From Alex Kimani, a veteran finance writer, investor, engineer and researcher for Safehaven.com. Originally published at OilPrice.com:
Earlier in the year, supertanker freight rates hit record levels as traders scrambled to park crude in storage to take advantage of a record gap between spot and future prices shortly after Russia invaded Ukraine. Freight rates for very large crude-oil carriers (VLCC) along the Middle East Gulf to China route reached as high as $180,000 a day while VLCC time charter rates for floating storage jumped to as much as $120,000 per day.
But the situation has now reversed with supertanker rates plunging sharply. According to Bloomberg, ships capable of hauling 2 million barrels of crude are now earning about $38,000 a day, down 62% from just weeks ago after OPEC+ cut production and reduced releases from US reserves lowered seaborne volumes, Bloomberg reports.
“Clearly OPEC+ cuts and waning SPR releases would both be short-term volume headwinds. They cut production from the first of November and you would expect some lag, and we are seeing activity in the Middle East cooling off somewhat. That’s the simple explanation,”Lars Bastian Ostereng, an analyst at Arctic Securities has told Bloomberg.
Lower freight rates are encouraging some crude to travel longer distances. For instance, Bloomberg has reported that a South Korean refiner bought 2 million barrels of U.S. crude for March arrival. Meanwhile, offers for long-haul U.S. cargoes for delivery to Asia have declined partly due to lower shipping costs.
But things could not be more different in the natural gas arena.
Energy Crisis Sparks Mad Dash For Floating LNG Terminals
Demand for LNG floating storage and regasification units (LNG-FSRUs) has increased sharply this year, with Europe facing an energy supply squeeze as Russia has progressively cut pipeline gas flows.
Demand for LNG imports has intensified after the ruptures on the key Nord Stream pipeline system quashed any prospect of Russia turning its gas taps back on. This has forced dozens of countries in Europe to turn to FSRUs or floating LNG terminals, which are essentially mobile terminals that unload the super-chilled fuel and pipe it into onshore networks.
Currently, there are 48 FSRUs in operation globally, with Rystad Energy revealing that all but six of them are locked into term charters.
According to energy think-tank Ember, the EU has lined up plans for as many as 19 new FSRU projects at an estimated cost of €9.5bn.
The biggest beneficiaries are Korean shipbuilding, for whom FSRUs are a major revenue-generator. Korea is the definitive world leader in this field. According to local media, Korean shipbuilders managed to book 46% more orders so far, YoY. And the government’s goal is for the country to grab 75% of the market share by 2030.
The setup couldn’t be better. With the supply of these vessels so tight, the cost of charters into Germany has doubled year-on-year to $200,000 a day.
“Last year there was a surplus of FSRUs and this year there is a deficit. Up until now there have been sufficient vessels in the market, but as most have now been taken, it’s becoming more challenging,” Per Christian Fett, the global head of LNG at shipbrokers Fearnley LNG in Oslo, has told Bloomberg.
Texas-based Excelerate Energy Inc. is sending three FSRUs to Europe with combined throughput capacity to import 15 billion cubic meters of gas, or about 10% of the pipeline and LNG imports from Russia in 2021. Demand for the terminals in Europe is so strong that it could make it less affordable for emerging nations to use FSRUs for their own needs. “The risk is real that underutilized facilities in other regions of the world could be relocated to Europe, existing charter terms permitting,”Kaushal Ramesh, a senior analyst at consultant Rystad Energy, has said.
New Dutch terminal
The Netherlands has taken its first delivery of LNG at a new terminal, boosting Europe’s efforts to wean itself off Russian gas. Previously, the Netherlands could only import LNG through Rotterdam; however, that has changed with the commissioning of two FSRUs, the Golar Igloo and Eemshaven LNG, moored in Eemshaven. The FSRU project was completed in record time Please use the sharing tools found via the share button at the top or side of articles. With the pair of floating ships now supplying gas to the landlocked Czech Republic and Germany.
“The arrival of the new LNG terminal is an important step not only for the Netherlands, but for the whole of Europe to completely phase out the dependence on energy from Russia as quickly as possible,” Rob Jetten, Dutch minister for climate and energy, has declared. FRSUs offer the quickest and most efficient way for Europe to end its reliance on the pipelines that bring in large quantities of natural gas from Russia.
Europe has been working hard to wean itself off Russian energy commodities ever since the latter invaded Ukraine. The European Union has banned Russian coal and plans to block most Russian oil imports by the end of 2022 in a bid to deprive Moscow of an important source of revenue to wage its war in Ukraine.
But ditching Russian gas is proving to be more onerous than Europe would have hoped for. Whereas supplies of Russian pipeline gas–the bulk of Europe’s gas imports before the Ukraine war–are down to a trickle, Europe has been hungrily scooping up Russian LNG. The Wall Street Journal has reported that the bloc’s imports of Russian liquefied natural gas jumped by 41% Y/Y in the year through August.
“Russian LNG has been the dark horse of the sanctions regime,” Maria Shagina, research fellow at the London-based International Institute for Strategic Studies, has told WSJ. Importers of Russian LNG to Europe have argued that the shipments are not covered by current EU sanctions and that buying LNG from Russia and other suppliers has helped keep European energy prices in check.
LNG Deluge
Maybe Europe’s LNG imports from Russia can be justified on a purely economic basis.
Natural gas prices in Europe have plunged over the past few weeks with CNBC reporting that a “Wave of LNG tankers is overwhelming Europe in an energy crisis and hitting natural gas prices.” According to MarineTraffic via CNBC, 60 LNG tankers, or ~10% of the LNG vessels in the world, are currently sailing or anchored around Northwest Europe, the Mediterranean, and the Iberian Peninsula.
It’s a fair bet that a good chunk of those vessels originated from the United States.
Europe’s natural gas demand has skyrocketed as the EU tries to lower its reliance on Russian natural gas following its invasion of Ukraine. Europe has displaced Asia as the top destination for the U.S. LNG, and now receives 65% of total exports. The EU has pledged to reduce its consumption of Russian natural gas by nearly two-thirds before the year’s end while Lithuania, Latvia and Estonia have vowed to eliminate Russian gas imports outright. Unlike pipeline gas, supercooled LNG is much more flexible and can be shipped from far-flung regions, including the U.S. and Qatar.
Europe is not alone here. Shipping data has revealed that China has imported nearly 30% more gas from Russia so far this year, typically at a steep discount.
Thankfully, there’s a clear upside to imports of Russian LNG to Europe: the continent has managed to fill its gas stores well ahead of schedule, with Reuter’s gas meter revealing that 90% of the EU gas storage is currently filled.
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An interesting article on how Germany managed to build a LNG terminal in months instead of years:
https://www.wsj.com/articles/natural-gas-terminal-engineering-feat-germany-11670513353
(paywall-free: https://archive.ph/ADbZV )
Colour me cynical but I’m not buying it. Not an engineer of course but when I think of all the planning, legal clearances, preparation, resourcing and all the rest of it this is way too short a timeline. It’s like how that massive initial sanctions package back in February just appeared out of the blue almost overnight. I think that over time we will learn that the Germans have been working on this since last year but on the quiet and that they knew that they would have need of it. But that opens up another can of worms. Assuming this to be true, then it implies that they knew that they would never activate the NS2 pipeline. And if that is true, then perhaps that is why they were not upset at those pipelines being blown up – because they knew that they would never use it but would be going ahead with these terminals instead.
when I think of all the planning, legal clearances, preparation, resourcing and all the rest of it this is way too short a timeline.
I explained that a few months ago.
Regarding clearances for those LNG infrastructures:
1) construction started before construction permits were delivered;
2) the requirement for environmental impact studies was abolished;
3) laws were revised to allow construction in protected nature areas;
4) the period for public comments on the projects was reduced to two weeks.
The Greens enthusiastically agreed to all of that, of course.
Regarding planning for those “super rapid” LNG projects realized in a few months:
5) it is based on earlier plans for LNG infrastructure that were shelved because of the absence of economic viability;
6) the construction takes place in areas with direct sea access without the need for dredging;
7) only a short pipeline must be laid to connect the FSRU to the German gas network.
And that applies to only one of the LNG projects. The others will take at least a couple of years because conditions 5-7 are not all met.
Thanks for providing the paywall free link. From the article:
“Since Russia stopped most natural gas exports to Europe this fall, gas flows from Russia to Germany have shriveled from 55% of imports last year to zero.”
Really? How about writing that the US Sanctions and the sabotaging of the pipeline was the reason? But wait! That would be stating the truth and is not so dramatic!
And has it gone to zero? Still gas being imported via Yamal and Druzhba, is none of that flowing to Germany?
There was an article in Links about a week or to ago of a fleet of tankers sitting off Europe waiting for oil prices to skyrocket before they would be sent to European ports to sell their oil cargoes. If they were still there recently, then somebody got on the wrong side of that trade which would include the costs of siting out at sea just waiting.
How very interesting.
One factor that may be affecting supertanker shipping rates is the price cap. That cap means the western oil tanker fleet can’t move Russian oil, right? So that will idle some capacity.
The other factor, which Conor has pointed out, is that oil production / strategic release levels are flat-to-declining, which means less oil is getting shipped. Reduced demand, excess shipping capacity, lower prices.
One key thing missing from this excellent situation analysis is cost-per-btu (unit of energy) delivered to the EU. This is the linchpin around which most EU economic activity rotates. Have energy costs in EU fallen enough to sustain economic activity, particularly industrial activity and production-for-export?
I’d be interested to hear from people with good insight into that question. Because the answer to that question tells us if EU’s economy can survive an extended / forevermore decoupling from Russian energy sources.
The other interesting question is whether the energy that Russia was shipping to EU is being absorbed by non-West-controlled customers, such as China and India, and if it is being absorbed, at what price. That tells a longer-term story of Russia’s ability to sustain its war with the West.
I often see reports of major economic-integration discussion among the non-West players (e.g. SCO, etc.), with China and Russia as prominent drivers, and I note that these integration discussions seem to be intensifying. These activities are less likely to show up in the Western press, and NC seems like an appropriate forum to explore that topic.
LNG ships and gasification facilities are extremely capital intensive. Therefore, to build them you have to be willing to make a multi-decade commitment. As interest rates go up, the capital cost component of the firm price (probably take-or-pay) increases significantly.
As Nordstream and Baltic Pipe demonstrate, LNG is not cost competitive with subsea pipelines (which are also expensive). LNG would be more costly than Nordstream II (otherwise Germany would have been insane not to have gone with more fungible LNG in the first place).
These LNG projects makes sense (imho) only as (maybe) demonstration projects, PR, or temporary work-around to avoid even more economically and politically expensive curtailments this winter, but not as “positive NPV” economic projects.
The high LNG price is either subsidized or will be melded in with a much larger volume of cheap gas in the system (i.e. gas still flowing from Russia) over the long term to be affordable. This would suggest some governmental entities (e.g. NATO?) fronting the capital, taking the economic risks, and worrying about the long term commercial arrangements later. Just guessing here.
Perhaps innovation (e.g. more standardization) might eventually bring down the price of LNG to Europe. Subsea pipelines from Norway (perhaps) might eventually get laid, but this takes years to plan and implement. I see no alternative that might sustain European economic viability than continued recourse to Russian gas. After the Ukraine mess is over, the sanctions will need to be lifted (imho) and perhaps Nordstream I and II repaired.
Karl:
Excellent followup. Thanks for taking the time to deliver that post.
Germany is not landlocked. But maybe they do rely on Dutch capacity, don’t see why they can’t build out their own however.
Europe has displaced Asia as the top destination for the U.S. LNG, and now receives 65% of total exports
Am I missing something here? I would assume that Russia will replace a large proportion of that US LNG to Asia? No skin off Russia’s nose. Lose one market, pick up another.