EOA Daily Energy Report
CHART OF THE DAY: Bullish for LNG
Total Exports from US LNG Liquefaction Plants in 2022 (mt)
Source: EIA, 2023 and EOA, 2023
The US exported more than 42 million tons (mt) of LNG to the European Union in 2022, double the 2021 amount.
Diverting LNG shipments is one of the most significant developments in energy politics. This did not only help the EU plug the gap left by some Russian gas supplies, but it also prevented Russian President Vladimir Putin from achieving his goal of dividing the EU over the war in Ukraine and stirring chaos in the EU’s energy sector. Instead, Moscow’s invasion has secured a lucrative market for the US LNG industry for decades to come.
As the US LNG industry expands, this raises questions about whether it will consolidate. For instance, will we see companies merging to create an LNG conglomerate?
EOA’s Main Takeaway:
We are bullish on LNG for the medium and long term. Natural gas will be the alternative fuel if renewable energy fails to deliver. The higher the share of renewable energy in power generation, the more the need for natural gas to backstop renewables. We have seen how the failure of some clean energy policies has forced some countries to go for the “second-best” choice to meet climate goals and that is natural gas.
Even if the war in Ukraine ends and sanctions are relaxed, the US will remain the main supplier of gas to Europe in the foreseeable future. While the US LNG industry aims to have long-term contracts, some European countries see a conflict between long-term LNG contracts and climate goals. However, avoiding long-term contracts and buying spot cargoes from the US is not a cost-effective measure, because spot cargoes will be sold sometimes at record-high prices. Additionally, the competition between the EU, China, and others over LNG supplies could lead to a high gas and power prices, and this could mean that European countries may need Russian piped gas again. Here, Putin would win the energy war.
STORY OF THE DAY
OFFSHORE ENERGY: Shell’s UK prospect seen as one of North Sea’s ‘largest natural gas discoveries in over a decade
Summary: On Feb 8, Deltic Energy, Shell’s partner in the Pensacola prospect in the North Sea, announced that its first exploration well at Pensacola “has resulted in a highly positive outcome, and at approximately 300 BCF,” which would represent “one of the largest natural gas discoveries in the Southern North Sea in over a decade.” Pensacola is located in license P2252, operated by Shell with Deltic Energy and ONE-Dyas as its partners.
EOA’s Main Takeaway:
The Shell-Deltic Energy discovery is significant on several fronts. It does not only encourage investments in the North Sea to bring more oil and gas on stream and help reduce dependence on Russian gas, but it also threatens natural gas projects in the Eastern Mediterranean (see our Weekly Newsletter published on Jan 15), and it could also affect LNG projects and shipments in the future.
NEWS OF THE DAY
1- REUTERS: Venezuela's PDVSA allocates heavy crude cargo to Italy's Eni
EOA’s Takeaway: After Russia’s invasion of Ukraine, the US administration granted sanctions waivers to Italy’s ENI and Spain’s Repsol to ship Venezuelan crude on the condition that the oil is exported only to Europe in an effort to replace Russian barrels. But why Venezuelan crude in particular? Because crude quality matters.
Ironically, the two countries helping Venezuela increase its oil production are the US and Iran. With respect to the US, last year Washington gave Chevron a license to expand its activities in Venezuela and increase production on the condition that all the oil would be exported to the US. Chevron has been exporting oil from Venezuela since December 2022.
The Venezuelan oil has compensated for some of the sour crude that became unavailable after the 180 million barrel withdrawal from the Strategic Petroleum Reserve (SPR) was halted. So, again, crude quality matters.
2- REUTERS: Eni's Vaar Energi makes Arctic oil discovery
EOA’s Takeaway: Such discoveries and in light of the recent change in BP’s view towards oil and gas, prove that oil companies will maintain their oil explorations despite limited investments and that gas and oil-rich countries do not want their resources to be stranded assets. In addition, it is clear now that Europe will lean heavily on natural gas, not only to meet climate goals (reduce emissions), but also because natural gas is the backstop plan when it becomes challenging to achieve renewable energy goals, or when renewable energy does not deliver the expected power generation.
3- TASS VIA KOMMERSANT: Russian oil production, exports grow
EOA’s Takeaway: Ship tracking data supports these statements on Russian oil output and exports, and we as the EOA have been highlighting in our reports that Russian production is not declining but increasing instead which is bearish for the market. However, lower investments will hamper Russian production, but most of this impact on Russia’s oil industry will be seen in 2024 and 2025. For more on this, we encourage you to read the EOA 2023 Oil Market Outlook.
4- ENERGY INTELLIGENCE: Russia Faces Challenges Over Turkey Hub
EOA’s Takeaway: Turkey is positioning itself to become a major regional energy player, but this will not happen overnight. And to achieve this transformation, Ankara will need Russia's support. However, this relationship is a double-edged sword. We covered this subject in detail in our Weekly Newsletter published on Dec 18, 2022.
5- REUTERS: With years of high prices ahead, LNG buyers covet long-term deals
EOAS’s Takeaway: Long-term LNG contracts reduce risks for exporters and importers. And as we noted above, the competition between the EU, China, and others over LNG supplies could result in high gas and power prices. Long-term contracts enhance energy security by insuring steady supplies while prices are less volatile.
6- S&P GLOBAL: Oil sanctions splitting global market, boosting 'grey' trade movements: TotalEnergies' Pouyanne
EOA’s Takeaway: That's a spot-on statement by TotalEnergies CEO Patrick Pouyanne, and we have been repeating in our reports that economic sanctions don't work. Sanctions on Iran have led to various trade and shipping schemes to skirt western restrictions on Iranian oil. And these methods, which were later applied in Venezuela, kept growing in complexity throughout the years. Now, considering sanctions on Moscow, these same methods are being employed to keep Russian oil in the official as well as in the grey market. Sanctions have produced a grey market where Russian, Iranian, and Venezuelan oil is available for all consumers willing to buy in.
7- REUTERS: Plains expects 2023 Permian oil output up by as much as 500,000 bpd
EOA’s Takeaway: As we highlighted in yesterday's report, crude quality matters. The important question here is how much of that increase is condensate?
8- REUTERS: Kazakh oil, condensate output down 1% m/m in Jan
EOA’s Takeaway: This is a nothingburger. The output drop has no impact on the oil market.
9- BLOOMBERG: China’s State Refiners Buy More Russian Oil, Energy Aspects Says
EOA’s Takeaway: While this fits with our view that China will continue to import Russian crude in larger quantities as its economy continues to recover, the direct purchases, and not those bought indirectly via a third country, mean that they are compliant with sanctions on Russian oil. But this should not give the impression that Beijing is abiding by western sanctions – it is only taking advantage of buying at prices below the $60 price cap. It remains to be seen if this becomes a trend.
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