Weekly Overview: Brexit, US LNG and Panama Canal

Britain’s June 23 referendum on whether to leave the European Union, and the resulting resignation of its pro-remain prime minister, has set in train the process for selecting his successor who will have to decide how best to implement withdrawal.

This is too long-winded a process for the heads of some other EU member states who say divorce is divorce, and are making the most of the confusion in the UK – its prime minister, David Cameron, has said he will have gone by October; and the main opposition leader, Labour’s Jeremy Corbyn, has so far refused to leave despite the exodus of the shadow cabinet – to pressure it into hasty action. They want it to invoke Article 50 of the EU treaty to kick-start the two-year process.

A senior executive of a major French bank with UK activities said this week that the decision meant a difficult time not just for the UK but for Europe and the world and he was saddened by it. However he also said he was certain that London would remain a very strong financial centre and he told NGE that it was not so much the volatility – which brings opportunities – as the instability that was worrying.

However, with the exception of loss of eligibility for certain funding grants and the weightier matter of Scotland also seeking again to withdraw from the UK – its economy is still running at a deficit, a problem that helped derail the Scottish independence referendum of 2014 – it is not clear that energy markets will be greatly affected by UK withdrawal. Trade with the European Union means, as Norway and Russia have found out, following the EU’s rules, such as the UK-influenced network codes and adherence to anti-trust legislation.

Wholesale energy contracts will remain enforceable and the European Federation of Energy Traders said it “remained confident that decision-makers will find the right means to secure the continued inclusion of the UK in the EU single energy market…. We will continue promoting competition, transparency and open access in the UK energy sector as part of our regional spectrum irrespective of how the terms for the UK’s continuing engagement with EU markets are finally formulated.”

At a higher level, the president of the European Commission Jean-Claude Juncker insisted to the European parliament June 28 that it was ‘business as usual’, despite the surprise decision of the British public. ”We have launched a plan for the Energy Union. Do you really want — because everyone says ‘things must change’ without ever saying precisely what must change — do you really want us to put an end to this continental effort to sever our dependence on Russia and to safeguard energy supplies in Europe? No. We will carry on down this path.”

Of course views and opinions in the European Union are far from uniform across the bloc; Germany has a more positive view on Nord Stream 2 and the need to retain some dependence on Russia than do the Baltic states, for example.

However if the UK withdrawal plan becomes clear and irreversible in the coming months that might give French EDF the excuse it needs not to proceed with the Hinkley Point C nuclear plant in the UK. No longer investing in another EU member state, EDF could argue it faces a bigger risk if it went ahead than before, although both governments say they are committed to it.

France is poised to inject €3bn into the company, which is 75% state-owned, late in July. Unions are in talks with management after which the final investment decision will be taken. Due on stream originally in 2017, now 2025 is the earliest start-up date for the plant, which might now rely on more Chinese money than at present. Nonetheless on June 28, French economy minister Emmanuel Macron – who has backed Hinkley Point C all along -- said his government is still backing the investment by EDF, despite the Brexit vote.

Plan B for the UK appears to be a combination of capacity markets and demand-side management, in order to reduce the threat of black-outs – a feature of British life not known since 1973, the year it joined what was then the European Economic Community. If it were outside the EU there would be less scrutiny of the measures that the UK adopted to meet its security of energy supply and carbon targets.

Across the Atlantic, the rise in US gas prices has given pause to the excitement about LNG exports, with August delivery at Henry Hub now around $2.80/mn Btu. This is despite the high level of storage, and reflects risk of continuing high air-conditioning demand.

The higher it rises, the more export markets have to rise, or the sellers lose more money on their long-term contracts. Buyers in the UK will be affected though, as a weaker pound makes imports of all kinds of energy more expensive in local terms.

And with the announcements in the past week about the six-week halt in injections into the Rough storage site and the Dutch Groningen field having its annual output ceiling lowered by another 3bn m³ – subject to a public consultation starting July 1, it could go down to less than half its 2013 level – the European gas market might become more bullish than it has been.

Widening the Panama Canal

Looking at the wider picture the widening of the Panama Canal will be able to shave tens of cents off exports that go to Asia borne on all but the Q-Flex and Q-Max vessels, according to the US Energy Information Administration.

 “The newly expanded Panama Canal will be able to accommodate 90% of the world's current liquefied natural gas (LNG) tankers with LNG-carrying capacity up to 3.9bn ft³,” it said June 30. Before, only 30 of the smallest LNG tankers – 6% of the current global fleet – with capacities up to 0.7bn ft³ could transit the canal.

This will have “significant implications for LNG trade, reducing travel time and transportation costs for LNG shipments from the US Gulf Coast to key markets in Asia and providing additional access to previously regionalized LNG markets,” it said June 30.

 “A transit from the US Gulf Coast through the Panama Canal to Japan will reduce voyage time to 20 days, compared with 34 days for voyages around the southern tip of Africa or 31 days if transiting through the Suez Canal.” Journeys to the west coast of South America will also become a lot shorter.

The Panama Canal Authority has introduced new tolling fees designed to encourage additional LNG traffic through the Canal, especially for round trips. Transit costs through the Panama Canal for an average 3.5bn ft³ carrier are estimated at $0.20/mn Btu for a round-trip voyage, representing about 9% to 12% of the round-trip voyage cost to countries in northern Asia.

“Based on IHS data, the round trip voyage cost for ships traveling from the US Gulf Coast and transiting the Panama Canal to countries in northern Asia is estimated to be $0.30/mn Bu – $0.80/mn Btu lower than going through the Suez Canal and $0.20/mn Btu – $0.70/mn Btu lower than travelling around the southern tip of Africa. LNG exports to India, Pakistan, and the Middle East are not expected to flow through the Panama Canal because alternative routes, either the Suez Canal or around the southern tip of Africa, have lower transportation costs." About 9.2bn ft³/day of US natural gas liquefaction capacity is either in operation or is being built.

William Powell