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Increasing demand from South East Asia. US sanctions against Russia. Brexit. These major, global news headlines are all connected by one thing – natural gas.
Although oil continues to dominate news headlines when it comes to the energy market, it is impossible to ignore the fact that natural gas has also struck up its own fair share of environmental and political debates this summer, leading to a period of frenzied buying and selling.
From shifting energy mixes in Asia to the imposition of US sanctions on Russia’s gas pipeline projects and the lingering uncertainty over the ability of the UK to guarantee its energy security post-Brexit – there is plenty for analysts to speculate over.
Asia - the demand hotspot
In terms of geographic demand, the spotlight undoubtedly is on the Asian market.
South Korea is a prime example of a growing market for LNG. Newly elected left-wing President Moon Jae-in has put environmental protection at the heart of energy policymaking following rising concerns over air pollution and nuclear safety. South Korea is now moving to shift away from its dependence on crude oil (41% of primary energy consumption in 2015), coal (31%) and nuclear (13%) energy, towards an energy mix dominated by renewables and LNG.
Looking east and you have Bangladesh which is preparing to join India and Pakistan as major consumers of LNG. Pakistan and India are currently the only South East Asian countries that import LNG, importing around 25m tonnes in 2016, 8% of global demand. But as Bangladesh moves to simultaneously compensate for its depleting gas reserves and double its power capacity to 24GW, South East Asia is gearing up to become the world’s second largest LNG importing region by the mid-2020s.
With this growing demand, comes the increasing momentum of investment and development in the natural gas sector. This momentum can already be seen not only in the number of South East Asian import projects, but also in the global LNG bunkering market.
LNG bunkering is the practice of providing LNG fuel to a ship for its own consumption. Doing so entails the distinct advantage of reducing the amount of pollution caused by shipping vessels compared to when traditional marine fuel is used. According to Statistics MRC, the LNG bunkering market is expected to grow from $249m in 2016 to over $8,000m by 2023. This growth stems from the growing marine logistics business, cost efficient LNG products and the imposition of environmental regulations. Environmental regulations along coastal areas and in ports means the use of LNG is highly beneficial compared to heavy marine oil, reducing the emission of SOx, NOx and particulate matter by up to 95%, 90% and 99%, respectively.
LNG supply is expected to grow by almost 50% from 2015 to 2020. To match this, there appears to be a growing consumption market, subduing the concerns of a global surplus. What is uncertain however is how supplier nations will compete for their share in the market, and how the politics involved will in turn shape how trade relationships and distribution networks are developed over the coming years.
Europe - the US vs Russia battleground
When it comes to the influence of politics on the natural gas market, one of the key talking points this summer has been the imposition of US sanctions on Russia. The sanctions not only targeted the provision of goods, services, technology and information, but also the construction and modernisation of Russian energy export pipelines.
As it stands, Russia dominates the European market. The recent sanctions however threaten pipeline projects and could hamper Russia’s ability to proceed with expanding its dominance of Europe’s energy market. Projects including Gazprom’s Nord Stream 2 pipeline and the doubling of the capacity of the under-construction Turkish Stream pipeline, both designed to ramp up distribution to meet the expected increasing demand, are victims of the sanctions.
So is this good news for US gas? Does this open the door of the European market for US gas? Potentially.
One of the main reasons that gas from the US has not yet been competing with Russia for the supply to Europe is cost. Despite the fact that thanks to the development of the US shale sector, US gas is cheaper than European gas, by the time US gas makes its way across the Atlantic, this is no longer the case. The need for US gas to be delivered in the form of LNG incurs costs including liquefaction, shipping and regasification. This means that once shipped, unless the spread between US and European gas is wide enough, US gas cannot compete on cost with domestic supplies.
This could however change as the LNG market grows and develops. As gas markets which were traditionally domestic start linking up (e.g. Qatar and Australia), supplies of LNG are expected to increase as gas-rich nations move to maximise on their geological assets and compete for their share of the market. As this supply increases, chances are the price of this liquified fuel will become increasingly lower.
Russia is ultimately going to be forced into deciding whether to compete on price and defend market share or cut back supply to keep prices high. Based on current evidence, the former is the most likely.
Last month, Lithuania became the first ex-Soviet state to buy US natural gas. Although Lithuania has been importing LNG from Norway since 2014, the US import is yet another move by the eastern European country to not only cement its ties with the US, but to also prove to Russian Gazprom that it has a variety of options. The move is a signal that the US shale and LNG industry has the potential to access other domestic European markets, challenging Gazprom’s market dominance.
It is unlikely that Lithuania will be the only European country to challenge Russia. Many central European nations, including Poland and Lithuania, resent Russia’s leverage over their gas supply and so could
UK - the threat to energy security
Brexit comes at a time of pre-existing uncertainty for the UK’s energy market - with the closure of Centrica’s Rough Storage back in June, the UK Continental Shelf being deemed to be in terminal decline and domestic shale fracking looking less than promising.
How the UK’s energy security will be ensured after May 2019, and the role politics will play in deciding this, is a hot topic of debate.
Based on 2015 figures, the UK imports 42% of its gas - 4% from the EU and 38% from Norway. This means that once the UK leaves the EU, it will depend on “foreign gas” for almost half of its demand, a dependency which will only increase as the UK’s own reserves continue to decline. Not only will new trade deals have to be established, but bilaterally agreed pipeline regulation and supervision contracts will need to be renegotiated. It is also likely that storage agreements will have to be agreed as the UK’s domestic storage capacity depletes.
The implications of this are two-fold. For the UK seeking to import gas, there will undoubtedly be fees imposed by the EU, at operator and/or transmission levels. For EU countries importing UK gas, there is a chance that taxes could be applied, discouraging demand for UK imports.
Although the EU market will suffer as a result of these changes, the UK and Ireland will likely be worse off.
Once the UK leaves the EU, Ireland will find itself cut off from mainland Europe. Ireland imported 97% of its gas from the UK and EU market in 2015. With no regas capacity for LNG and only enough domestic storage capacity to supply 5.2% of its annual demand, Ireland will continue to have to import its gas supply from the EU - and this will still have to be via the UK.
The implications of Brexit extend beyond physical supply and demand logistics. The UK NBP gas market is Europe’s longest-established spot and futures gas market and along with Dutch TTF, is widely used as an indicator for Europe’s wholesale gas market. After Brexit however, the NBP risks becoming much less liquid, and could become decoupled from TTF.
From taxes to tariffs, market liquidity to market access - the driving force behind the settlement of these uncertainties are the politicians negotiating on behalf of both parties.
The global scale of the politics involved in the natural gas market is clear. But what is unclear is what this means for the natural gas market going forward.
The way in which the LNG market is growing and expanding indicates that it will undoubtedly remain a key, influential player in the way in which the world’s energy market develops over the coming years. As the world moves away from its dependence on conventional fossil fuels such as oil and coal, natural gas is favourited by many to be the key stepping stone towards a greener, cleaner global energy economy. Its popularity as an energy-source-of-the future is evident not only in Platt’s forecast that more than 100m tonnes per year of liquefaction capacity is expected to come onstream between now and 2020, but also in the diversification of the supply and demand market.
With the Asian market emerging as a demand “hotspot” for LNG, bunkering and transport networks improving enabling a global market and competition likely increasing in Europe in the form of US LNG, it appears that LNG could move away from small-scale regional markets and become a global commodity like oil and copper.
So does this mean that natural gas is the soon-to-be-favourite pawn in political games? There is a very high chance that it will.
LNG has already been caught up in a series of political stand-offs this year. The Emirati States politically isolated Qatar, the world’s largest producer of LNG, on the basis of its alleged support of ISIS. The US imposed sanctions on Russia’s gas pipeline projects over its involvement in last year’s presidential elections. And as politicians across the globe use their natural gas capabilities to leverage political ambitions, it is likely that many more of these stand-offs will materialise over the coming years.
In what form these stand-offs will come is uncertain. The only certainty is that the natural gas playing field is changing. It is growing and diversifying. With politics arguably having the capability to dominate over price, the market trends and models we are used to are likely to be subject to quite a few unpredictable pushes and pulls.