How long do we give management to seal the deal?... that's a fair point and I know the thought is crossing the minds of a growing army of ants! My answer - till March next year, even till June as long as IDG + the fundamentals are still hanging tight. In saying that, would be a touch deflated if 2 - 4mts hadn't been stitched up by March. The truth is, only in 2018 has the macro environment started to slowly but surely gather momentum and in the end, its going to be the buyers who decide when they feel the looming supply shortage will arrive (not the ability of management) ! Will it be 2023 or 2025, analysts are divided, customers will "jump off the fence" accordingly.
Brent Crude now creeping into the $80s, destined for the $90 - $100 range for the following reasons ~ Output slumping in Venezuela because of economic crisis. ~ US experiencing growth pains with pipeline bottlenecks, especially suffering from an oil production surplus in the Permian region. The produced oil needs to find a way to the trading hubs of Cushing or the Gulf Coast, which is predominantly done via pipelines but in the case of a pipeline crunch, producers are forced to move their oil through trucks and by rail, which would considerably increase the value. ~ US sanctions on Iran's oil exports are due to begin on Nov 4, expected to starve the country of 1.5 Million barrels a day. ~ OPEC/ Russia met over the weekend to discuss a possible increase in crude output, rejecting the notion. The perfect storm I would say!
Its common knowledge that China currently has an insatiable demand for natural gas, while that demand will continue to grow exponentially in the future. Hopefully the trade war settles down soonish and we secure Chinese buyers... a 10% tariff shouldn't change the game or attractiveness of cheap Gulf Coast LNG! But if positive developments do come from bi lateral talks over the next month or 2, the de-escalation of trade barriers is not going to happen overnight, high probability of spilling over into 2019!
In China's "13th 5 year plan for Economic & Social development 2016 - 2020", the plan clarifies the energy development outline and guidance, with aims to build a clean, decarbonised, safe and efficient modern energy system. During this period, granted total energy consumption grows by more than 2.5% per year - the plan proposes that by 2020 the total energy consumption should be controlled within 5 billion tons of coal, non fossil energy consumption increase should be more than 15%, natural gas consumption should reach 10% and a mandatory cap on coal @ 58%. Well, China's power generation mix % (consumption) over the last 3 years reads like this;
Coal... 1523.5mt 2017 (60.4%) - 1520.7mt 2016 (62%) - 1540.4 2015 (63.7%)
Oil... 489.7mt 2017 (19.4%) - 472.6mt 2016 (19.3%) - 452.2mt 2015 (18.7%)
Hydro... 210.5mt 2017 (8.3%) - 210.1mt 2016 (8.6%) - 203mt 2015 (8.4%)
Natural Gas... 166.3mt 2017 (6.6%) - 144.9mt 2016 (5.9%) - 141.1mt 2015 (5.8%)
Renewables... 85.8mt 2017 (3.4%) - 65.7mt 2016 (2.7%) - 51.8mt 2015 (2.1%)
Nuclear... 45.2mt 2017 (1.8%) - 38.8mt 2016 (1.6%) - 31mt 2015 (1.3%)
Total energy consumption 2017 2521.4mt - 2016 2452.9mt - 2015 2419.7mt
* The volumes above were converted from MTOE.
In 2017 the country's natural gas consumption breakdown was;
110mt Domestic Production
38.9mt LNG
28.4mt Pipeline supply (fixed over last 3 years with Turkmenistan, Uzbekistan, Kazakhstan).
Will bring to light how rapidly natural gas consumption is growing in comparison to domestic production in which the latter won't keep up. Yearly production & % increase from year to year;
2005 - 37.7mt (18.9%) 2006 - 44.8mt (18.2%) 2007 - 52.9mt (16.1%) 2008 - 61.4mt (6.2%) 2009 - 65.2mt (12.4%) 2010 - 73.3mt (10%) 2011 - 80.6mt (2.6%) 2012 - 82.7mt (9.4%) 2013 - 90.4mt (7.7%) 2014 - 97.3mt (3.5%) 2015 - 100.7mt (1.7%) 2016 - 102.4mt (7.9%) 2017 - 110.4mt
Average production growth from 2005 - 2017 = 9.5%
2005 - 35.6mt (23.2%) 2006 - 43.8mt (23.2%) 2007 - 54mt (15.3%) 2008 - 62.2mt (10.2%) 2009 - 68.5mt (20.1%) 2010 - 82.2mt (24.2%) 2011 - 101.4mt (10.1%) 2012 - 111.6mt (14%) 2013 - 127.2mt (9.6%) 2014 - 139.4mt (3.4%) 2015 - 144.1mt (7.7%) 2016 - 155.6mt (14.3%) 2017 - 177.8mt
Average consumption growth from 2005 - 2017 = 14.6%
Chinese gas demand is forecast to grow by 60% between 2017 - 2023 according to the IEA's latest annual gas market report, Gas 2018, which was released on the 26th of June. So... the IEA is projecting growth @ 8.5% per year through 2023, which would represent an increase of 91.3mt (2018 onwards) from 2017s demand of 177.3mt. If domestic production grows at a modest 5% per year on 2017s production output of 110mt, that = 33mt + China has already contracted 28mt with Russia's Gazprom from the Power of Siberia Pipeline project, completion expected late 2019/ early 2020 + 7.25mt (received 38.9mt in 17') of additional, under construction LNG supply already contracted under long term deals. In knowing these numbers, one can make the assumption that China is searching for roughly 23.05mt of LNG over a 6 year period = 3.8mtpa. Note - obviously that amount does not include investment quantities in next wave projects!
The world consumed 283mt of LNG in 2017, which will grow to 392mt once 91.1mt of under construction supply comes online by 2021. 18 worldwide countries are currently exporting LNG, will reveal the story of each giving an indication of how much supply is available to market;
Qatar 78.2mt Capacity - Fully Contracted. The 3.4mt SPA signed on the 9th of Sept with CNPC, to be produced from QatarGas 2, fills their nameplate output.
Australia 86.6mt - 74.35mt Contracted + consumption 31mt in 2017 Vs production 88.8mt + pipeline imports 4.3mt = 12.25mt Deficit. No supply available & 3 import terminals proposed!
USA 78.25mt - 69mt Contracted + consumption 547.2mt + pipeline exports 48.9mt Vs production 554.4mt + pipeline imports 59.7mt + LNG imports 1.5mt. Although a Deficit of 49.5mt, many long term LNG contracts have not kicked in yet & the US EIA is expecting average domestic production rate @ 84.7 bcf/d in 2019 = 643.6mt per year. SUPPLY AVAILABLE!
Malaysia 29.3mt - 26.5mt Contracted + consumption 31.6mt Vs production 58mt. No supply available.
Russia 27.3mt - Fully Contracted.
Indonesia 26.9mt - 21.1mt Contracted + consumption 29mt Vs production 50.3mt. No supply available.
Algeria 26mt - 16.05mt Contracted + consumption 28.7mt + pipeline exports 26.9mt Vs production 67.4mt. No supply available.
Nigeria 22mt - 20.55mt Contracted. Consumption unknown.
Trinidad & Tobago 14.8mt - Fully Contracted.
Papua New Guinea 7.2mt - Fully Contracted.
Oman 10.7mt - Fully Contracted.
Brunei 7.2mt - 6.1mt Contracted. Consumption unknown.
UAE 7.6mt - 4.7mt Contracted + consumption 53.4mt Vs production 44.6mt + pipeline imports 12.1mt. No supply available.
Norway 4.2mt - 4.08mt Contracted. Sells .2mt to China on spot market.
Angola 5.2mt - 3.7mt sold in 2017 on spot market. Glencore has 1.8mt rights to capacity. In 2015/16 terminal was shut down due to maintenance work.
Peru 4.4mt - 4.2mt Contracted + consumption 4.95mt Vs production 9.6mt. .4mt Available
Equitorial Guinea 3.4mt - Fully Contracted.
Cameroon 1.2mt - Fully Contracted.
* All totals are formed from a complete set of BTA contracts.
In 2017, Europe's Top 7 Natural Gas Suppliers were;
1) Russia exported 140mt
2) Norway 84.5mt
3) Algeria 34.7mt
4) Netherlands 32mt
5) UK 7.4mt
6) Iran 6.5mt
7) Libya 3.2mt
Now a rundown of each country's pipeline sales/ volumes + LNG exports (if applicable) + consumption Vs production + LNG imports (if applicable) + pipeline imports (if applicable)... revealing the severity & shortage of Europe's natural gas supply. Pipeline Sales/ volumes over last 3 years;
RUSSIA - 2017 2016 2015
Austria - 6.3 4.1 3.1
Belgium - 0 4 8
Czech Republic - 4 3.1 3
Finland - 1.6 1.7 2
France - 8.5 7.7 7
Germany - 35.8 34 33.4
Greece - 2 1.8 1.4
Hungary - 6 3.7 4.3
Italy - 16.5 16.8 17.7
Netherlands - 6.3 10.8 1.7
Poland - 8.2 7.5 6.5
Slovakia - 10.1 2.5 2.7
Turkey - 20.4 17.1 19.6
UK - 2.9 0 0
Other EU - 8.9 7.6 7.2
Rest of Europe - 2 0 0
Total Europe - 139.5 122.4 117.6
Belarus - 13.1 12.2 12.4
Kazakhstan - 2.4 2.6 3.7
Ukraine - 0 0 5.1
Other CIS - 3.7 3.3 3.2
Total CIS - 19.2 18.1 24.4
Grand Total Pipe - 158.7 140.5 142
+ LNG Exports - 11.4 10.3 10.7
+ Consumption - 313.3 310.9 303.1
= 483.4 461.7 455.8
Vs Production - 470.3 436 432.4
+ Pipeline Imports - 13.9 16 12.5
* Currently no supply available for sale * Note - Poland has a 7.5mt, 25yr BTA with Gazprom that ends in 2021 with reports saying they will not be renewing!
NORWAY - 2017 2016 2015
Austria - 0 1.2 1.2
Belgium - .15 .15 1.5
Czech Republic - 2.2 2.4 0
France - 12.6 12.2 12.7
Germany - 19 21.9 25.8
Italy - .6 4.3 5.1
Netherlands - 16.7 13.7 13.2
Spain - 1.9 2.3 1.5
UK - 26.2 21.2 19
Other EU - .6 1.2 .8
Rest of Europe - .5 0 0
Total Europe - 80.45 80.55 80.8
+ LNG Exports - 4.08 4.08 4.08
+ Consumption - 3.3 3.2 3.3
Vs Production - 91.1 85.6 85.9
* Supply available 3.27mt *
ALGERIA - 2017 2016 2015
Italy - 13.3 12.7 4.8
Spain - 8.7 8.7 8.8
Other EU - 2.3 2.5 1.4
Other Africa - 2.5 3.4 3.1
Total Pipeline - 26.8 27.3 18.1
+ LNG Exports - 16.05 16.05 16.05
+ Consumption - 28.7 28.5 28
Vs Production - 67.4 67.6 60.2
* Currently no supply available for sale *
NETHERLANDS - 2017 2016 2015
Belgium - 7.1 8 2.1
France - 3.6 3.4 3.4
Germany - 14.9 16.9 17
Italy - 6 6.8 4.4
UK - 0 3 2.3
Other Europe - .37 .44 .66
Total Europe - 31.97 38.54 29.86
+ Consumption - 26.7 25.5 24.3
Vs Production - 27 31 33.5
+ Pipeline Imports - 30 28.1 22.3
As you can see, the Netherlands is importing vast quantities of natural gas through pipeline just to cover their consumption & exporting volumes. Europe's largest natural gas field in Groningen has been falling rapidly since 2013. In 2013 the field produced 50.7mt, 2014 42.8mt, 2015 32mt, 2016 29.7mt, 2017 17.7mt and expectations for 2018 is at 14.2mt. The Dutch government intends to cut production to 8.8mt by October 2022 then to 0 by 2030. The reductions is due to limiting the risk of earthquakes after decades of extraction has led to dozens of earthquakes each year. The Netherlands only has 2 other sources of domestic gas supply... Norg/ Grijpskerk fields 5.2mt and Bergermeer field 3mt.
UK - 2017 2016 2015
Belgium - 5.8 4.3 5.4
Ireland - 1.3 2 3.1
Netherlands - .8 1.1 1.3
Total Europe - 7.9 7.4 9.8
+ Consumption - 58.3 59.9 53.1
Vs Production - 31 30.9 30.1
+ LNG Imports - 5.3 7.7 9.4
+ Pipeline Imports - 29.1 25.2 21.4
* No supply available for sale * but the country is a relatively small exporter anyways. The emerging news from the UK is the critical state of proven gas reserves, down to 152.9mt (as of end 2016) and IF keep producing at their average yearly production rate of 30.3mt, thats 5 years remaining!!
IRAN - Exported 6.5mt in 2017 + consumption 158.6mt Vs Production 165.2mt.
5.7mt in 2016 + consumption 149mt Vs Production 150.3mt
5.7mt in 2015 + consumption 141.6mt Vs Production 141.6mt
* No supply available for sale *
Using a reserves/ production ratio (R/P) - if the reserves remaining at the end of any year are divided by the production in that year, the result is the length of time that those remaining reserves would last if production were to continue at that rate. The top 5 worldwide countries with depleting reserves are;
Denmark 3.3mt production per year - 2.9yrs remaining (10.4mt)
UK 30.3mt - 5yrs (152.9mt)
Mexico 34.9mt - 5.2yrs (180.1mt)
Germany 4.8mt - 5.3yrs (25.1mt)
Thailand 28.5mt - 5.4yrs (152.9mt)
* Italy 3.9mt - 6.6yrs (25.1mt)
Summing up from the painted a picture of the worldwide natural gas landscape;
A) Aside from the US, there is practically zero LNG available for purchase from 17 exporting countries! For the time being the market is being supplied by fluid spot trading by trading houses like Trafigura, Vitol, Gunvor, Glencore who accounted for 27mt sold in 2017 & portfolio traders like Shell, BP, Total/Engie, Endesa/Enel, EDF accounting for 26.3mt. Qatar sold 11mt which will retreat to 0mt when long term contracts kick in this year and the next while Angola shipped 3.7mt. 77.6mt from approx 1100 cargoes was sold on the spot market in 17'.
B) Europe's gas shortage is severe, with pipeline capacity and sales fully loaded! Russia must build new pipelines, discover/ develop new gas reservoirs, navigate financing troubles through sanctions, if it wishes to snatch part of the upcoming pie but even then, their share is going to be dwarfed by the superior US. There's a reason why there's been a flurry of SPAs signed with US companies in 2018, apart from the link to Henry Hub pricing... there's no real alternatives to source long term supply until the next wave of FIDs are taken.
C) Interestingly, coal is losing the fight against natural gas aside from the obvious, being far less environmentally friendly. In January 2011 coal reached a historical high of USD $139.05 per ton. At the end of August 2018, the spot price for thermal coal from Australia's Newcastle terminal was USD $119 per ton = $5.27 per mmbtu (delivered) while at one point in July it broke through the $120 barrier for the first time since November 2012, up 140% from record contract lows in late 2015/ early 2016 (USD $48.80 in Jan 16'). The price was driven by strong buying activity from India and China, although as we know, China is shifting their power industry away from coal and the production numbers last 5 years reflect that; 1406.4mt (produced in 2017), 1361.5mt (16'), 1469.6mt (15'), 1500.6mt (14'), 1525.1mt (13'). India however is increasing production & consumption with their consumption figures reading; 341.3mt (2017), 326.5mt (16'), 318.2mt (15'), 311.9mt (14'), 282mt (13')... possibly explaining why India are not currently in the LNG conversation! Russian thermal coal price averaged $121 per ton = $5.35 per mmbtu in August. Both benchmark prices are remarkable when considering Russia sells piped gas to Europe for around $5 per mmbtu (delivered) and Qatar ships for a purported $5.60 mmbtu... hardly much difference to buy the world's cleanest burning fossil fuel!
Global LNG Outlook 2018 (Sept 12), the latest forecast from Bloomberg NEF states, " Demand growth will plummet during 2019 - 22 and recover to > 4% annually from 2023. Asia will add a total of 143mt in 2017 - 2030, accounting for 86% of the world's total LNG demand growth in the period. About 17 projects will likely take FID in coming years, potentially adding 172mt of capacity by 2030. About 90mtpa of those "likely" FIDs coming from North America, mostly in the Gulf of Mexico. New contracts to underpin FIDs on new supply projects will need to take place by 2021 to provide sufficient supply capacity post-2025 ".
In closing, its always beneficial to tune in to what legendary Charif Souki has to say. Here's transcript from an over the phone interview he had with Bloomberg on the 20th of Sept.
Bloomberg reporter, " So why, i mean why would Chinese companies still want to sign a long term contract (with the US), why wouldn't you go more towards European companies for example, like Cheneiere just did? " Charif - " Well, fundamentally the Chinese need the gas and they are going to continue to increase natural gas for the foreseeable future. If anything, in spite of all the news and all the hoopla about Chinese demand, its probably still understated given the massive amounts of gas they are going to need on a long term basis... so they really don't have much of a choice. They're playing this silly political game where they are going to put some tariffs on Chinese consumption of LNG supposedly but that only effects the customers. Its only going to make LNG more expensive in China! It changes absolutely nothing to the rest of the world".
Bloomberg reporter, " But longer term, you know, we are looking at the 2nd wave of LNG projects of which Tellurian is part of... is it possible though that China will now funnel more money into projects in say Qatar or Canada or Russia or Australia to secure longer term supplies from different countries? " Charif - " I think if they could they would but there is not enough gas and the next wave of natural gas that is going to come on the global market is going to come from the US. Fundamentally you can't change that. We have the cheapest gas on a global basis with only a couple of places around the world that can compete with us... Russia & Qatar in particular, but for finite amounts! The US is fortunate to be in a very, very competitive position where we have a tremendous amount of gas - we can put it on the water cheaper than anybody else... I think last week one of the executives at Shell said that from now on, for future projects, the benchmark is the US gulf coast! Given whats happening in the Permian Basin, given what we already have at the Eagle Ford and given the gas thats coming from the Utica and Marcellus very cheaply down to the gulf coast, we have a massive advantage there! We have very, very cheap gas and we know how to build liquefaction very cheaply, thats not going to change. Chinese demand for natural gas is going to continue to increase, that's not going to change. They are only 10% of the market so they can do whatever they want, they are not going to impact the global market ".
Lots and lots of positive signs to suggest market conditions have taken a U - turn, gravitating towards the next LNG boom! There's no doubt about it, the US shale revolution of abundant, cheap, reliable, Henry Hub linked gas will be the future benchmark and leader of shipping LNG around the globe! Facts are in our favour... the price you have to pay for patience will be worth the wait in gold!! Keep the faith!
In GV we trust!
JK.
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