Signage is seen on a gasoline pump at an Exxon gas station in Brooklyn, New York City, U.S., November 23, 2021. REUTERS/Andrew Kelly
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HOUSTON, April 4 (Reuters) – Exxon Mobil Corp (XOM.N) on Monday said its first-quarter results could top a seven-year quarterly record, with operating profits from pumping oil and gas alone of up to $9.3 billion.
A snapshot of the largest U.S. oil company’s quarter ended March 31 showed operating profits from oil and gas, its biggest unit, could jump by as much as $2.7 billion over the prior quarter’s $6.6 billion.
Exxon does not hedge, or lock in oil sales, and results generally match changes in energy prices. Russia’s invasion of Ukraine pushed up oil by 45% last quarter over the final period of 2021, to an average of $114 per barrel, the highest in seven years. read more
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The estimates suggest total earnings for the quarter of about $9.8 billion at the mid-point of Exxon’s estimates, according to Scotiabank global equity research.
Exxon shares, which have jumped 36% year to date, rose slightly on Monday to $83.16. Official results are expected to be released on April 29, according to a securities filing.
The outlook implies adjusted earnings around $2.29 per share, Scotiabank analyst Paul Cheng said in a note. The total would guarantee Exxon its highest quarterly profit since at least 2014.
The blockbuster oil and gas profits offer a preview of what lies ahead for other firms’ oil earnings. Such results could strengthen calls by U.S. and European Union lawmakers for windfall profit taxes on energy companies.
RUSSIA WRITEDOWN?
Final results could be dampened by impairments to Exxon’s Russian operations. The company last month said it would phase out of Russia following the invasion of Ukraine. The oil company has $4 billion in assets at risk to potential seizure and faces a 1% to 2% hit to production and revenue from the move. read more
“Depending on the terms of its exit from Sakhalin, the company may be required to impair its investment in the project up to the full book value,” it said in a filing.
High oil and gas prices accelerated after Russia’s invasion and sanctions were imposed on its oil, coal and LNG. Global oil prices hit a 14-year high in the first quarter and have since cooled as the U.S. announced a release of emergency stocks and China began a lockdown.
Operating profits in refining could be up to $300 million higher than the $1.5 billion earned in its fourth quarter, while its chemicals business could decrease by as much as $300 million compared with the previous quarter’s $1.3 billion profit.
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Reporting by Sabrina Valle; Editing by Chizu Nomiyama and Richard Pullin
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March 25 (Reuters) – China’s state-run Sinopec Group has suspended talks for a major petrochemical investment and a gas marketing venture in Russia, sources told Reuters, heeding a government call for caution as sanctions mount over the invasion of Ukraine.
The move by Asia’s biggest oil refiner to hit the brakes on a potentially half-billion-dollar investment in a gas chemical plant and a venture to market Russian gas in China highlights the risks, even to Russia’s most important diplomatic partner, of unexpectedly heavy Western-led sanctions.
Beijing has repeatedly voiced opposition to the sanctions, insisting it will maintain normal economic and trade exchanges with Russia, and has refused to condemn Moscow’s actions in Ukraine or call them an invasion. read more
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But behind the scenes, the government is wary of Chinese companies running afoul of sanctions – it is pressing companies to tread carefully with investments in Russia, its second-largest oil supplier and third-largest gas provider.
Since Russia invaded a month ago, China’s three state energy giants – Sinopec , China National Petroleum Corp (CNPC) and China National Offshore Oil Corp (CNOOC) (0883.HK) – have been assessing the impact of the sanctions on their multi-billion dollar investments in Russia, sources with direct knowledge of the matter said. read more
“Companies will rigidly follow Beijing’s foreign policy in this crisis,” said an executive at a state oil company. “There’s no room whatsoever for companies to take any initiatives in terms of new investment.”
The Ministry of Foreign Affairs this month summoned officials from the three energy companies to review their business ties with Russian partners and local operations, two sources with knowledge of the meeting said. One said the ministry urged them not to make any rash moves buying Russian assets.
The companies have set up task forces on Russia-related matters and are working on contingency plans for business disruptions and in case of secondary sanctions, sources said.
The sources asked not to be named, given the sensitivity of the matter. Sinopec and the other companies declined to comment.
The ministry said there is no need for China to report to other parties about “whether there are internal meetings or not”.
“China is a big, independent country. We have the right to carry out normal economic and trade cooperation in various fields with other countries across the world,” it said in a faxed statement.
U.S. President Joe Biden said on Thursday that China knows its economic future is tied to the West, after warning Chinese leader Xi Jinping that Beijing could regret siding with Russia’s invasion of Ukraine. read more
Global oil majors Shell (SHEL.L) and BP (BP.L), and Norway’s Equinor pledged to exit their Russian operations shortly after Russia’s Feb. 24 invasion. Moscow says its “special operation” aims not to occupy territory but to destroy Ukraine’s military capabilities and capture what it calls dangerous nationalists. read more
TALKS ON HOLD
Sinopec, formally China Petroleum and Chemical Corp, has suspended the discussions to invest up to $500 million in the new gas chemical plant in Russia, one of the sources said.
The plan has been to team up with Sibur, Russia’s largest petrochemical producer, for a project similar to the $10 billion Amur Gas Chemical Complex in East Siberia, 40% owned by Sinopec and 60% by Sibur, set to come online in 2024.
“The companies wanted to replicate the Amur venture by building another one and were in the middle of site selection,” said the source.
Sinopec hit pause after realising that Sibur minority shareholder and board member Gennady Timchenko had been sanctioned by the West, the source said. The European Union and Britain last month imposed sanctions on Timchenko, a long-time ally of Russian President Vladimir Putin, and other billionaires with ties to Putin. read more
Timchenko’s spokesman declined to comment on sanctions.
The Amur project itself faces funding snags, said two of the sources, as sanctions threaten to choke financing from key lenders, including Russia’s state-controlled Sberbank (SBER.MM) and European credit agencies. read more
“It’s an existing investment. Sinopec is trying to overcome the difficulties in financing,” said a Beijing-based industry executive with direct knowledge of the matter.
Sibur did not comment on the suspension of the talks for the new chemical plant but said it continues to cooperate with Sinopec. It said the two companies continue to work jointly on implementing the Amur plant.
“Sinopec is actively participating in the issues of the project’s construction management, including equipment supplies, work with suppliers and contractors. We are also jointly working on the issues of project financing,” Sibur told Reuters by email.
Sinopec also suspended talks over the gas marketing venture with Russian gas producer Novatek (NVTK.MM) over concerns that Sberbank, one of Novatek’s shareholders, is on the latest U.S. sanctions list, said one source with direct knowledge of the matter. read more
Timchenko resigned from Novatek’s board on Monday in the wake of the sanctions. Novatek declined to comment. read more
Novatek, Russia’s largest independent gas producer, entered a preliminary deal in 2019 with Sinopec and Gazprombank to create a joint venture marketing liquefied natural gas to China as well as distributing natural gas in China.
Beyond Sinopec’s planned Amur plant, CNPC and CNOOC were among the latest investors into Russia’s natural gas sector, taking minority stakes in major export project Arctic LNG 2 in 2019 and Yamal LNG in 2014. read more
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Reporting by Chen Aizhu, Julie Zhu and Muyu Xu; editing by William Mallard and Jason Neely
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WASHINGTON, March 2 (Reuters) – The United States is open to imposing sanctions on Russia’s oil and gas flows but going after its exports now could help Moscow, the White House said on Wednesday as oil prices surged to an 11-year high and supply disruptions mounted.
After Russia’s invasion of Ukraine, the White House slapped sanctions on exports of technologies to Russia’s refineries and the Nord Stream 2 gas pipeline, which has never launched. So far, it has stopped short of targeting Russia’s oil and gas exports as the Biden administration weighs the impacts on global oil markets and U.S. energy prices.
“We don’t have a strategic interest in reducing global supply of energy … that would raise prices at the gas pump for Americans,” spokesperson Karine Jean-Pierre said at a White House news briefing.
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The administration warned it could block Russian oil if Moscow heightens aggression against Ukraine. “It’s very much on the table, but we need to weigh what all of the impacts will be,” White House spokeswoman Jen Psaki told MSNBC earlier on Wednesday.
The National Economic Council’s deputy director, Bharat Ramamurti, told MSNBC that the White House does not want to make a move just yet.
“Going after Russian oil and gas at this point would have an effect on U.S. consumers and actually could be counterproductive in terms of raising the price of oil and gas internationally, which could mean more profits for the Russian oil industry,” he said.
“So we don’t want to go there right now.”
The White House deputy national security adviser, Daleep Singh, told CNN the Biden administration was looking at cutting U.S. consumption of Russian oil while maintaining the global supply of energy.
“There are other producers in the world that could backfill for any Russian oil we don’t import,” Singh said.
The Biden administration has taken pains to say it has not yet targeted Russian oil sales as part of sweeping economic sanctions it has slapped on Moscow since last week. read more
Even so, traders and banks have shied away from Russian oil shipments via pipeline and tankers, so as not to be seen as funding the invasion, sending energy markets into disarray. read more
And some U.S. lawmakers have pushed legislation that analysts said could lead to higher gasoline prices.
The top Democrat and a Republican on the Senate energy committee floated a bill that would prohibit the import of Russian crude, liquid fuels and liquefied natural gas. The United States imported an average of more than 20.4 million barrels of crude and refined products a month in 2021 from Russia, about 8% of U.S. liquid fuel imports, according to the Energy Information Administration.
Democratic Senator Joe Manchin and Republican Senator Lisa Murkowski are working on getting support for their bill, a Manchin spokesperson said.
The United States did slap sanctions on Russia’s oil refineries, banning the export of specific technologies, a move that could make it harder for Russia to modernize those plants. read more
Nearly one week after Moscow invaded Ukraine, U.S. crude oil ended Wednesday at $110.60 per barrel, the highest close since May 2011, while global benchmark Brent settled at its highest since June 2014, at $112.93. read more
Meanwhile, OPEC+ oil producers meeting on Wednesday agreed to stick to their modest output rises, offering little relief to the market or consumers. read more
On Tuesday, the United States and its allies agreed to release 60 million barrels of oil reserves to help offset supply disruptions.
“We want to minimize the impact on the global market place … and the impact of energy prices for the American people,” Psaki said. “We’re not trying to hurt ourselves, we’re trying to hurt President Putin and the Russian economy.”
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Reporting by Doina Chicau, Timothy Gardner, Susan Heavey and Valerie Volcovici; writing by Timothy Gardner; editing by Louise Heavens, Alistair Bell and Leslie Adler
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“We are shocked by the loss of life in Ukraine,” CEO says
LONDON, Feb 28 (Reuters) – Shell (SHEL.L) will exit all its Russian operations, including a major liquefied natural gas plant, it said on Monday, becoming the latest major Western energy company to quit the oil-rich country following Moscow’s invasion of Ukraine.
The decision comes a day after rival BP abandoned its stake in Russian oil giant Rosneft (ROSN.MM) in a move that could cost the British company over $25 billion. Norway’s Equinor (EQNR.OL) also plans to exit Russia. read more
Shell said in a statement it will quit the flagship Sakhalin 2 LNG plant in which it holds a 27.5% stake, and which is 50% owned and operated by Russian gas giant Gazprom .
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Shell said the decision to exit Russian joint ventures will lead to impairments. Shell had around $3 billion in non-current assets in these ventures in Russia at the end of 2021, it said.
“We are shocked by the loss of life in Ukraine, which we deplore, resulting from a senseless act of military aggression which threatens European security,” Shell Chief Executive Ben van Beurden said in a statement.
Rival BP’s Chief Executive Bernard Looney called an urgent meeting with his leadership team on Thursday, just hours after the first Russian bombs fell on Ukrainian capital Kyiv last week, two BP sources told Reuters.
During that previously unreported meeting, Looney made it clear the company’s investment in Rosneft had become untenable, the sources said.
“There was only one decision we could make,” one of the BP insiders said. “The exit was the only viable way.”
Looney held two more board meetings at the weekend, after which board members voted to immediately exit the Rosneft stake, the sources said.
Looney also spoke to British Business Secretary Kwasi Kwarteng on Friday, when Kwarteng expressed his concern about BP’s interests in Russia. Kwarteng welcomed BP’s decision to exit on Twitter on Sunday.
SHELL
Kwarteng had a similar message for Shell on Monday.
“Shell have made the right call to divest from Russia,” he said on Twitter, adding that he had spoken to van Beurden earlier on Monday.
The Sakhalin 2 project, located off Russia’s northeastern coast is huge, producing around 11.5 million tonnes of LNG per year, which is exported to major markets including China and Japan.
For Shell, the world’s largest LNG trader, leaving the project deals a blow to its plans to supply gas to fast-growing markets in the coming decades.
Shell said the Russia exit will not affect its plans to switch to low-carbon and renewables energy.
The company also plans to end its involvement in the Nord Stream 2 Baltic gas pipeline linking Russia to Germany, which it helped finance as a part of a consortium of companies. Germany last week halted the project. read more
Shell will also exit the Salym Petroleum Development, another joint venture with Gazprom.
Together, Salym and Sakhalin 2 contributed $700 million to Shell’s net earnings in 2021.
“Right decision by the Board of Shell to exit its Russian ventures,” Adam Matthews, chief responsible investment officer for the Church of England Pensions Board, which invests in Shell, said in a LinkedIn post.
“Following BP’s decision the focus is on those that have yet to take such a step,” Matthews said.
Norway’s Equinor, majority owned by the Norwegian state, said earlier on Monday that it would start divesting from its joint ventures in Russia. That came after the country’s sovereign wealth fund, the world’s largest, said on Sunday it would divest its Russian assets.
Other Western companies including global bank HSBC and the world’s biggest aircraft leasing firm AerCap said they plan to exit Russia as Western governments ratchet up economic sanctions on Moscow. read more
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Reporting by Ron Bousso and Shanima A in Bengaluru; Editing by Jonathan Oatis, Simon Webb and Richard Pullin
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Kremlin: personal sanctions on Putin would not harm him
Russia keeps up pressure with land and sea exercises
Ukraine says Moscow is trying to sow panic
Four-way talks on east Ukraine start in Paris
MOSCOW/PARIS, Jan 26 (Reuters) – Russia warned on Wednesday that imposing sanctions on President Vladimir Putin personally would not hurt him but would be “politically destructive”, after U.S. President Joe Biden said he would consider such a move if Russia invaded Ukraine.
Biden said on Tuesday that personal sanctions on Putin, though a rare step, could be considered as part of a concerted drive by Washington and its allies to convince Moscow that any new aggression against Ukraine would bring swift and massive costs.
Kremlin spokesman Dmitry Peskov said U.S. congressmen and senators discussing personal sanctions against Russia’s top leaders were ignorant of the fact they were legally barred from holding assets, property and bank accounts abroad.
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Individual sanctions against Putin would be “not painful (but) politically destructive”, said Peskov, who has previously said they would amount to a severing of diplomatic relations.
As officials began four-nation talks in Paris, Russia held new military drills on land and sea and moved more paratroopers and fighter jets to Belarus, north of Ukraine, for what it describes as joint exercises there next month.
Ukraine said Russia, which has gathered tens of thousands of troops near its border but denied it plans to invade, was trying to sow panic. Foreign Minister Dmytro Kuleba said Moscow had not yet massed sufficient forces for a large-scale offensive, but that did not mean it could not do so later.
Nearly eight years after Russia seized Crimea and backed separatist fighters in Donbass in eastern Ukraine, the former Soviet republic has become the flashpoint in potentially the most dangerous East-West confrontation since the Cold War.
Russia says the crisis is being driven by NATO and U.S. actions, and is demanding security guarantees from the West, including a promise by NATO never to admit Ukraine. Moscow sees Ukraine as a buffer between Russia and NATO countries.
The United States has spent weeks trying to build agreement with European partners on a strong sanctions package if Russia attacks. But the task is complicated by Europe’s dependence on Russian energy and the fact that sanctions would hurt its own businesses too.
Italian business leaders, including power giant Enel , UniCredit bank (CRDI.MI) and top insurer Generali (GASI.MI), went ahead with a video conference with Putin on Wednesday despite a call from their government not to take part.
“I would like to underscore that we consider Italy as one of the leading economic partners,” Putin said, hailing cooperation with Italian companies and banks on major energy projects.
The EU relies on Russia for around a third of its gas supplies. Any interruptions to its Russian imports would exacerbate an existing energy crisis caused by shortages.
The United States has been talking to major energy-producing countries and companies around the world over a potential diversion of supplies to Europe if Russia invades Ukraine.
‘NORMANDY’ TALKS
In Paris, officials from France, Germany, Russia and Ukraine began talks on the simmering Donbass war in which some 15,000 people have been killed since 2014.
Andriy Yermak, chief of staff to Ukraine’s President Volodymyr Zelenskiy, called the talks “a strong signal towards achieving peace in eastern Ukraine”.
But he said major ceasefire violations were taking place, and ruled out the prospect of speaking directly to the separatists.
In Russia’s parliament, Andrey Turchak, a senior member of the ruling United Russia party, said Moscow should support the separatist regions with certain types of weapons.
Russia denies being a party to the Donbass conflict but senior Ukrainian sources say they estimate it has 2,000 military personnel there, supporting about 35,000 separatists.
The four-way “Normandy format” talks, which have not been held for more than six months, are seen by the European powers as vital to remaining relevant in the broader dialogue with Moscow while the United States and NATO hold separate crisis negotiations.
French officials said they hoped that some progress could be made that would help wider efforts to reduce tensions.
A French presidential official said the aim was to set a date for talks on humanitarian measures and prisoner releases that would then lead to negotiations on the future of the Donbass region. However, he said the reality was that the Paris talks would serve to determine if Russia was serious.
“Either President Putin will seek maximum tension with us… or he assesses that in this great period of volatility, it’s useful to use this format to reduce tensions.”
Interfax news agency quoted the Russian defence ministry as saying a paratrooper unit had been deployed to Belarus on Wednesday, a day after moving in artillery forces and marines ahead of joint exercises next month.
It said Russia was also moving Su-35 fighter jets to Belarus for the “Allied Resolve” exercises.
The buildup of Russian forces in Belarus, a close Russian ally and former Soviet republic north of Ukraine, creates a new front for a possible attack.
RIA news agency said more than 20 Russian vessels had embarked on exercises in the Black Sea, south of Ukraine.
In the Vatican, Pope Francis led prayers for peace in Ukraine, referring to its “suffering people” and saying he hoped that wounds, fears and divisions could be overcome.
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Additional reporting by Natalia Zinets, Pavel Polityuk, Matthias Williams, Tom Balmforth, Vladimir Soldatkin, Gabrielle Tétrault-Farber, Maria Kiselyova, Andrew Osborn and Alexander Marrow, writing by Mark Trevelyan, editing by Timothy Heritage and John Stonestreet
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SINGAPORE/NEW YORK, Oct 15 (Reuters) – Major Chinese energy companies are in advanced talks with U.S. exporters to secure long-term liquefied natural gas (LNG)supplies, as soaring gas prices and domestic power shortages heighten concerns about the country’s fuel security, several sources said.
At least five Chinese firms, including state major Sinopec Corp and China National Offshore Oil Company (CNOOC) and local government-backed energy distributors like Zhejiang Energy, are in discussions with U.S. exporters, mainly Cheniere Energy (LNG.A) and Venture Global, the sources told Reuters.
The discussions could lead to deals worth tens of billions of dollars that would mark a surge in China’s LNG imports from the United States in coming years. At the height of a Sino-U.S. trade war in 2019, gas trade briefly came to a standstill. LNG export facilities can take years to build, and there are several projects in North America in the works that are not expected to start exporting until the middle of the decade.
Talks with U.S. suppliers began early this year but speeded up in recent months amid one of the biggest power-generating, heating fuel crunch in decades. Natural gas prices in Asia have jumped more than fivefold this year, sparking fears of power shortages in the winter.
“Companies faced a supply gap (for winter) and surging prices. Talks really picked up since August when spot prices touched $15/mmbtu”, said a Beijing-based senior industry source briefed on the talks.
Another Beijing-based source said: “After experiencing the recent massive market volatility, some buyers were regretting that they didn’t sign enough long-term supplies.”
Imports for winter of 2021 are capped as soaring global prices hurt demand
Sources expected fresh deals to be announced over the coming few months, after privately controlled ENN Natural Gas Co, (600803.SS), headed by the ex-LNG chief of China’s largest buyer, CNOOC, announced a 13-year deal with Cheniere on Monday. read more
It was the first major U.S.-China LNG deal since 2018.
The new purchases will also cement China’s position as the world’s top LNG buyer, taking over from Japan this year.
“As state-owned enterprises, companies are all under pressure to keep security of supply and the recent price trend has deeply changed the image of long-term supplies in the mind of leadership,” said the first Beijing-based trader.
“People may have taken the spot (market) as the key in the past, but are now realizing that long-term cargoes are the backbone.”
CHEAPER U.S. GAS
The sources declined to be named as the negotiations are private.
Sinopec declined comment. CNOOC and Zhejiang Energy did not immediately respond to requests for comment.
Venture Global declined comment. Cheniere did not immediately respond to a request for comment.
“We expect more deals to be signed before year-end. It’s primarily driven by the global energy crunch and prices we’re seeing now… U.S. supplies now stand out as attractive,” said a third Beijing source briefed on the talks.
U.S. cargoes used to be expensive versus oil-linked supplies from Qatar and Australia for example, but are cheaper now.
A deal at $2.50 + 115% of Henry Hub futures , similar to ENN’s deal according to traders, would be roughly about $9-$10 per million British thermal units (mmBtu) on a delivered basis into Northeast Asia. This includes an average shipping cost of $2 per mmBtu for the U.S.-China route.
Jason Feer, global head of business intelligence with consultancy Poten & Partners said Chinese companies are heavily exposed to Brent-related pricing for LNG and the U.S. purchases give some diversity to the pricing.
Asian spot gas prices are currently trading at above $37 per mmBtu after reaching a record high of over $56 earlier this month. read more
Traders expect prices to go higher in winter when demand typically surges.
Chinese buyers are scouting for both near-term shipments to cover demand this winter and long-term imports as demand for gas, seen by Beijing a key bridge fuel before reaching its 2060 carbon-neutral goal, is set for steady growth through 2035.
China’s H1 2021 imports surged 28% on yr in counter-seasonal spike, but H2 imports seen capped by high prices
It’s hard to estimate a total volume of the deals being discussed, sources said, but Sinopec alone could be eyeing 4 million tonnes annually as the company is most exposed to the spot market versus domestic rivals PetroChina and CNOOC, said a third source.
Traders said Sinopec is in final talks with 3 to 4 companies to buy 1 million tonnes a year for 10 years, starting from 2023, and is looking for U.S. volumes as part of the requirement.
Delays in LNG export projects in Canada, in which PetroChina owns a stake, and Mozambique, where both PetroChina and CNOOC have invested, also made U.S. supplies attractive, sources added.
North American LNG exporters have been adding to capacity because of demand in major Asian economies.
Cheniere, the largest exporter out of the United States, said in late September it expects to announce “a number of other transactions” that will support their going forward with the Corpus Stage 3 expansion next year.
Venture Global is building or developing over 50 million tonnes per annum (MTPA) of LNG production capacity in Louisiana, including the 10-MTPA Calcasieu, which is expected to cost around $4.5 billion and start producing LNG in test mode in late 2021. read more
However, some buyers remained cautious.
“There is a lot of hype in the market and nobody knows for sure how long this supply crunch would last. For companies that do not have fresh demand in the next year or two, it’s better to wait,” said a separate Chinese importer.
Reporting by Chen Aizhu, Jessica Jaganathan in Singapore and Scott Disavino in New York; additional reporting by Gary McWilliams in Houston; editing by Raju Gopalakrishnan and Jason Neely
Our Standards: The Thomson Reuters Trust Principles.
LONDON, Oct 4 (Reuters) – Demand for coal and natural gas has exceeded pre-COVID-19 highs with oil not far behind, dealing a setback to hopes the pandemic would spur a faster transition to clean energy from fossil fuels.
Global natural gas shortages, record gas and coal prices, a power crunch in China and a three-year high on oil prices all tell one story – demand for energy has roared back and the world still needs fossil fuels to meet most of those energy needs.
“The demand fall during the pandemic was entirely linked to governments’ decision to restrict movements and had nothing to do with the energy transition,” Cuneyt Kazokoglu, head of oil demand analysis at FGE told Reuters.
“The energy transition and decarbonisation are decade-long strategies and do not happen overnight.”
Over three-quarters of global energy demand is still met by fossil fuels with less than a fifth by non-nuclear renewables, according to energy watchdog the International Energy Agency.
Energy transition policies have come under fire for the run up in energy prices. In some places, they are having an impact, such as in Europe where high carbon prices aimed at reducing emissions have made utilities reluctant to switch on coal-fired plants to alleviate the shortage.
In China, policies to reduce emissions have contributed to the government’s decision to ration energy to heavy industry.
But much of the rise in energy prices is simply because producers took enormous amounts of capacity offline last year when the pandemic led to an unprecedented fall in demand.
Several factors mean temporary shortages may not last.
They could abate with a decision by OPEC to open taps to unleash supply it reined in during the first onslaught of COVID, likely new liquid natural gas (LNG) output coming online after a price slump in the last decade and a Chinese government climb-down on price setting which has undercut coal power production.
RENEWABLES A “SOLUTION, NOT A CAUSE”
Producers of gas, coal, and to a lesser extent oil have been caught flat-footed by the economic recovery, much of it sparked by government stimulus spending in energy-intensive industries.
National policies have also played a role in the power supply problems. In China, state mandated power prices mean utilities simply cannot afford to burn coal and sell the power, because the cost of coal is too high to make a profit.
Chinese utilities are producing below capacity to avoid losing money, not because they cannot produce more.
Meanwhile, most gas projects take several years to design and build, so the shortage now reflects investment decisions taken pre-pandemic – and before the energy transition gathered political momentum.
The chief of the Paris-based IEA said energy transition policies were not to blame for the crisis.
“Well-managed clean energy transitions are a solution to the issues that we are seeing in gas and electricity markets today – not the cause of them,” Fatih Birol said in a statement.
2020 LOSSES ERASED
Still, the IEA’s data show global demand for coal, the single largest source of CO2 emissions, surpassed pre-pandemic levels late last year.
Global coal supplies are tight because China, responsible for around half of global output, has tightened safety regulations at mines after a spate of accidents, sapping supply.
That has left China importing more coal from Indonesia, in turn leaving less for other importers such as India.
Global coal demand is set for with a 4.5% increase this year, pushing beyond 2019 levels.
IEA coal consumption
Global natural gas demand fell 1.9% last year, a smaller drop than other energy sources as utilities cranked up power production to meet heating needs during winter.
But the IEA projects gas demand will rise 3.2% in 2021 to over 4 trillion cubic metres, erasing 2020 losses, and pushing demand above 2019 levels.
Rystad LNG demand
Natural gas McKinsey
Cold weather patterns in the northern hemisphere, Oslo-based consultancy Rystad Energy said, “caused a rise in demand for coal, liquefied natural gas (LNG), electricity and even a bit of oil (that) is here to stay”.
LNG accounts for just over 10% of the global supply but is more readily traded globally so can be deployed more easily to cover short-term supply crunches.
“Eye-popping price spikes and their spread between summer and winter will widen, especially for gas, both natural and liquefied,” Rystad added, as prices are higher amid cold winter weather than in summer.
SUPPLY GAPS, SHORT-TERM RALLIES
Last to catch up, oil demand is set to rebound toward pre-pandemic levels above 100 million barrels per day sometime next year, according to four of the major tracking groups.
High prices on oil markets are because OPEC and allied producers still have millions of barrels per day of oil production offline after they made record cuts to supply during the pandemic to match plummeting demand for transport fuel.
Producer club OPEC offers the most robust prediction for a demand rebound, putting the recovery date at the second quarter of 2022.
Oil use rises above 100 million barrels per day in 2022
FGE Oil Demand
In the more distant future, with most forecasters predicting a peak in fossil fuel demand within the next two decades and the IEA recommending against new projects to ensure net zero emissions, broader supply gaps could fuel more price shocks.
McKinsey fossil fuel peak
“Prices for fossil fuels will remain volatile”, said Nikos Tsafos, senior fellow at the Center for Strategic and International Studies (CSIS).
“The risk of a supply-demand imbalance is greater in a market that is shrinking where the case for further investment is weak, which could produce short-term rallies.”
Writing by Noah Browning; editing by David Evans and Ed Osmond
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Royal Dutch Shell operates a plant in Qatar, known as Pearl GTL, that transforms natural gas into liquid fuels.
Stuart W. Conway/Shell International Limited
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Natural gas has long been oil’s poor step-cousin, a commodity that many ignore until they have to pay their heating bill.
Now, natural gas is the lead player in a drama that is gradually dragging down the world economy. A surge in the price of the commodity—along with other fuel sources, like coal and propane—is forcing countries to reduce factory production, and could drive heating and electricity prices sky-high this winter.
Analysts have already been downgrading global growth forecasts based on the energy crunch. Goldman Sachs recently forecast that China wouldn’t grow at all in the third quarter versus the prior quarter, in part because of its energy problems. In the United Kingdom, power companies serving nearly two million people have gone out of business.
In the U.S., natural-gas futures rose above $6 per million British thermal units (BTUs) during the week, nearly quadrupling from their pandemic lows. Oil demand is rising with gas, as some utilities are likely to switch their input fuel to oil as gas stays expensive.
The problem is even more acute in places that have to import more of their fuel. Europe and Asia are bidding up the cost of liquefied natural gas, or LNG, to secure enough for winter. European gas prices have roughly quadrupled from their five-year average, and were recently trading at a record $32 per million BTUs, according to S&P Global Platts Analytics. The Asian benchmark price hit an all-time high of $34 on Thursday.
There is no simple answer for why multiple energy sources are expensive and scarce today. A cold spell late last winter in Europe led to low levels of gas in storage. U.S. producers, which account for the largest share of gas production in the world, have held back on drilling new wells as they work to get their balance sheets in line after years of overspending. The Chinese economy had been rebounding, causing demand to surge just as supplies were running low. And the prices of other commodities such as coal have been rising too, making it difficult for power producers like utilities to switch their input fuels. Oil and gas have also been beset by the same problems facing all global markets—too few workers to move the fuel.
Climate change’s role in the power crunch is also tricky. Carbon emissions are leading to more severe weather that is damaging energy infrastructure. One reason oil and gas supplies are low now is that Hurricane Ida damaged infrastructure in the Gulf of Mexico, taking substantial supplies off line.
But combating climate change also brings challenges. The transition to cleaner fuels hasn’t always gone smoothly. One reason European power prices have increased is that the wind simply didn’t blow enough in recent weeks to power turbines that make up a growing portion of the Continent’s power supply.
“There will be two parties in this debate,” says Daniel Yergin, an expert in energy markets who is vice chairman at IHS Markit. “One is saying let’s go faster, and the other is saying you’re going too fast. Don’t constrain investment when you don’t really have sufficient alternatives to replace what you’re constraining.”
For investors, the power crunch opens up new opportunities. It could be months before the market comes back into balance. A cold winter could lead to even higher prices that would not only sap economic growth but possibly cause political upheaval.
The obvious beneficiaries would seem to be natural-gas producers. But it isn’t quite so simple, in part because most producers have already hedged their 2021 production and most of their 2022 output at lower prices. “Any of the hedges even for next year are well under $3,” says Truist Securities analyst Neal Dingmann.
He thinks that investors can still get natural-gas exposure, and benefit from rising oil prices too, by purchasing stocks of oil companies that also happen to be large gas producers.
Among those are
Cimarex Energy
(ticker: XEC), which won shareholder approval this week to merge with
Cabot Oil & Gas
(COG). Cabot is unhedged on 2022 production as of its latest earnings report. Similarly, dry natural gas and natural gas liquids account for nearly half of production at
Marathon Oil
(MRO), which also has reported relatively few hedges for this year and next, Dingmann says.
Larger oil companies tend not to hedge production, either. Among the biggest beneficiaries could be
Royal Dutch Shell
(RDS.B), a major producer of propane, whose prices have also skyrocketed, Dingmann notes. “In the third quarter, I think people are going to be very surprised” by how much these companies make from gas, he says.
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Another way to play these dynamics is to invest in companies that are key cogs in the global supply system, like
Cheniere Energy
(LNG), whose terminals on the Gulf Coast allow U.S. gas to be processed and shipped overseas. Small-cap
Tellurian
(TELL) offers exposure to the same theme, though it is more speculative.
“It’s excellent for LNG companies,” says Rebecca Babin, senior energy trader at CIBC Private Wealth Management. “There was concern that there was overinvestment in LNG as recently as two years ago.” No longer.
Some petrochemical companies could benefit, too. Chemical plants need natural gas to run. Those with operations in the U.S. are in better shape because they’re paying relatively less, notes Rich Redash, the head of global gas planning at S&P Global Platts. That could benefit
