

The government pushed to reopen Rough in a bid to increase energy security after Russia reduced piped gas flows to Europe, which increased competition for gas supplies and subsequently sent gas prices rocketing.

Reopening Rough at 20% of its former capacity instantly made the site the UK’s largest storage facility and increased the country’s gas storage capacity by 50%, meaning storage can meet the nation’s demand for nine days. In comparison, Germany holds Europe’s largest gas storage capacity, which can meet the nation’s gas needs for 89 days.

As O’Shea has previously said, Rough is not a silver bullet for the UK’s energy security, but with gas supply expected to remain tight over the next couple of years, storage can play an important role in meeting peak winter demand.

However, some analysts believe expanding Rough is not essential given the UK’s ability to secure gas from continental Europe via the IUK and BBL pipeline interconnectors with Belgium and the Netherlands. The UK also has ample LNG regasification capacity and imports piped gas from Norway.

“It [gas storage] is not essential in my opinion, and this I think was Ofgem’s view when it chose to not support Centrica Storage Limited back in 2015-2016, it chose interconnectors over subsidizing storage when it was uneconomical,” an analyst at a trader told Energy Intelligence.

Hydrogen future

Centrica wants to transform Rough into a 200 Bcf hydrogen storage site, which it says will be the world’s largest hydrogen storage site. The firm wants to start storing hydrogen at Rough in 2027 and has said the project will cost £2 billion and require an “appropriate support mechanism from the UK Government.”
Eric Thorp, London


Data Snapshot

LNG Netbacks at Key Receiving Terminals

LNG Exporter Netbacks Between Key Receiving Ports
($/MMBtu)AlgeriaAustralia WestAustralia EastMalaysiaNigeriaNorwayOmanPeruQatarRussiaTrinidadUS GulfUS East Coast
Dahej, India12.5912.9712.6712.9512.3312.1813.3311.9213.2712.6912.0511.8312.13
Sodegaura, Japan13.4414.5714.5914.6513.4210.6014.2812.5614.1714.9312.8112.0913.56
Zeebrugge, Belgium14.0712.7312.4312.7813.6613.9513.3512.3913.2312.4213.7713.0213.85
Huelva, Spain12.7511.4611.1711.5112.3312.1812.0511.0611.9411.1612.3911.5912.40
Isle of Grain, UK14.3813.0312.7313.0813.9914.2513.7412.7013.5412.7214.0813.3214.15
Everett, US1.420.140.430.191.161.060.010.790.62-0.151.58----
Created with Highcharts 9.0.0($/MMBtu)QATAR TO NORTHEAST ASIANetbackNetback12. Sep26. Sep10. Oct24. Oct7. Nov21. Nov5. Dec19. Dec2. Jan16. Jan30. Jan13. Feb020406080Energy Intelligence

LNG Market Indicators

Spot LNG Pricing
Latest WGIDailyDaily Chg.Chg. From Latest WGI
NE Asia15.7015.63-0.04-0.07
SW Europe14.3013.39-1.14-0.91
Futures Pricing
($/MMBtu)Chg.LatestPreviousWeek Ago
Henry Hub, US (futures)-0.082.392.472.43
NBP, UK (futures)-0.9315.5816.5115.83
European Spot Pricing
Chg.LatestPreviousWeek Ago
Dutch TTF-0.8916.1717.0616.88
Zeebrugge (Belgium)--12.18----
German NCG-0.8014.3315.1415.01
NBP (UK)-1.1415.1616.3016.00
US Markets
US Spot Prices
Sabine Pass, Louisiana0.042.482.442.40
Corpus Christi, Texas0.002.302.302.23
Cove Point, Maryland0.212.242.032.07
Elba Island, Georgia----2.22--
Nymex Henry Hub Futures
Near Month-0.082.392.472.43
Second Mth-0.072.492.562.49
Third Mth-0.072.642.712.66
Created with Highcharts 9.0.0($/MMBtu)GLOBAL GAS PRICINGUS NymexDutch TTFNE AsiaMar '22Apr '22May '22Jun '22Jul '22Aug '22Sep '22Oct '22Nov '22Dec '22Jan '23Feb '230255075100125Energy Intelligence