Editorial: LNG’s Exposure to Geopolitical Risk Can Only Rise [LNG Condensed]
Gas markets have always been politicised to some degree, and particularly so in the European arena, but never to the extent that oil markets have been globally. This is not because of the existence of Opec and the lack of a counterpart in the gas market, but because of the strategic importance of oil as the energy source for transportation. If the oil stopped flowing, economies would literally grind to a halt.
The geographic distribution of oil resources meant that many economically strong countries became dependent on the international supply chains bringing oil to their shores, sometimes leading to the adoption of foreign policies overtly designed to safeguard those supply chains. Meanwhile, the concentration of oil supplies in the Middle East exposed the world economy to the political and social instabilities of the region.
Gas trade was pulled into this complex geopolitical environment primarily by oil indexation. If oil prices rocketed as a result of a Middle Eastern conflict for example, then so too would gas and LNG prices regardless of the underlying supply and demand situation.
The erosion of oil indexation both in pipeline gas and long-term LNG contracts, as well as the growth in gas hub and spot LNG trade, has decoupled gas pricing to a large extent from oil. Witness the slump in spot LNG prices this year and its impact on European gas pricing, while Brent has largely stayed in a $60-$70/b range.
However, the LNG market is far from free of geopolitics, and it cannot escape further entanglement as the industry expands globally, creating international supply chains on a par with oil. This can already be seen in the two most important ‘oil’ issues of the day.
The US-China trade war threatens a slowdown in the global economy, which will affect gas consumption just as it will oil, but it is also an economic conflict between a fast emerging major LNG exporter – the US – and what is likely in the next five years to become the world’s largest LNG importer – China. LNG has already become a trade weapon, with the imposition of tariffs on US LNG exports to China.
The second issue is the potential for conflict between the US and Iran over the latter’s nuclear programme. Oil tanker seizures, attacks on shipping and the shooting down of drones all raise the stakes in a situation where the risk of closure of the Strait of Hormuz is real. According to BP data, 26% of all LNG cargoes passed through the strait in 2018, a significant proportion, particularly for those countries almost entirely dependent on LNG for their gas supplies, such as Japan, South Korea and Taiwan.
The expansion of LNG trade inevitably lengthens supply chains and starts to encompass less politically and financially-stable countries. It exposes gas and LNG trade to events far distant. Exporters have to deal with counter-parties with higher credit risk and to countries where policy interventions can be significant and unexpected. Over the past five years, for example, China has made multiple interventions affecting the seaborne coal market, creating short-term supply and demand shocks, particularly for coal exporters in Asia-Pacific.
The fact is that the geopolitical risk to which the LNG market is exposed can only rise with the growing importance of gas as an energy source. The geographical distribution of gas resources worldwide is less concentrated than for oil. However, the higher the proportion of gas in the primary energy mix, the more significant gas and LNG become as import dependencies requiring protection, the more likely they are to be used as trade weapons, and the more likely they will be the subject of, for example, extraterritorial political sanctions.
Growth in the number of LNG producers improves security of supply overall, but also the risk grows that somewhere in the world some element of supply will be affected by social, political or natural events, the effect of which will ripple through a more interconnected global gas market. Just as gas decouples from its entanglement with the geopolitics of oil, its increasing importance as a source of energy brings new challenges of its own. This is the inevitable price of success.
LNG Condensed Volume 1, Issue 7 - July 2019 - Now Available:
Volume 1, Issue 7 - July 2019
In this Issue:
Editorial: LNG’s Exposure to Geopolitical Risk Can Only Rise
Nigeria’s T7: Resetting the Narrative
LNG-for-Coal Switching Critical for Emissions Control
LNG Derivatives on the Rise
Indonesia, from LNG Exporter to Importer
Project Spotlight: Costa Azul LNG
Technology: Compressor Efficiency Improvements
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