NGW Magazine Volume 5, Issue 9
Natural Gas World Magazine delves into current developments and the most critical global events, explaining why they matter and their potential short to medium term consequences.
In this issue:
EDITORIAL: DAMNED IF YOU DO…
Oil has seen a limited recovery over the past week, based on some modest re-opening for business. Prompt Brent has been trading in the high $20s-low $30s, after plunging to a near two-decade low of under $20 in April.
By most accounts, Russia and its Opec+ allies are closing in on their targets for supply cutbacks in May. Norway has also imposed its own unilateral cut to production. Private companies have had to take their own more drastic measures in their attempt to survive.
OIL: DEAD ON THE WATER?
The social impact of the pandemic may mean there is no return to the energy demand trajectory which existed pre-Covid-19. But once the smoke has cleared, governments will have to decide whether to use fiscal stimuli to accelerate the energy transition or simply to jump-start the economy at the lowest cost.
The oil market has experienced a series of entirely new events in the space of just a few months: the market was flooded with oil as a result of the breakdown in talks between Russia and Saudi Arabia and then demand vanished as a result of the coronavirus (Covid-19).
IEA ON GLOBAL ENERGY IN 2020: A TURBULENT TIME AHEAD
The impact of the Covid-19 on global energy and carbon emissions over the course of this year was the subject of a review released by the International Energy Agency (IEA) April 30. This is based on real-time analysis of daily data collected for 30 countries until mid-April.
Major uncertainties surround the economic outlook, including the trajectory of the pandemic, the effects and duration of virus containment measures, reopening strategies and the shape and speed of recovery as the pandemic recedes.
But while the review is inevitably rich in caveats, it seems safe to agree with the IEA executive Fatih Birol’s observation that “the energy industry that emerges from this crisis will be significantly different from the one that came before.”
RUSSIA’S VIEWS ON ENERGY AND TERRITORY
The Russian government approved its Energy Strategy to 2035 (ES-2035) in April. A month earlier, the president, Vladimir Putin signed off the ‘Basic Principles of Russian Federation State Policy in the Arctic to 2035’ (BPA-2035) defining how Russia’s state policy in the Arctic zone will be implemented.
In May 2019, Putin approved a new energy security doctrine which includes “strengthening co-operation with foreign partners, defending Russian energy companies’ legal rights abroad and access to international markets, and further developing Russia’s import replacement program.
RUSSIA EYES PETCHEMS BOOST
Russia’s largest oil and gas producers are moving into petrochemicals, adding value to exports and establishing a greater downstream hedge against volatile oil and gas prices.
Considering its vast hydrocarbon reserves, Russia’s petrochemicals footprint is minuscule, accounting for less than 2% of global supply capacity. This is set to change, with a raft of new projects due to come on stream over the coming years. These projects will mainly rely on ethane as feedstock, produced as a by-product of gas processing. Oil-derived naphtha, on the other hand, is proving far less popular.
EU REGULATORS QUESTION SUBSIDIES
The French system whereby transmission system operators (TSOs) collect network tariffs from shippers in order to pay out subsidies to gas storage terminals may not be compatible with European Union (EU) competition rules. France handed out €540mn (US$580mn), to storage operators in 2018 and €500mn in 2019, prompting the European Commission to launch an antitrust investigation in late February this year (NGW Vol 5, #7).
But France is not alone in allowing such cross-subsidies. In Italy, for example, TSOs collected €280m/year on behalf of storage operators between 2016 and 2019, according to a report published earlier in April by the EU’s Agency for the Co-operation of Energy Regulators (Acer). These subsidies are meant to cover missing revenues; storage operators have struggled to make profits in recent years thanks to a low spread between summer and winter gas prices which discourages shippers from putting gas into storage. In their defence, the French regulator CRE and the Italian regulator Arera have argued that closing unprofitable storage facilities would jeopardise security of supply.
SUB-SAHARAN AFRICA COUNTS THE COST
French oil major Total was forced to suspend construction work on the proposed onshore liquefied natural gas (LNG) complex in northern Mozambique April 20, following an outbreak of Covid-19 at the project site.
According to Mozambique’s National Health Institute, the Total project at Afungi accounted for 19 of the 31 confirmed Covid-19 cases that had been recorded in country at that time.
The operator and 26.5% stakeholder, together with its partners – Mozambique’s national oil company ENH, Japan’s Mitsui, Thailand’s PTT and India’s ONGC Videsh, Bharat Petroleum Resources and Oil India – are involved in preliminary construction work on the $20bn, 12.9mn metric tons/yr LNG facility that has become the centre of Mozambique’s Covid-19 outbreak.
IRAN’S GAS FAILS TO DELIVER
Iran is preparing to start drilling Phase 11 of South Pars next month, using an old platform it is moving from another phase which has faced pressure fall much sooner than expected.
South Pars is the world’s biggest non-associated gas field, of which a third (14 trillion m.) is in Iran and the rest in Qatar. It is divided into 24 phases on the Iranian side, of which 18 phases have been completed, 5 phases are being developed and only phase 11 remains undeveloped.
ADVANTAGE TO APPALACHIAN DRILLERS
US oil and gas producers are under immense pressure as a result of the collapse in crude prices, accelerated by the drop in demand as countries around the world respond to Covid-19 pandemic. But as oil and associated gas production – particularly in the Permian Basin – is already taking a hit, Appalachian drillers appear better positioned to weather the storm.
This is not to say that producers in the Appalachian Basin – which holds the prolific Marcellus and Utica shale gas plays – are not facing headwinds. Like shale drillers across the country, they have increasingly come under pressure from shareholders to prioritise returns over growth and demonstrate capital discipline. In addition, as associated gas production in the Permian Basin boomed, contributing to the US’ oversupply, natural gas prices have been unfavourable for some time.
GAZPROM CONCEDES DEFEAT IN BULGARIA
Russia has heavily discounted its gas for Bulgaria, its “brotherly” Slavic nation, describing the gesture as a gift to commemorate the anniversary of its liberation from Ottoman rule.
But the reason was more prosaic than ancient ties of friendship that outlived the Soviet Union. Russia has found it harder to deliver gas to Europe, including Bulgaria, and this will only become harder when alternative gas lines are fully in use. More generally, the Bulgarian deal has pointed up serious problems with Russia’s geopolitical arrangements.