Editorial: Darkest before dawn [NGW Magazine]
Among its many other dubious achievements, 2020 exposed the poverty of the English lexical stock. “Unprecedented” became the go-to adjective in interviews with oil executives and analysts’ reports. It occurred in business news more often than it had in any earlier 12-month period. Furthermore, it was always in a negative context.
That trend perhaps peaked early. Spring saw the unprecedented, negative price of West Texas Intermediate as inefficiencies in the US storage market – there was still room for more injections – pushed the benchmark crude below $0/barrel.
Many claimed that the pandemic was merely accelerating what was already happening: working from home being one example. Others talked of a return to normality. But many outlets that were set up on the premise of lunch-time footfall and retail shopping have gone to the wall, perhaps forever.
Some traders have grown rich on short selling – but only against a backdrop of plummeting commodity prices, project cancellations and colossal write-offs by companies great and small. Inevitably the weaker collapsed but others saw escape through mergers and takeovers: these include Premier and Chrysaor in the UK and a slew of shale players in the US.
Other side-effects of the Covid-19 virus included European hub gas prices at record lows, major reductions in pipeline exports from Russia and Norway and liquefaction capacity the world over – but most famously in the transparent US – being shut in. Some buyers only took their take-or-pay volumes through gritted teeth while others, including major Chinese buyers, tested the applicability of force majeure in their contracts.
Gas demand did not fall as much as demand for oil products – notably kerosene as so many commercial flights were cancelled. And as NGW goes to press the spot price of LNG in Asia is very high and being pushed higher by freight rates. The markets in India and China seem to be back to normal. Whether this will silence buyers’ regular demands to be released from oil indexation remains to be seen: Brent at $50/barrel means LNG not far above $5/mn Btu, less than half the spot price.
High carbon prices in Europe will also encourage yet more switching from coal there, which can only be a good thing environmentally and for gas. Reliance on UK renewables is still some way off: at time of press, gas was meeting almost 50% of power demand while wind was below 10%, reflecting the harsh realities of life when temperatures are near zero. A few days earlier the percentages were almost the reverse.
Separately but also shockingly, there were two fires at Norwegian facilities – first the Hammerfest liquefaction terminal handling Snohvit gas, and second the methanol plant at Tjeldbergodden, Europe’s largest, that processes gas from the Heidrun field. A difficult start then for the new CEO of state-controlled Equinor.
But the year ended on a slightly brighter note. There are now two vaccines, one of which made in the UK can be stored in a conventional fridge and costs only a few pounds per shot. The implications are staggering if not immediate.
What else can we hope for from this year? Citizens of the UK are now no longer part of the European projet. Certainly a lot of things taken for granted, especially where travel and study are concerned, will become a lot more complicated. But tariff and quota-free trade in goods at least will reassure exporters and the uncertainty is over. Currency traders also seemed to think the pound worth buying, in the hours after the treaty became UK law.
As for energy trade, nobody seems concerned that anything will change there. The UK and the EU anyway had been in broad alignment on capacity regulations and the need to limit carbon emissions and to facilitate trade.
Looking across the Atlantic, a seasoned politician rather than a highly individualistic businessman is now about to assume control of the White House. And his views on the climate chime with both the European Union’s and the UK’s. If anything, there is a risk of inflationary promises to electrify and to decarbonise the two major trading blocks, without analysis of the life-cycle costs that this will create. The public only has so much patience for expensive experiments and can see through short-term politicking.
Many governments, especially in Europe, are heavily weighed down with debt as they borrowed to lessen the impact of their respective varieties of lockdown. Measures that they take that push up the cost of energy will be difficult to sell to the public at large, even if popular in the capitals.
The energy transition of course spells bad news for gas producers that rely on conventional output that is not in the lower half of the cost curve, but the rate of change may be slowed by engaging with the demands to lower methane leaks and so save money along the value chain. This has already raised the intriguing possibility of gas prices reflecting the environmental damage done by bringing the molecules to market.
Gas at the moment is essential for many needs and green hydrogen seems wasteful; but gas has successors lining up to replace it. Its opponents will point to any defect they can find in normal methane. Business is business after all and it pays to advertise. So perhaps this year might see the gas industry explain more clearly the complex trade-offs in social and environmental as well as financial terms that the net-zero carbon future implies. The next COP meeting is only 11 months away and it is time to prepare.