China’s delicate balancing act on gas market reform

The article below appeared on 28th June, 2017 in The Analyst, a weekly column by Peter Stewart in the Interfax publication Natural Gas Daily.

China will continue to prioritise LNG in its energy mix despite the prospect of substantially higher LNG prices after around 2022. The dichotomy between government targets to boost the use of gas and the dynamics of a volatile world market was discussed at an Interfax breakfast seminar in London this week.

China’s gas demand is expected to grow by 8-9% per year over the next five years, increasing its dependence on imports and forcing it to compete for LNG against Japan and South Korea, the region’s traditional heavyweight buyers of the fuel, as well as emerging buyers.
China’s gas demand growth is outpacing production, widening its supply-demand gap. The country is likely to use around 222 billion cubic metres of gas in 2017, an increase of around 8% from 2016. China’s imports of gas and LNG hit 54 mt last year, up by 22% on an annual basis, and could rise by 14% this year.
This rapid increase in demand and imports will require a correspondingly massive investment in LNG receiving capacity, despite the fact that piped supplies are cheaper. China imported more LNG than usual during the first four months of 2017 to cover a drop in piped supplies from Uzbekistan following a now-resolved commercial dispute, but its imports are typically skewed in favour of cheaper pipeline gas. Piped supplies accounted for around 52% of China’s gas imports in 2016, when the price of pipeline gas averaged $5.2/MMBtu compared with $6.6/MMBtu for LNG.
Global Gas Analytics forecasts China’s regasification capacity could reach more than 100 mtpa by 2025, roughly double its capacity in 2016. With LNG imports expected to roughly double within the next 10 years, the rise in capacity will be needed.
The growth in China’s LNG demand will be particularly strong between now and 2020, with offtake expected to be supported by low prices for spot and contract cargoes.
Meanwhile, despite all the talk of a slowdown in the Chinese economy, the government will continue to prioritise policies to reduce atmospheric pollution, which will cause rapid growth in demand for gas. This will continue to be the case after 2020, when the price outlook is expected to gradually become more challenging.
The outlook for Chinese LNG imports will also be squeezed by increasing volumes of piped supplies – including via the 38 billion cubic metre per year Power of Siberia pipeline from Russia, which is expected to be commissioned by 2020 – as well as by increased volumes of cheaper domestic supplies from conventional and shale gas projects that are set to come onstream during the period.
Security of supply
The need for supply security will be a significant driver of Chinese LNG demand. A delegate at the Interfax seminar on Tuesday said the country’s state-run oil and gas firms have already prioritised security of supply over price – and that their stance will not change even if gas and LNG prices rise after 2022, when many expect the glutted global gas market to rebalance.
As gas becomes a bigger part of the energy mix, Beijing has also made the development of sufficient underground gas storage a high priority, with fixed targets in its gas development plans.
These efforts face a number of challenges – gas demand growth is not uniform across the country, and implementation plans at the provincial level vary. But despite the complexity of China’s multi-layered implementation plans, huge growth is expected in the Chinese gas market. “It’s a clash of two systems,” said a delegate at the seminar. “But we shouldn’t lose sight of the huge growth [in gas demand] due to the switch from coal, and growth in the power and transport sectors.”

Oil prices continue to weaken as global glut grows

Oil prices remain under pressure as rising US production pushes back impact of OPEC-led cuts.
International benchmark Brent crude oil futures dropped as low as $45.4 per barrel on Tuesday – their lowest level since November 2016 – and dropped to similar levels early on Wednesday before recovering slightly. The United States benchmark West Texas Intermediate dropped to $42.8/bbl on Tuesday and was trading at around $43/bbl at the time of publication.
OPEC members and a group of 11 non-OPEC producers led by Russia agreed on 25 May to extend their 1.8 million barrels per day (MMb/d) output cut for a further nine months. The original deal was for cuts of 1.2 MMb/d by OPEC members and nearly 600,000 b/d by non-OPEC countries to be made during the first six months of 2017. This was initially extended until the end of June, but now the cuts have been extended until the end of March 2018.
The oil price weakness comes despite heightened geopolitical tensions between the US and Russia over Syria, as well as a rift between Gulf Cooperation Council (GCC) members Saudi Arabia and Qatar over the latter’s alleged support of terrorist groups. Saudi Arabia, the United Arab Emirates and Egypt have broken diplomatic ties with Qatar, claiming the country – the world’s largest LNG exporter – has supported Sunni and Shia terrorist groups in the Middle East. They also allege that it has been accommodating Iran in a way that the other GCC members deem unacceptable.
The recent weakness in oil prices stems from concerns that rising global production, led by the US, is keeping stocks stubbornly high. Oil-indexed commodities including gas and LNG have also come under pressure, along with others such as gold. The Goldman Sachs Commodities Index, which tracks the most liquid commodity futures markets, has dropped to its lowest level since 11 November 2016. Higher production from Nigeria and Libya – which were exempted from the OPEC/non-OPEC deal because of their history of disrupted production – and weaker demand growth in China have helped depress sentiment in the oil market.
Gloomy outlook for 2018
The weak oil price outlook now looks set to extend into 2018 as the inventory overhang is still not being absorbed by rising demand. Earlier this month, the International Energy Agency (IEA) gave its first outlook on what it expects 2018 might have in store for oil markets. Its analysis suggests that high global oil stocks will continue despite the OPEC/non-OPEC cuts. “Our first outlook for 2018 makes sobering reading for those producers looking to restrain supply,” the IEA said. “In 2018, we expect non-OPEC production to grow by 1.5 MMb/d, which is slightly more than the expected increase in global demand.”
The IEA estimates that oil stocks have grown by 360,000 b/d so far in 2017 despite OPEC’s efforts to restrain production. The US is the main culprit, with crude production there expected to grow by around 400,000 b/d in 2017 and by nearly double that in 2018. US crude production averaged 9.3 MMb/d in the week ending 9 June, an increase of 900,000 b/d from the lows reached nearly a year earlier.
The latest analysis from Interfax Global Gas Analytics suggests that reduced disruption in global oil supplies is also taking its toll.
“The reductions in supply disruptions from Nigeria and Libya have caught the attention of market participants,” Interfax Global Gas Analytics said in its latest monthly report, published on Wednesday. The report estimates that production outages in May 2017 averaged 520,000 b/d in Libya and 360,000 b/d in Nigeria – nearly half the level of outages seen at the same time last year in both countries. The publication lowered its forecasts for Brent crude oil in 2017 as a whole and 2018 by around $2/bbl, to $52.0/bbl and $56.1/bbl respectively.
Unsurprisingly, OPEC’s own analysis is more optimistic – albeit cautiously so – on when the market will rebalance. OPEC’s latest Monthly Oil Market Report says OECD oil stocks will continue to decline in H2 2017. “The decline seen in the overhang in OECD commercial oil inventories in the first four months of the year […] is expected to continue in the second half, supported by production adjustments by OPEC and participating non-OPEC producers,” it said. “These trends along with the steady decline in oil in floating storage, indicate that the rebalancing of the market is underway, but at a slower pace, given the changes in fundamentals since December, especially the shift in US supply from an expected contraction to positive growth.”

Companies need to get wise to smart power systems

Peter Stewart participated in the Hyper-smart Power Systems panel discussion at St Petersburg International Economic Forum. The article below appeared in the 1st June issue of Natural Gas Daily, an Interfax publication covering the global gas and energy markets. The views expressed are his own.
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Iran’s response crucial in Saudi-Qatar spat

The article below appeared on 15th June, 2017 in The Analyst, a weekly column by Peter Stewart in the Interfax publication Natural Gas Daily.
 
This is not a storm in a teacup. Qatar has supported Saudi Arabia in its proxy war against Iran in Yemen and has been part of the Gulf Cooperation Council (GCC) – which also includes Bahrain, Kuwait, Oman, Saudi Arabia and the United Arab Emirates – since it was founded in 1981. But its joint ownership of the world’s largest gas field means it has closer ties with Iran than its Arab neighbours.
Saudi Arabia’s decision to up the ante in its long-simmering dispute with Qatar is a high-risk strategy. Although all sides are scrambling to defuse the crisis, there is a relatively low but nonetheless real risk that the rift with Qatar will spiral out of control. Airspace could be a trigger point. The geographical distances involved are tiny – Qatar’s capital Doha is just 100 km from the Saudi border, while Bahrain’s capital Manama is just 140 km from Doha. The UAE and Iran are separated by less than 80 km at their nearest point. Flights from Qatar have to pass over Bahrain’s airspace. Iran has responded to the crisis by sending food shipments by air and sea to Qatar and by opening its airspace to 100 new Qatari flights per day.
If the spat were to escalate, the stakes could not be higher. Qatar is the world’s biggest LNG exporter, and with Iran it straddles the largest gas field in the world. The field, known as the North Dome in Qatar and South Pars in Iran, is a single gigantic pocket of gas and condensates formed hundreds of millions of years ago in the Permian and Triassic eras. It holds an estimated 51 trillion cubic metres of gas.
Riyadh has accused Doha of backing Shia militant groups allied to Iran in Saudi Arabia and Bahrain, and it has also accused Qatar of supporting the Houthi rebels in Yemen – even though Qatar has provided support for the Saudis’ military campaign there.
Impact on LNG market
The flare-up in Saudi-Qatari tensions has had an immediate impact on trade flows. LNG shipments are being rerouted because of the blockade. Interfax Global Gas Analytics has said the row will force Qatar to sell more LNG on a spot basis, while Egypt and Dubai will need to find alternative sources of the fuel. Qatari cargoes to these countries have already been diverted. Another potential destination for rerouted Qatari shipments is northwestern Europe, including the UK. Qatari LNG carriers will no longer be able to bunker at Fujairah. Oil shipments are also being affected.
In the longer run, however, a realignment of geopolitical allegiances could have important ramifications for investment. Qatar has used gas from North Dome to build an LNG export capacity of 77 mtpa and to provide power for the country’s residential and commercial sectors. It has also developed a GTL and fertiliser industry. Iran has ambitions to develop its gas resources through pipeline and LNG exports, and to expand its petrochemical industry to make use of the NGLs produced by the field. It has been stymied in the past by technological constraints as a result of sanctions by the United States and the EU.
The GCC has so far provided a united front against Iran, but it has been split into two factions for years. Saudi Arabia and Bahrain are Sunni countries with large Shia populations, while the UAE has long-standing border disputes with Iran over islands in the Gulf, meaning the three countries are united in the face of the perceived threat from Tehran. Saudi King Salman bin Abdulaziz Al Saud led a 2011 proposal for greater GCC integration intended to counter Iranian influence in the region.
The less-hawkish group includes Qatar, Kuwait and Oman. Kuwait has refused to join the blockade of Qatar and is offering to mediate in the crisis. Oman has sent food shipments to Qatar and has opened new shipping traffic between the countries. Oman is relatively non-aligned in Middle Eastern politics and has discussed building a pipeline to import Iranian gas for its LNG plants. Kuwait, meanwhile, is a key LNG importer in the region. The joint development of the Dorra field with Saudi Arabia in the Neutral Zone between the two countries was put on hold in 2013, and Kuwait’s LNG imports have subsequently soared. Iran also lays claim to Dorra.
It is unclear what diplomacy can achieve at this stage. US Secretary of State Rex Tillerson and his Russian counterpart Sergei Lavrov have called for negotiations. Turkey has warned that the crisis would have global ramifications were it to escalate and has sent its foreign minister to Doha to try to mend fences. The Turkish parliament approved sending troops to Qatar on 7 June – just two days after Saudi Arabia and its allies severed diplomatic ties.
It is difficult to predict specific outcomes and whether the rift will be permanent. A previous spat in 2014 took nine months to resolve, but history suggests that diplomacy will eventually prevail. However, the complex backdrop of Iran and Saudi Arabia’s battle for supremacy in the Middle East makes a swift and permanent resolution unlikely.
By Peter Stewart

More action needed on Asian grid integration

The article below appeared on 7th June, 2017 in The Analyst, a weekly column by Peter Stewart in the Interfax publication Natural Gas Daily.
 
Billed as the Russian equivalent of the Davos forum, the St. Petersburg International Economic Forum (SPIEF) conference is a platform for big ideas. The integration of Asian electricity grids and the potential for Russia to become an ‘energy bridge’ between Asia and Europe were among the biggest of the big ideas discussed at the three-day event.
Proposals to build a huge electricity transmission grid in northeast Asia have been labelled as either “visionary” or “pie in the sky” in the past, depending on the viewpoint of the observer. The latest scheme – known as the Energy Super-Ring or Asian Super Grid – involves integrating the national power grids of Mongolia, Russia, China, Japan and South Korea.
Progress so far has been tentative. China’s State Grid Corp., South Korea’s state-backed power and nuclear utility Kepco, Russia’s Rosseti and Japan’s Softbank Group signed a memorandum in March 2016 on how the integration might be achieved. Although Mongolia did not sign the 2016 memorandum, the plan is to integrate the country into the system as well. Mongolia’s Energy Minister Purevjav Gankhuu, who spoke on the panel, called for “clear action” to give the project momentum, noting that a feasibility study had still not been concluded despite 12 years of discussion about this and similar schemes.
The aim of the project is to integrate the increasingly complex energy supply sources across the five countries, which have a combined land area of 2.87 billion hectares, and ensure common standards across regional and national grids to allow scope for maximum integration. The Far East is rich in hydrocarbon resources – including oil, gas and coal – but also has enormous potential for renewable energy, including hydropower, wind and solar generation. For example, Russia claims its Asian coast has 350 days of sunshine per year.
The SPIEF panel, chaired by World Energy Council (WEC) Secretary General Christophe Frei – who has led a series of discussions for WEC on its Energy Trilemma index – included Oleg Budarin, the chairman of Rosseti, which has been promoting the scheme. Budarin said it was important to ensure that technologies and standards are aligned at the start of the project, rather than trying to retrofit systems later on. “Early integration is much more efficient,” he said.
From centralised to distributed systems
The enormous change under way in the power sector – from centralised to distributed systems, which will see customers will play an increasingly important role – was highlighted as a key driver of the need for systems integration. The rise of local and renewables-based generation – especially through new technologies such as blockchains, which allow electricity contracting to be done at a more local level – will require the power system to become more integrated. “Our ally is the consumer. They should vote for integration,” said Budarin.
The panellists agreed that homogenous transmission systems and convergent pricing would optimise conditions for power transmission between regions, but also outlined a number of challenges. The huge geographical area, and the uneven distribution of demand between urban and rural areas, will be a particular challenge for planners.
Meanwhile, the idea that a more interconnected system is more resilient is too simple, panellists said. For example, cyberattacks can spread more quickly if grids are interconnected. “You always have to manage complex systems in the right way,” said Frei.
Russia will play a key role in the progress towards grid integration in the region. Its policy has been increasingly directed eastwards in recent years, led mainly by demographic trends that are driving the growth in energy demand towards emerging markets in Asia.
The Power of Siberia pipeline was announced in May 2014 and is slated to export 38 billion cubic metres per year of gas from eastern Siberia to northeastern China. Several plans have been proposed to expand the flow of gas from Russia – not only from eastern Siberia but also the country’s resources in western Siberia – into China, and potentially onward into South Korea and Japan. Although these plans have been scaled back and in some cases postponed since oil prices peaked in mid-2014, the core Power of Siberia project is on track to be completed by around 2019.
Russia is also diversifying its energy policy to encourage the development of renewables and to encourage the use of ‘smart’ technologies such as smart grids and meters.
More than 120 panel discussions were held over the three days of the SPIEF, around one-third of which touched on the theme of energy and a dozen of which dealt directly with the upcoming revolution in energy systems around the world.
Should the Asian Super Grid go ahead, it would unlock huge opportunities for investment in the five main countries involved. A total of 475 investment agreements amounting to RUB 1.82 trillion ($32 billion) were concluded at the 2017 SPIEF conference, compared with 356 in 2016 and 205 in 2015. A recent Eastern Economic Forum in Vladivostok resulted in around 200 agreements worth RUB 1.70 trillion, with predominantly Chinese, Japanese and South Korean companies.
 

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