Rus­sia, the US and China race for liqui­fied nat­u­ral gas

The rise of liq­ue­fied nat­u­ral gas could open up a new bat­tle be­tween China, Rus­sia and Trump’s Amer­ica, re­ports Jil­lian Am­brose

The Sunday Telegraph - Money & Business - - Front page -

The bat­tle for en­ergy mar­ket dom­i­nance is tak­ing to the high seas. Once a niche el­e­ment of the global mar­ket, su­per-cooled megatankers filled with liq­ue­fied gas are in­creas­ingly criss-cross­ing the globe. Liq­ue­fied nat­u­ral gas, or LNG, is now the world’s fastest-grow­ing source of en­ergy. The boom in trade has kick­started tril­lions of dol­lars of in­vest­ment in ex­port projects in the US, Qatar and Aus­tralia to meet the grow­ing needs of su­per-con­sumers in China and Europe.

But it is also set to reignite smoul­der­ing trade ten­sions be­tween the US, China and Rus­sia in an ul­tra-high stakes game of po­lit­i­cal one-up­man­ship.

China’s shock de­ci­sion to in­clude LNG in a raft of US ex­ports that are set to face crip­pling im­port tar­iffs is likely to put the US on a col­li­sion course with Rus­sia in the fight for Euro­pean gas buy­ers.

But this is not the first time the LNG mar­ket has been thrown into flux. The as­cent of LNG to the com­mod­ity trad­ing main­stream and a po­lit­i­cal weapon has been rid­dled with false starts for decades.

Since the late Fifties, en­gi­neers have toiled with trans­port­ing gas on boats by com­press­ing it at tem­per­a­tures of around 260F be­low freez­ing to cre­ate an eas­ily trans­portable liq­uid.

When un­shack­led from the lim­i­ta­tion of pipe­line sys­tems, th­ese seaborne car­goes can make their way from the Mid­dle East to the Far East, and from the United States to Europe.

The US in par­tic­u­lar has a lot to gain from the grow­ing dom­i­nance of LNG mar­kets. It was Jan­uary 1959 when the world’s first com­mer­cial LNG tanker, a con­verted Sec­ond World War lib­erty freighter built in 1945, car­ried 5,000 cu­bic me­tres (178,000 cu­bic feet) of chilled gas from the US state of Louisiana to the Thames es­tu­ary.

Decades later, the tran­sit of the Meth­ane Pi­o­neer’s ply­wood-bound alu­minium tanks to Bri­tain is set to be re­peated at a scale unimag­in­able even at the turn of this cen­tury.

Then, the world’s largest gas pro­duc­ers in Qatar, Nige­ria and Trinidad viewed the US as a key des­ti­na­tion for their car­goes.

Qatar’s na­tional gas com­pany floated the first of a new gen­er­a­tion of su­per-tankers from a South Korean ship­yard in 2007.

The 1,132ft be­he­moth, ca­pa­ble of car­ry­ing 9.4 mil­lion cu­bic feet of LNG, was des­tined to ship gas from the Mid­dle East to spe­cially equipped im­port ter­mi­nals on the east coast of the US and Europe. The US shale rev­o­lu­tion sub­verted all ex­pec­ta­tions. To­day, th­ese same US im­port ter­mi­nals have been equipped to ex­port the na­tion’s new-found en­ergy abun­dance to com­pete for a place in the global mar­ket against the sup­pli­ers who had once hoped to profit from Amer­i­can buy­ers.

Soon, the US will be one of the globe’s most im­por­tant en­ergy ti­tans, a po­si­tion that pres­i­dent Don­ald Trump rel­ishes.

There is no short­age of buy­ers wait­ing, some with tricked-out su­per-tankers equipped to re­ceive, store and “re­gasify” LNG im­ports with­out the need for a fixed on­shore ter­mi­nal.

Th­ese floating gas process plants are dot­ted along the coast­line of coun­tries look­ing for fast, flex­i­ble and eco­nom­i­cally com­pet­i­tive op­tions with­out the pro­hib­i­tive costs of a ma­jor on­shore im­port ter­mi­nal. From Egypt to Pak­istan, they are al­ready in­ject­ing gas into pipe­lines and de­pots to be used in homes, fac­to­ries and the transport in­dus­try.

The great­est prize is China, a coun­try with seem­ingly in­sa­tiable ap­petite for gas. Around 12 tril­lion cu­bic feet of LNG trav­els across the world’s oceans ev­ery year, of which 40pc passes through the South China Sea.

The IEA ex­pects Chi­nese gas de­mand to grow by 60pc be­tween 2017 and 2023, as it scram­bles to re­duce chok­ing air pol­lu­tion by switch­ing from coal to gas.

China alone ac­counts for over a third of the growth in global

‘Buy­ers and sell­ers of LNG are po­si­tion­ing them­selves into projects they ex­pect to emerge as win­ners’

de­mand in the next five years. By as soon as next year, it is likely to over­take Ja­pan as the world’s largest nat­u­ral gas im­porter.

But if Trump be­lieved that the US would be flex­ing its new-found en­ergy strength by sell­ing shale gas by the boat­load, he cer­tainly was not an­tic­i­pat­ing a sting­ing 25pc im­port tar­iff on US gas from the Chi­nese in re­cent weeks.

The re­tal­ia­tory hit against $60bn (£47bn) worth of US gas, and Trump’s plan for global gas dom­i­nance, fol­lows US tar­iffs against Chi­nese steel.

It threat­ens to up­end plans for a string of new ex­port ter­mi­nals along the east coast of the US and send rip­ples through the global mar­ket just as it as­serts its place in the main­stream com­modi­ties sec­tor.

Ex­perts at oil con­sul­tancy Wood Macken­zie be­lieve the tar­iffs are “un­likely to be ter­mi­nal” for the US due to high de­mand in the rest of Asia and the po­ten­tial to ex­port into Europe. Last week, the EU said it would “im­port more liq­ue­fied nat­u­ral gas from the United States to di­ver­sify and ren­der its en­ergy sup­ply more se­cure”.

This brings a fresh set of prob­lems though. By tar­get­ing Euro­pean gas buy­ers, the US may stum­ble from one diplo­matic row to an­other – this time with Europe’s largest gas sup­plier, Rus­sia.

At the re­cent meet­ing be­tween Rus­sian pres­i­dent Vladimir Putin and his US coun­ter­part, Trump’s only point of good-na­tured de­fi­ance was to warn the Krem­lin that US LNG tankers are set to chal­lenge Rus­sia’s pipe­line gas dom­i­nance in Europe.

“We are go­ing to be sell­ing LNG and will have to be com­pet­ing with the pipe­line and I think we’ll com­pete suc­cess­fully,” he told as­sem­bled re­porters, and a be­mused Putin.

Trump has been a vo­cal critic of the Nord Stream pipe­line, planned to dou­ble the ca­pac­ity be­tween Rus­sia and Ger­many, in part be­cause Nord Stream 2 will bind the ties be­tween Rus­sia’s state-owned gas giant Gazprom and Euro­pean buy­ers ever tighter.

It is far eas­ier and cheaper to flow gas in its nat­u­ral state through pipe­line sys­tems from pro­ducer to user than liq­uefy, ship and re­turn to gas again.

But for some eastern Euro­pean coun­tries, the higher price may be one worth pay­ing to re­duce their re­liance on Rus­sia for en­ergy.

It emerged last week that Gold­man Sachs, arguably the most im­por­tant voice in the global oil mar­ket, was look­ing to buy its first tanker load of liq­ue­fied nat­u­ral gas on the open mar­ket. The move comes just weeks af­ter the IEA de­clared a bright five years ahead for a mar­ket, which to date has strug­gled un­der the weight of ex­pec­ta­tion.

“In the next five years, global gas mar­kets are be­ing re­shaped by three ma­jor struc­tural shifts,” said Dr Fatih Birol, the IEA’S ex­ec­u­tive direc­tor.

“China is set to be­come the world’s largest gas im­porter within two to three years, US pro­duc­tion and ex­ports will rise dra­mat­i­cally … and in­dus­try is re­plac­ing power gen­er­a­tion as the lead­ing growth sec­tor.” The statis­tics sur­round­ing China’s star­tling hunger for LNG un­der­line the sever­ity that an en­ergy trade war with the US could have on the global mar­ket as a whole.

The IEA also fore­casts strong growth in gas use in other parts of Asia, in­clud­ing in south and south-east Asia, for sim­i­lar rea­sons. But the China ef­fect is al­ready tak­ing hold.

“In the last two months,” says Kim Fustier of HSBC, “we have seen nu­mer­ous signs that the LNG cy­cle is turn­ing af­ter three years in the dol­drums.”

This sum­mer, the mar­ket price for one-off LNG car­goes has been more in line with typ­i­cal win­ter prices, Fustier ex­plains, mainly due to the seem­ingly in­sa­tiable ap­petite among Chi­nese buy­ers.

In the first half of the year, China’s LNG im­ports climbed by 50pc com­pared to the same months last year.

This puts the coun­try on track to blast past its record-break­ing 38m tons of LNG im­ports last year by 25pc, to be­tween 48m and 49m tons in 2018.

“Buy­ers and sell­ers of LNG are po­si­tion­ing them­selves into projects they ex­pect to emerge as win­ners. We think now’s a good time to buy LNG ex­po­sure, be­fore the cy­cle truly turns and as­set prices start ris­ing once again,” says Fustier.

Royal Dutch Shell fired the start­ing gun on the world’s dash for gas with its £41bn takeover of LNG giant BG Group, as global com­mod­ity mar­kets plum­meted.

The un­wa­ver­ing faith of Shell boss Ben Van Beur­den that the LNG mar­ket would emerge as a key en­gine for the com­pany’s fu­ture growth helped the deal sail through de­spite early doubts. Maarten Wet­se­laar, who leads Shell’s gas and “new en­er­gies” divi­sion, says the ev­i­dence to date bears this out.

“Since the start of the cen­tury, the num­ber of coun­tries im­port­ing LNG has quadru­pled, while the num­ber of coun­tries sup­ply­ing LNG has al­most dou­bled.

“The de­mand for LNG has gone up dur­ing that same pe­riod from 100m to nearly 300m tons a year and is ex­pected to keep grow­ing,” he says.

French oil and gas ma­jor To­tal has taken a leaf from Shell’s book by ‘De­mand for LNG has gone up from 100m to nearly 300m tons a year and is ex­pected to keep grow­ing’ com­plet­ing a smaller, but still sig­nif­i­cant, $1.5bn deal to ac­quire the LNG busi­ness owned by Engie, for­merly known as GDF Suez.

To­tal also snapped up a 10pc stake in No­vatek’s sec­ond Arc­tic LNG project along­side Korea’s Ko­gas, for an undis­closed sum. Malaysia’s Petronas has taken a 25pc stake in Shell’s LNG Canada project.

“If we had to guess, Qatar will be next,” says Fustier. “Exxon, Shell and To­tal are in the run­ning to get a piece of the 23m ton per year ex­pan­sion, given their ex­ist­ing LNG po­si­tions in Qatar.”

Foren­sic guess­ing is all part of the game. Af­ter all, it wouldn’t be the first time the LNG mar­ket has de­fied ex­pec­ta­tions.

The Sakura, left, is among a new breed of su­per-tankers de­signed to carry gas to plants like the Adri­atic LNG ter­mi­nal, above. Don­ald Trump and Vladimir Putin met in Helsinki in July, top right

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