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Last month, the tanker Myrina, chartered by Royal Dutch Shell PLC, set off from the west coast of France transporting liquefied natural gas to Asia. According to individuals acquainted with the situation, the skipper got a call as the ship approached the Strait of Gibraltar.
According to one of the guys, his supervisor in London instructed him, “We have to travel to Rotterdam immediately.” The ship performed a U-turn and returned along the Spanish and French coasts, dropping off a portion of its cargo in the Dutch port. It landed in Bilbao, Spain, on Thursday to deliver the remainder of its cargo.
Buyers from Europe, Asia, and Latin America are vying for limited gas supplies, rushing to fill tanks and caves before winter arrives in the Northern Hemisphere.
Natural gas supplies are dangerously low across the globe, and prices have never been higher in most areas, after setting fresh highs in Europe and Asia this week. As countries recover from pandemic shutdowns, demand has risen sharply, catching merchants, shipowners, and energy executives off surprise.
Due to a lack of supply from Russia and high demand in China and Latin America, European economies like as Spain, the Netherlands, and the United Kingdom have become especially susceptible. In recent years, nations have reduced their reliance on coal-fired power facilities and increased their reliance on natural gas.
Even in the United States, the world’s biggest natural gas producer, the bidding battle has driven up prices to levels not seen in over a decade, paving the way for a costly winter heating season and increased power bills.
Tankers are being diverted to the highest bidder, an unusual event that adds to the market’s instability. Because of rising energy costs, manufacturers are reducing output, jeopardizing the post-pandemic recovery. In addition, China and Europe are ramping up coal- and oil-fired power facilities, reversing progress toward lower-carbon energy sources.
“The system has gone crazy,” said ystein Kalleklev, CEO of Flex LNG Ltd., which owns a fleet of LNG-transporting boats.
The market isn’t expected to level out anytime soon. Producers’ incentives have shifted as investors prefer businesses that seek long-term stability over short-term price fluctuations.
Even if they did, LNG facilities and ships shipping LNG from the United States are almost full, and adding more is a long-term project. Meanwhile, political and regulatory barriers to getting Nord Stream 2, a major new pipeline to Europe, up and operating may be preventing Russia, another big natural-gas producer, from adding to supplies.
Russian President Vladimir Putin stated on Wednesday that Moscow was ready to assist stabilize the global energy market, implying that he might help calm the escalating situation in Europe. Moscow, he added, is a dependable supplier that consistently follows through on its promises. Nonetheless, several authorities, dealers, and experts have said that Gazprom PJSC, Russia’s state-owned energy behemoth, has been sluggish to boost gas supplies.
As global leaders prepare to gather in Glasgow for the United Nations climate summit, which starts Oct. 31, to make great promises about weaning themselves off carbon-based energy sources, particularly gas, the supply and demand mismatch is playing out.
The current shortages are making it more difficult for countries to manage the transition to less carbon-intensive energy sources like wind and solar. Gas was plentiful, giving governments and businesses the confidence to pursue renewable energy development, knowing that in an emergency, power systems could always fall back on inexpensive gas, which produces about half as much carbon as coal.
In July, a worker at the EQT Corp. fracking facility in Mannington, West Virginia.
The Wall Street Journal’s Maddie McGarvey took this photo.
A market that has changed
Frackers in Appalachia and Texas have been using new technology to pump massive quantities of natural gas for more than a decade, driving down prices. Gas exported from ports along the East and Gulf Coasts established a worldwide market. Governments in Europe, in particular, shifted their energy production to less costly fuels, and coal and oil-fired power plants in certain nations remained dormant for extended periods of time or were mothballed.
Many of those power facilities have been brought back online in recent months, helping to drive up oil and coal costs.
These skyrocketing energy costs risk driving up inflation, stifling industrial production, and delaying the global economy’s recovery from the Covid-19 shutdowns.
According to The Wall Street Journal, China’s Vice Premier Han Zheng, who oversees the country’s energy policy, instructed executives of the country’s major state-owned energy firms to “expand coal supply by any means.”
Goldman Sachs Group economists believe China’s GDP did not grow in the third quarter compared to the second. One explanation is that energy-intensive sectors like factories and smelters have reduced production in response to government directives to reduce energy consumption as well as fuel and electricity shortages.
China has been using more natural gas as authorities urge industries to use cleaner fuels, and the country’s shifting policies have contributed to a coal scarcity. According to the International Energy Agency, it will account for 30% of world gas demand growth by 2024.
Record costs for natural gas, coal, and carbon allowances, which big polluters are obliged to buy, have driven power prices to all-time highs in Europe.
In September, LNG storage tanks were seen on the Isle of Grain in England.
Agence France-Presse/Getty Images/daniel leal-olivas
After power costs rose in mid-September, zinc producer Nyrstar Netherlands (Holdings) BV started to slow down its electrified facility in Budel-Dorplein. When energy costs are at their highest, the plant has been operating at less than full capacity for up to a few hours a day. Steel is coated with zinc, and the metal is utilized in plastics, batteries, and medicines.
According to Guido Janssen, vice president of European operations, this is the first time Nyrstar has taken such steps since energy markets soared in 2008-09 with strong expansion in China’s economy. “This isn’t a typical scenario,” he said.
Yara International AS is a Norwegian fertilizer conglomerate. In September, A curtailed ammonia output in Europe by 40%, claiming that record-high gas costs rendered the process unprofitable. Ammonia, which is used in fertilizers, is made from natural gas.
British Steel Ltd. started charging an additional $25 per metric ton for alloy metal earlier this month in order to pass on a part of its energy expenses to consumers.
“We can no longer manufacture steel economically at certain hours of the day due to the enormous expenses we now face,” a British Steel spokesman stated.
Fuel is more costly in North America than it has been since the fracking industry reshaped the market.
Some manufacturers will be unable to make a profit if natural gas prices in the United States continue to rise to around $10 per million British thermal units, up from nearly $6 now, according to Paul Cicio, president of manufacturing trade group Industrial Energy Consumers of America, who advocates limiting LNG exports from the United States to allow inventories to recover.
In an interview, Mr. Cicio said, “Anytime the price of natural gas has gone up in the United States, there has been a direct decrease in industrial jobs.”
According to market intelligence company Kpler, global demand for LNG increased 5.3 percent in the first nine months of 2021 compared to the same time the previous year, as economies thawed after pandemic lockdowns.
Because of the severe and unexpected weather, supply has been sluggish to react. In February, gas wells in Texas froze, and storms in the Gulf of Mexico cut down production late this summer. Wind speeds in Europe have been slower than usual, limiting renewable energy production.
The winter of 2020-21 in Europe stretched on, reducing the amount of time available to replenish gas supplies. According to Natasha Fielding, an analyst at Argus Media, equities in Europe have been 18 percent higher at the start of October on average over the last five years than they are this year.
In September, LNG tanks were seen at a PetroChina storage facility in Jiangsu Province, China.
Getty Images/Feature China/Barcroft Media
Droughts have dried out hydroelectric dams in Brazil, southern China, and the United States. As Brazil’s hydroelectric production has decreased, the nation has entered the gas supply war, buying the most LNG since at least 2013, according to Kpler statistics.
Disruption of the contract
Longer-term changes in the way the gas market operates have sent more cargoes to the top bidders across the globe.
Long-term contracts dominated the LNG market in the past, since export terminal developers sold a significant portion of their capacity to customers before constructing the facilities. Unsold capacity made space for spot cargoes, which are more easily accessible and not bound by long-term commitments.
In July, LNG was stored at the Sakhalin Energy Co. on Sakhalin Island, Russia.
Yuri Smityuk/TASS/ZUMA Pres/Yuri Smityuk/TASS/ZUMA Pres/Yuri Smityuk/TASS/
With more export facilities available these days, especially in the United States, the expansion of spot cargoes has produced a market that is more susceptible to price fluctuations.
The globe is now engaged in a high-stakes bidding war as a result of the disruption. Over the summer, Asian customers in South Korea and Japan, who are more used to paying high costs for energy, kept bids high. This pulled ships east, depriving Europe of LNG at a time when it should be stockpiling for the coming winter.
Lately, Europe has acquired a stronger position. According to experts, a major benchmark for European natural gas pricing has traded at similar levels to a marker that monitors Asian LNG prices, presumably helping Europe attract additional gas.
According to Kpler, European LNG imports increased by approximately 35% in September compared to August. According to vessel-tracking companies, the Gaslog Salem, an LNG tanker that had left from the Gulf Coast for Asia, diverted to the Mediterranean late last week.
According to vessel trackers and industry experts, cargoes have been diverted in certain instances because merchants sell the goods to higher bids and pay the original customer, or shippers terminate contracts in favor of greater earnings.
“The market is distributing supply based on price, which is unusual—this hasn’t always been the case with LNG,” said Jason Feer, head of business intelligence at shipbroker Poten & Partners Inc. “The LNG industry is maturing into a more commoditized market.”
Gas exporters sprung up along American coastlines since the shale boom started to take advantage of the price differential between the United States and the rest of the world. The gap has never been greater than it is today, with costs in Asia and Europe hovering around $40 per million BTUs.
According to shipbrokers, traders, and vessel owners, traders and energy companies in charge of big LNG fleets, such as Shell, are expected to benefit from the arbitrage. Still, around 70% of Shell’s LNG contracts are long-term, limiting the company’s potential to benefit from price increases, according to a source familiar with the situation.
According to the most recent U.S. statistics, several LNG shippers are now operating at full capacity, exporting near-record volumes of 9.7 billion cubic feet of gas per day in July.
Cheniere Energy Inc., the biggest LNG exporter in the United States, is loading an average of 112 LNG cargoes each day at its two Gulf Coast plants. This is up from an average of approximately one shipment per day in 2020, thanks in part to the market’s recovery from the epidemic, and comes after the firm expanded one of its facilities.
LNG export facilities in the United States, which liquefy gas by freezing it, are likewise almost full. New capacity takes years to build, and projects approved a few years ago won’t be ready in time to pump additional gas into Europe before the winter. According to industry officials, analysts, and investors, the availability of spot cargoes has decreased support for new export projects in the United States and abroad in recent years.
In the meanwhile, natural-gas companies have promised to keep oil-field expenditure and production about constant in order to deliver more cash to shareholders, implying that large increases in supply are unlikely in the foreseeable future.
“We can increase supply, but we’re in a new age of shale development today,” said Toby Rice, CEO of EQT Corp., the largest gas producer in the United States. “We’re going to be disciplined, which means we’ll only contemplate sustainable expansion.”
To satisfy global demand, he added, shale firms require additional pipelines and LNG facilities, but regulatory stalemates have pushed up infrastructure prices and limited supply choices in certain areas of the nation. Even though a pipeline could connect it to the gas-rich Marcellus Shale less than 300 miles away, Massachusetts, for example, imports LNG and is subject to the global battle for supply, he added.
According to the consulting company Spears & Associates, the cost to drill a well and put it into production has increased approximately 2.5 percent in each of the first three quarters of this year, with another 3 percent increase anticipated before the final three months of 2021.
According to oil-field service executives polled by the Federal Reserve Bank of Dallas, there aren’t enough competent employees to fill all of the job vacancies in the oil sector, and salaries have increased significantly.
“Responding takes time. “They need to find personnel if they want to expand output,” said Linhua Guan, CEO of private Texas oil and gas company Surge Energy. “Last year, they had a lot of layoffs.”
When the market was trading at about $3 per million BTUs, several shale firms utilized hedging contracts and other derivatives to lock in pricing for part of their future output. This provided them with protection against a price collapse, but it also limited their potential to profit from the present price increase, another deterrent to expanding supply.
Governments in Europe have been utilizing natural gas as a stepping stone to transition away from coal and oil and toward renewable energy sources. However, due to the supply shortage, coal power plants are nearing full capacity, according to Glenn Rickson, head of European power analysis at S&P Global Platts, albeit some have been hampered by limited coal supplies.
Since the beginning of the summer, Italy’s San Filippo del Mela, Western Europe’s biggest oil-fired power plant, has been producing approximately 125 megawatts of energy each day on average. Mr. Rickson said this is more than twice the 50 megawatts it generated each day from 2018 to 2020.
According to Philip Lambert, chief executive of mergers-and-acquisitions advisory firm Lambert Energy Advisory Ltd, governments around the world began to wean their economies off coal and onto gas in order to plug carbon emissions and reduce urban pollution, but they didn’t invest enough in gas production or LNG infrastructure. “Right now, we’re in the midst of a very, very terrible situation.”
Joe Wallace, Collin Eaton, and Benoit Faucon may be reached at [email protected], [email protected], and [email protected], respectively.
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