The United States and Russia are stalwarts at the top of the list for both natural gas producing and consuming countries in the world. They remain at the top of both lists, and barring a cataclysmic shift in U.S. energy policy, they will both remain there for the foreseeable future. The next largest producer of natural gas is Iran at less than half of Russian production, and less than a third of U.S. production. The third largest consumer of natural gas is China, at a little less than half of Russian consumption and less than ¼ of U.S. consumption. Based on the above It is clear that the U.S. and Russian economies are highly reliant on natural gas both as a fuel source, and for revenue generated by the abundance of this natural resource.
Qatar, the final leg of the Global Gas power triangle, is on the list not for its consumption (22nd in the world) but for being at the forefront of the LNG export world. Although no longer the volumetric leader in LNG exports, with the U.S. now exporting more than 11 Bcf/d, Qatar’s influence on the global natural gas stage remains firmly entrenched. Additionally, Qatar’s plans to nearly double its liquefaction capacity by 2027 with the first trains coming online in 2025, thus maintaining its role as a global gas market leader. At present Qatar Petroleum has just under 80 BCM of liquefaction capacity, or the equivalent of 7.5 Bcf/d. Australia is close behind, but reamains beleaguered by governmental issues impacting everything from labor to operations to proposed carbon tariffs.
The United States takes the lead on the global natural gas stage both for its prolific production growth, and its dynamic ability to shift from a significant LNG importer to the worlds’ largest exporter in less than 2 decades. LNG export projects were first sanctioned in the U.S. back in in 2012 when Charif Souki led Cheniere to FID on trains 1 and 2 at Sabine Pass. In the course of ten years the U.S. will have added more than 15 LNG trains and at least temporarily moved in to the role of world’s largest LNG exporter. The impact of this prolific growth on global gas markets was acutely felt in the first half of 2020 when the U.S. and European natural markets moved to parity with one another while both regions struggled to find ways to deal with oversupply conditions created by a warm winter and early pandemic panic.
In Russia, the first large diameter modern era gas export pipeline came online at the same time U.S. natural gas imports were peaking. In 2006 the Yamal-Europe natural gas pipeline was completed, and more than 3 Bcf/d began flowing from Russia, though Belarus and Poland, on the way to an interconnect with the German pipeline grid. Since that time 2 other major pipeline projects have been completed by Gazprom allowing for more piped Russia supply to reach downstream markets.
The first of these two projects was the Nord Stream pipeline, which connected Russian supply directly to Germany through a 5.25 Bcf/d subsea pipeline. Even to this day, approximately 10yrs after completion, this project is a remarkable engineering feat. The 1,224 KM pipeline carries natural gas the full length of the pipeline without compressor stations, and theoretically requires very minimal maintenance efforts for at least 50 years.
In a vacuum this would appear to be highly beneficial for both the Russian supplier and the European (largely German) consumer. Reliable, high volume, low-cost supply is of course the panacea for a consumer of natural gas. However, what also must be considered in a project of this scale is the influence it hands over to the supplier. This later point has proven to be a thorn in the side of project developers (Gazprom, Uniper, Wintershall, Engie, OMV, and Shell) who have worked since 2012 to double Nord Stream capacity.
In December of 2019 the United States Senate approved a Defense spending bill which included the implementation of sanctions on companies working on the Nord Stream 2 pipeline project. At the time this was seen as potentially ineffective with the project nearing completion. However, the rarified bi-partisan endeavor by the US. Government did seem to slow the project, at least until earlier this week when the Biden administration surprisingly contradicted its own earlier comments about the project. Until Tuesday, the Biden administration had publicly supported blocking completion of the project, clearly agreeing that it would have severe negative impacts on the U.S., Baltic allies, and others.
Nonetheless sanctions have now been lifted, in what publicly appears to be an effort to avoid conflict with Russia and tangentially support German economic interests. Interestingly, sanctions were technically extended but simultaneously waived. It will be interesting to see how quickly the project can be commissioned. Whether or not it has the potential to alter storage balances in Europe in the final quarter of 2021 or the spring 2022 remains to be seen, and of course assumes no change to the surprise reversal in sanctions.
The second of the 2 major pipeline Russian pipeline projects to come online since the U.S. decided to become an exporter of natural gas and enter the global gas market as a supplier was the ‘Power of Siberia’ pipeline. This project delivers more than 3.5 Bcf/d of supply from fields in Southern Russia (North and to the East of Lake Baikal) to China through incredibly harsh terrain. Like the Nord Stream project, the Power of Siberia is expected to be expanded with the second phase set to add another 50 BCM per year, or just under 5 Bcf/d of incremental imports to China.
With the U.S. now exporting more than 10% of its domestic natural gas supply, relationships with Russia, Qatar, and shared destination markets (countries) now have increasing complexities. The role of the United States as a protector of undue market influence/manipulation is less credible as we are ourselves a major supplier to the global natural gas market. How the 3 pending projects covered in this report (Qatargas Expansion, Nord Stream 2, Power of Siberia II) fare may have a significant impact on both global and domestic natural gas prices over the next decade. However, there are two other very important considerations which must simultaneously be appreciated.
First, outside of the United States most natural gas purchases are still made under multi-year crude linked contracts. Qatargas expects this to remain the norm under the terms planned for their expanded capacity. Secondly, demand side impacts of the zombie-like march towards all things renewable must be unpacked. In short, the U.S. and Germany are classic examples of the fallacy that renewable generation additions will immediately curb the consumption of fossil fuels in the power sector. Both of these points are independently worthy of a Friday Focus of their own, and in the coming months we will likely cover each topic in more detail.
Zane Curry
Zane has been with Mobius Risk Group since February of 2016. His primary responsibility is a fundamental analysis of the North American natural gas market. Additionally, he assists in the valuation of gathering, processing, transportation, and physical sales agreements. His experience in energy has been focused on natural gas, however, as the North American hydrocarbon value chain has become a more integrated system his knowledge has expanded to crude oil, petroleum products, and seaborne LNG. Prior to joining Mobius, Zane spent 6.5 years with a Houston based hedge fund (Goldfinch Capital) with AUM of approximately $750M. In his time with Goldfinch Capital, Zane was tasked with developing detailed models of the North American natural gas market, including 1st derivative components such as power generation by fuel source, supply side impacts of liquids focused drilling, etc. Zane is a graduate of Rice University, and a former member of his alma mater’s baseball program as both a player and coach.