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 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