Weekly Overview: US LNG, Oil Prices and Gas Storage

US engineers Bechtel handed over to Cheniere the keys to the first train of the Sabine Pass export terminal on May 27. Ahead of time and under budget, the pioneering US project is now underway and growing: the start-up of commissioning at the second train confirms the turning point in global gas trade.

It may take a week or two to bring a cargo into western Europe from the US, but it takes a similar time for the molecules to arrive from western Siberia. And LNG brings gas directly into an importing country’s grid, bypassing potential bottlenecks along the pipeline route.

It comes at a time of low oil prices, which the industry says are likely to remain lower for longer – perhaps, even, lower forever, to take the view of Oxford University professor, Dieter Helm. Technology and energy efficiency will bring down demand more and more rapidly, while on the supply side, there is so much energy that is cheap to produce.

Opec members met in Vienna June 2 and made no commitments to cut production, news of which, though coming as no surprise to many, promptly knocked the oil price down and, minutely, the average gas price in contracts linked to them.

Fundamentally production remains impacted by war, fire and other forces majeures; and in the US, after a year of stability, shale oil production is on the way down; but after the damp squib in April of the Opec Plus meeting in Doha, it was not to be expected that everyone would work together to limit production this time.

So this new start at Sabine Pass gives established gas producers such as Qatar and Russia an even worse headache but creates opportunities for consumers, especially in the power generation sector.

For example, the UK government, which is planning to phase out coal, could need another 15 GW of gas-fired capacity by 2030 to provide adequate cover. That is even assuming that the 3.2-GW Hinkley Point C nuclear plant goes ahead. Renewables will be built as well, but they are not only intermittent and unpredictable, but their asynchronous generation can destabilise the grid, causing brownouts.

They are also very expensive, and this is generally overlooked, according to Philip Lambert, founder of the energy advisory company which specialises in oil and gas asset acquisitions.

He told a conference organised by the Financial Times in London June 1 that the capacity to produce electricity in Germany from renewables was equivalent to an oil field with 1mn barrels/day output. Of that, wind accounted for half and was operating at 17% of capacity; the other half was solar at 10%. A proper carbon audit and cost audit was needed, he said, or the oil industry was in danger of dying before an adequate replacement could be found. The start of LNG exports from the US also throws open to question the value of storage in mature markets.

Storage: Luxury or Necessity

Built to save money on export pipelines, which would otherwise need to carry peak day demand for thousands of kilometres, storage is struggling to justify itself in many countries. Industrial demand is down and alternative energy sources, undreamed of when the facilities were built, are meeting power generation needs at irregular hours. This helps explain both the market’s relaxed approach to the swingeing cuts in output from Groningen, the swing gas producer for northwest European households, and governmental alarm.

A report published by Cedigaz this week says that in mature markets – North America, most of Europe, and the former Soviet Union – the growth in working capacity is limited, and could even be negative. Some plants in the European Union are being mothballed as the economics work against them. In the liberalised markets, the gas industry has undergone massive changes, largely impacting storage activity which is increasingly geared to trading and managing gas price fluctuations.

New storage needs, it says, are linked to the development of trading activity and to the use of natural gas as a back‐up of intermittent renewable energy in the power sector. The focus is on increasing peak deliverability rather than storage volumes, meaning salt caverns not depleted gas fields such as the slightly scaled down Rough field off the UK.

According to storage operator RWE, all the EU gas demand growth scenarios that are in line with EU-targets result in a significant and continuous downturn till 2030. The European Commission itself “believes that the current level of gas storage capacity is adequate” according to its gas storage strategy; and to make things even more affordable, the EC will “improve the operational rules on the crossborder use of storages.”

Storage bookings reflect the narrow summer-winter spread: volumes are down and the value put on standard bundled units (injection, space and withdrawal rights) is lower. Meanwhile operators have to maintain and upgrade the IT systems that control the operations and the staff that run them.

There are two approaches to this problem: for governments who cannot trust the market, of which Europe has a few, such as Hungary and France, one answer might be need subsidies: this may take the form of top-ups where auctions yield a low total, and the money recovered from users in lieu of payment for grid expansion; or the creation of strategic storage.

Governments who do trust the market however, such as the UK and Germany, will have to witness the mothballing of plant. Sale of the cushion gas will make a useful one-off contribution to the owner’s balance sheet.

In the UK, a paper published in April by the Gas Storage Operators Group, Energy and Utilities Alliance, WatersWye Associates and others, the UK’s comparatively low level of storage does not look set to rise, with a number of proposed storage projects that had been granted planning permission having been recently cancelled, such as Baird, Caythorpe and Whitehill; or put on hold.

The future shape of gas supply to the UK is changing dramatically, the report says. From self-sufficiency just over a decade ago, it now imports over half; and this is forecast to rise to over 90% within the next 20 years. Furthermore, the UK is highly likely to see greater volatility in its gas demand in the near future owing to the use of more renewable generation to help the UK meet its environmental obligations.

Use of linepack has gone up sharply and this is likely to worsen as a result of the combined impacts of declining offshore flexibility and the roll-out of additional gas fired generation to support the expanding number of renewable projects.

Moreover, if gas storage were not on the system, not only would UK need to secure additional imports of gas; the network operators would also need to invest in costly system reinforcement to allow the system to deliver that gas to customers. The costs of this reinforcement would ultimately be borne by customers through higher gas bills.

These are the kinds of benign dilemmas facing governments, at a time of oversupply and accompanying low gas prices. 

William Powell