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    Editorial: Herd mentality [NGW Magazine]


Long-term energy investors are easily cowed by short-term doubts. [NGW Magazine Volume 5, Issue 22]

by: NGW

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Natural Gas & LNG News, Top Stories, Insights, Premium, Editorial, NGW Magazine Articles, Volume 5, Issue 22

Editorial: Herd mentality [NGW Magazine]

The news that Germany’s dominant utility and major generator Uniper is reconsidering the size and the purpose of the LNG terminal it was backing – in its very own backyard at Wilhelmshaven – probably came as a surprise to many. It had not managed to drum up sufficient support from the gas suppliers likely to need LNG so a smaller terminal or one to handle hydrogen is the next option.

There is already an abundance of spare regasification capacity in other countries along the North Sea coast. A single market should minimise the need for costly investments: countries do not theoretically need to have the concrete and steel on their own territory, much though their governments may like it.

And the idea was political: Germany wanted to reassure the US that it was open to advances from US gas producers too. It now has bundles of paperwork supporting its claim.

But given the perceived need for gas in the years to come, Uniper might have been expected to bid for a good chunk of capacity in the terminal it was organising. It has spent a lot of time in capacity talks with the Canadian upstream LNG project developer Pieridae Energy, on the east coast, so far with nothing firm to show for it. That could have been a ground-breaking deal in several senses, giving North American LNG a short and direct line to Europe from Nova Scotia, as well as freeing some Canadian producers from the tyranny of the low-priced US market.

And two of Uniper’s big pipeline gas suppliers, Norway and the Netherlands, are either on the brink of decline or already almost at zero. Reliance on one supplier alone is never prudent – even if this year does mark a major anniversary since the February 1970 signing of the first long-term gas supply contract between West Germany and the Soviet Union.

To quote Alexei Miller speaking mid-November: “While 50 years ago we talked about supplying 52.5bn m³ of gas over 20 years, we now supply as much or even more than that to Germany every year. I am certain that we have many more decades of successful co-operation ahead of us.”

There are still two more horses in the German race, and three would definitely have been a stretch even for a country phasing out coal and nuclear. All eyes will be on these as they seek to tie up enough traders’ interest to go ahead. More inventive technology, better geography or more attractive commercial terms and conditions might push one into the clear lead.

The Uniper situation is a repeat of earlier price slumps: whatever the industry says about gas being a long-term business, it is also one requiring vision, particularly when the short-term signals are red. After all, contrarians might expect to secure lower engineering and construction costs when recession hits that vital sector.

Their customers might also expect bigger profits from bringing on a terminal at a time of relative tightness. But that generally means kicking off at a time of shortage. And if all shippers wait for the right moment to book capacity at a terminal based on today’s market conditions, then the high prices will vanish as several operations start almost synchronously.

Earlier this autumn it seemed that European gas prices would draw plenty more cargoes. Hub prices are meant to be higher than oil indexed prices in the winter: that is one reason why storage is so full. The other is that all the cheap US LNG had to go somewhere. But the month-ahead price has been falling while Asian demand for all kinds of fuel is strong.

At time of press, the Dutch hub, the Title Transfer Facility, the December contract was trading at just under a $2/mn Btu premium to the US Henry Hub, offering meagre returns after liquefaction, shipping and regasification. The spot Japan Korea Marker, by contrast, was $3.65/mn Btu higher than the US equivalent. But this is only a snapshot: a quick roll-out of a proven vaccine for Covid-19 for example or a very cold spell would change the European outlook.

No such doubts beset Sempra as it took a final investment decision at the other end of the supply chain – and the only one of this ill-starred year – on its Pacific coast liquefaction terminal. No Panama Canal stands between the Mexican plant and its offtakers. Once Sempra has the final approval from the government, there is nothing but open sea to Asia and the wealth of demand ready to soak up the LNG. Coming out of the Permian shale with its Henry Hub-discounted Waha pricing, the economics for French Total and Japanese Mitsui & Co look favourable and low costs have never been so important as the LNG market liberalises.

But even Sempra has to deal with reality: it has its own activist shareholders prepared to hold it to the exceptionally high standards of environmentalism that they might not live by in their private lives.

They are unhappy that the utility has “no net zero or long-term climate targets.” Instead, they say, Sempra continues to invest in greenhouse gas intensive natural gas assets and its current reporting does not disclose whether its lobbying is aligned with Paris goals, especially regarding natural gas use. This mirrors European squeamishness about low-priced energy: France has decided to do without gas produced by hydraulic fracturing and Ireland might follow.

So this period of oversupply appears to follow the trend: as always in a crisis, it is impossible to imagine life ever returning to normal, despite the evidence to the contrary. Those that do accept the challenge might therefore reap gratifyingly large rewards.