“Spain has ushered in a record high temperature, and the government announced that the temperature of commercial air conditioners should not be lower than 27 degrees Celsius; in France, the ‘City patrol’ patrols the streets and turns off the headlights of all homes to reduce energy consumption.”
This is the current energy situation in Europe pointed out in an article published on the website of the New York Times of the United States a few days ago. Against the background of energy supply shortage, many countries in Europe have called for saving or expanding supply sources and working together to alleviate the crisis.
On August 19, Gazprom (hereinafter referred to as “Gazprom”) announced that“
The only turbine still in operation in the “beixi-1” natural gas pipeline will be shut down for maintenance for three days from August 31, during which the “beixi-1” pipeline will stop gas supply. After the announcement, European natural gas futures prices hit a new high.
[Note: the “beixi-1” natural gas pipeline was completed in 2011. It starts from Viborg in Russia in the East and leads to Germany via the Baltic sea bottom. “Beixi-1” is currently the main gas transmission pipeline from Russia to Europe.]
Earlier, Gazprom said that due to the continued decline of its exports and production due to Western sanctions, the price of natural gas in Europe may rise by 60% this winter, reaching more than US $4000 per thousand cubic meters.
What is the future development trend of the international natural gas market? What role does the shipping market play?
Article | Zhang Longxing director of oil products business department of Shanghai oil and gas trading center
Editor | Ding Guizi lookout think tank
This article is an original article of Wangwang think tank. If you need to reprint it, please indicate the source of Wangwang think tank (zhczyj) and the author’s information before the article. Otherwise, legal liability will be strictly investigated
one
Why is the price of natural gas rising?
Since the outbreak of the conflict between Russia and Ukraine, sanctions against Russia by western countries led by the United States have been escalating. Russia resorted to measures such as ruble settlement and “beixi-1” supply cut off to counter the western countries.
On July 21, 2022, the natural gas receiving point of “beixi-1” pipeline of German kader natural gas transportation company. Figure | surging image
Natural gas is more environmentally friendly and economical than other fossil fuels, and has long been the key support for Europe’s energy transformation. Europe’s dependence on Russian natural gas has reached 40%, and natural gas is highly dependent on infrastructure with a long construction cycle, such as pipelines, receiving terminals, liquefied natural gas (LNG) carriers, etc. the difficulty of resource replacement is greater than that of oil and coal.
As a transitional fossil energy, the proportion of natural gas in the global primary energy consumption has increased from 14.6% in 1965 to 24.7% in 2020, but it is still less than 31.3% and 27.2% of oil and coal (2020). Within 100 days after the conflict between Russia and Ukraine, the export of crude oil and refined oil accounted for 63.4% of the export revenue of Russian fossil energy (oil, gas and coal), and the export of pipeline natural gas accounted for 25.8%.
The volume of natural gas is smaller, the price volatility and regionality are stronger, and it is easier to be disturbed by the local supply and demand relationship. Affected by the international situation, the natural gas price keeps rising, and TTF (natural gas futures at the Dutch natural gas ownership transfer virtual trading point) has repeatedly hit a record high. According to the heat value conversion, the current price of natural gas is 2.66 times that of coal and 2.57 times that of oil.
From 2008 to 2020, after heat value conversion, the price of natural gas is lower than that of oil. The industry often describes the natural gas market as “one gas shortage in four years and one gas shortage for four years”. The logic behind this is that there is a mismatch between the upstream natural gas resource investment and the downstream demand – the sensitivity of the supply side to the price lags behind, which is reflected in the investment side, which is even more lagging.
In 2020, the COVID-19 epidemic led to a decline in downstream demand, and the natural gas prices in the three major international markets once dropped to a historical low. The ultra-low oil and gas prices have seriously affected the confidence of upstream investment. The global LNG liquefaction project investment has been cold. The final investment decision (FID) has been reached for only one project in Mexico, Energia Costa Azul LNG T1. Demand declines, supply declines faster, and inventory is consumed in large quantities.
In the process of global economic recovery, natural gas demand recovered faster than supply. The global energy transformation has made natural gas bear greater responsibilities.
In 2020, the demand for natural gas will be bullish, the supply will be tight, and the price will counterattack, and will far exceed the oil price from 2021. The basic economic principle of “Fundamentals determine value, supply and demand determine price” has been vividly expressed in the international natural gas market.
two
Who is actively expanding the market?
On the supply side, Russia and the United States, as the only two countries with an annual natural gas output of more than 500 billion cubic meters, have a great impact on the global natural gas pattern in the past three years.
People swim in St. Petersburg, Russia, on June 25, 2022. In the distance is the headquarters of Gazprom. Figure Vision China
Russia is more sensitive to the price of natural gas, and the sales area is moving eastward. The European Union’s sharp reduction in the demand for Russian natural gas will bring chain reaction.
According to the data of the International Energy Agency (IEA), Russia’s natural gas production fluctuated significantly from 2019 to 2021. In 2020, the production will be reduced by 46 billion cubic meters, accounting for 34% of the global production reduction; In 2021, the output will increase by 69 billion cubic meters, accounting for 42% of the global output, mainly relying on Russian gas to adjust the output to balance the demand.
The large fluctuation of output reflects its high sensitivity to price and strong control over output adjustment. According to IEA data, in 2021, Russia’s external sales of natural gas increased by 12.742 billion cubic meters, a year-on-year increase of + 5.4%, of which the Asia Pacific region increased by 5.376 billion cubic meters, a year-on-year increase of + 20.4%, accounting for the largest proportion; The supply to Europe only rebounded by 523 million cubic meters, a year-on-year increase of + 0.3%.
On March 8, 2022, the European Union announced that it would reduce the import of 100 billion cubic meters of natural gas from Russia by the end of the year. Faced with the sharp reduction in export volume, Russia can only first reduce its natural gas production, but will not easily reduce or even stop its natural gas supply to the EU. It will actively try to increase natural gas exports to the Asia Pacific region and strive to increase LNG exports.
The natural gas export volume of the United States has steadily increased. According to IEA data, in 2020, the natural gas production capacity of the United States only decreased by 11.7 billion cubic meters, a year-on-year decrease of – 1.2%; In 2021, the production capacity increased by 18.9 billion cubic meters, a year-on-year increase of + 2.0%, and the annual output reached a historical peak of 967.1 billion cubic meters.
In addition, the United States has steadily expanded the Asian market while actively seizing the European market. The continuous expansion of LNG production capacity will be an important driving force for the future global LNG growth. In 2021, the United States exported a total of 10.831 billion cubic meters of LNG, a year-on-year increase of 49.2%; LNG exports to Europe and Asia increased by 8.520 billion m3 and 15.779 billion m3 respectively, up 32.8% and 47.8% year-on-year respectively.
Once the LNG liquefaction station of Calcasieu pass company in Louisiana is put into operation by the end of 2022, the United States will have the largest LNG Export Capacity in the world. According to IEA data, by the end of 2022, the standard LNG liquefaction capacity of the United States is expected to increase to 324 million cubic meters per day, and the peak capacity will increase to 390 million cubic meters per day, exceeding the peak capacity of Australia (estimated peak capacity is 323 million cubic meters per day) and Qatar (estimated peak capacity is 294 million cubic meters per day).
three
The hard balance of energy is on
On the consumption side, thanks to the economic recovery after the epidemic and the rare low temperature in the northern hemisphere, the global natural gas consumption will grow rapidly in the first half of 2021. According to IEA data, in the first half of 2021, global natural gas consumption increased by about 7% year-on-year.
However, the gradual tightening of supply and demand fundamentals and the resulting rise in natural gas prices have had a negative impact on demand in the second half of the year. In the whole year of 2021, global natural gas consumption increased by about 183 billion cubic meters, a year-on-year increase of + 4.6%. Among them, China and Russia contributed the main increment.
The demand for natural gas in the Asia Pacific region is strong. Even in 2020, the consumption of natural gas will still increase by 4 billion cubic meters, a year-on-year increase of + 0.5%; In 2021, its consumption will further increase by about 54 billion cubic meters, a year-on-year increase of + 6.4%.
In 2022, the “off-season” natural gas price has driven back many demands. News about the restart of coal power and nuclear power in the European Union has been constantly reported in the newspapers. Recently, the German finance minister has called for a complete cessation of natural gas power generation… The hard balance of energy is playing out in the natural gas field.
On the inventory side, since the second half of 2021, the European natural gas inventory has dropped to the lowest level in nearly five years. In the first quarter of 2022, 37% of Europe’s natural gas supply was exposed to geographical risks, making the market shortage worse; Since the second quarter, the demand for gas in Europe has entered a low season, and the natural gas market has entered a new round of replenishment in the low inventory starting point and high supply risk.
On March 23, the European Commission proposed that the natural gas inventory filling rate of EU Member States should reach 80% by November 1, 2022, while by the end of April, its inventory filling rate was only 33%. In the second half of the year, the EU has been hard cutting demand and trying to diversify supply, but the risk of short supply or supply interruption remains. The impact of LNG replenishment on the market balance has become the key to the trend of European gas prices. However, the construction period of the LNG project as a substitute for pipeline gas is long, and the remaining capacity of export liquefaction is limited. The new capacity is concentrated in 2024-2025.
At present, the global available liquefaction capacity can barely cover the incremental LNG demand in Eurasia, and more than half of the global new export capacity is contributed by the United States. In 2022, the United States will become the world’s largest LNG exporter, 70% of which will be shipped to the European Union and the United Kingdom. This means that US LNG exports will directly affect European natural gas supply.
On the morning of June 8, 2022, three sets of LNG export terminals with a total capacity of 15 million tons / year in Freeport, Texas, were closed after a fire. At present, the free port has three LNG production lines, each with an annual capacity of 4.5 million to 5.42 million tons, totaling about 15 million tons per year, accounting for about 20% of the LNG Export Capacity of the United States. The free port is expected to resume some liquefaction operations in early October and resume full production by the end of the year. If the supply problem is not fundamentally solved, the European natural gas supply crisis may reappear in winter.
Natural gas is the most expensive of the three traditional fossil fuels and will be further consolidated in the next three years. The natural gas price is expected to remain high in the medium and short term, which will stimulate the upstream to increase investment, discourage new demand, and shrink the stock demand. In the medium term, the market will probably turn to oversupply.
The global LNG trade ceiling is determined by the short board in the export liquefaction capacity, the capacity of the LNG carrier fleet and the regasification capacity of the terminal. from
In terms of total volume, the upper limit of global LNG trade mainly comes from export liquefaction capacity. From 2023 to 2025, the global LNG Export liquefaction capacity will reach 486 million, 514 million and 565 million tons, while the global LNG trade volume may be 430 million, 450 million and 475 million tons. In the next four years, the global LNG trade supply can cover the global LNG trade demand. From 2024 to 2025, the new production capacity will be increased. The market is expected to turn to oversupply, and the global natural gas price may decline.
four
LNG shipping market is very popular
The high separation between the global natural gas consumption market and the supply market has driven the LNG trade volume and trade proportion to increase year by year, and the regional supply and demand are mismatched, which promotes the demand for inter regional natural gas trade. The global LNG trade volume increased from 220 million tons in 2010 to 380 million tons in 2021; The proportion of trade increased from 27% in 2000 to 52% in 2020.
The European Union has accelerated to get rid of its dependence on Russian natural gas, and Russia has also countered it. LNG has a geopolitical premium, and cost is no longer the only core consideration.
Like pipeline natural gas, LNG project also faces the problem of long construction period. The construction period of the export liquefaction project is about 8-10 years, the construction period of the LNG carrier is 30-50 months, and the construction period of the regasification project of the import terminal is about 7-9 years.
In terms of the capacity of the LNG carrier fleet, according to Clarksons data, by 2021, there were 681 LNG active ships in the world, with a total deadweight of 55.37 million tons. According to the historical data of the International Gas Union (IGU), each ship can be transported about 10 times a year. Theoretically, the transport capacity of the LNG carrier fleet is about 550 million tons, which can cover the expected total trade volume of 380 million tons in 2021. There is still a surplus in transport capacity.
However, historical data can hardly cover current changes.
First, in 2022, the United States will become the world’s largest LNG exporter, with up to four flights to the Asia Pacific region in a year; Secondly, Europe is seeking for the future and buying goods from other regions other than Russia, resulting in a significant increase in LNG transportation distance; Finally, in recent years, the trend of large-scale LNG carriers is obvious. The old small-scale LNG carriers continue to withdraw from service, and the ship turnover rate decreases year by year.
Based on the above factors, traders have scrambled to sign long-term charters for LNG carriers to ensure that LNG can be transported. This has made the spot freight market of LNG carriers tense and the spot freight has reached a new high.
The number of long-term charters has increased significantly, and the rates are high and guaranteed. Many shipowners are withdrawing their capacity from the spot market and turning to the long-term chartering market. There are also ten-year charters in the LNG carrier market, which used to be only five years.
On December 16, 2021, a liquefied natural gas (LNG) carrier was being built in the dock at the China Changxing Island shipbuilding base in Hudong, Shanghai. Figure Vision China
The explosive growth of the market makes it difficult for traders to find any available ships in the spot market, and the LNG carrier market is experiencing a supply ceiling. The increase in demand for transport ships has also prompted shipowners to increase the strength of ordering transport ships. LNG carrier is known as one of the “pearl in the crown of shipbuilding industry”. According to the news of Korean media on June 15, in the first five months of this year, 61 orders for LNG carriers were added globally, and 39 and 22 orders were obtained by Korean and Chinese shipyards respectively.
On August 5, the first ship of the “CNOOC medium and long term FOB resource supporting liquefied natural gas (LNG) carrier project” undertaken by Hudong Zhonghua, a subsidiary of China shipbuilding group, was ignited and started in Changxing Shipbuilding Base, marking that China’s fifth generation “Changheng series” 174000 cubic meters LNG carrier, which is independently developed and designed by China and represents the highest technical level in the field of large-scale LNG carriers in the world, was built by the design blueprint “sailing” to the real ship.
In addition, the spot charter rate of LNG carriers has been very unstable, and high volatility and winter pulse market are normal. After the explosion of the free port in Texas, the LNG Export of the United States was greatly affected, and the LNG shipping market was immediately suppressed, which also reflected the vulnerability of the LNG spot freight market.
In the past three years, the trend of blng1 freight index (round trip voyage between Australia and Japan), blng2 freight index (round trip voyage between the United States and the European continent) and blng3 freight index (round trip voyage between the United States and Japan) of the Baltic Exchange.
In a longer time dimension, the LNG shipping market in the past 10 years, like the international LNG market, has shown strong periodicity, as shown in the following figure:
The short-term charter rate of LNG carriers was high in 2011 and 2012, and reached a peak of US $130000 per day in the first half of 2012. Due to the continuous entry of early-stage capital into the industrial chain, the capacity of LNG carriers has been growing since 2011, and the rate has dropped from 2015 to 2016.
Driven by strong Chinese demand, the LNG carrier freight market recovered in 2017 and continued to operate strongly in 2018. However, with the continuous expansion of the fleet, the market will cool down again in 2019 and 2020. Affected by the epidemic, 2021 started poorly, but it began to recover in autumn and fluctuated at a high level.
The LNG shipping market is in an excellent period since its birth, and this window period is expected to last for about 3 years
Yes, but the cycle cannot be avoided. The shipowner needs to consider locking in the long-term contract more. While steadily increasing the capacity of LNG carriers, domestic shipyards should also prevent mass rush and pay attention to the operational risks brought by large-scale expansion of capacity.