(Bloomberg) — One morning in early June, a fire broke out at an obscure facility in Texas that extracts natural gas from US shale pans, cools it into a liquid, and ships it overseas. It was erased in about 40 minutes. Nobody was injured.
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It sounds like a story for the local press at best – only more than three weeks later, financial and political shockwaves are still reverberating across Europe, Asia and beyond.
Because natural gas is currently the hottest raw material in the world. It’s a major driver of global inflation, and has seen extreme price jumps even by the standards of today’s turbulent markets — about 700% in Europe since early last year, pushing the continent to the brink of recession. It is at the heart of a dawning era of confrontation between the great powers, so intense that plans to combat climate change are being sidelined in western capitals.
In short, natural gas now competes with oil as the fuel that shapes geopolitics. And there aren’t enough of them to go around.
It is the war in Ukraine that has catalyzed the gas crisis to a new level by taking out a crucial part of the supply. Russia is reducing its pipeline shipments to Europe – meaning it wants to stop buying from Moscow anyway, though not quite yet. The scramble to fill this gap is building a global rush as countries scramble for scarce shipments of liquefied natural gas ahead of the northern hemisphere winter.
The new oil?
Germany says gas shortages could trigger a Lehman Brothers-like collapse as Europe’s economic powerhouse faces the unprecedented prospect of businesses and consumers running out of power. The main Nord Stream pipeline, which carries Russian gas to Germany, is due to be shut down for 10 days for maintenance on July 11, and fears are growing that Moscow may not be able to reopen it. Group of Seven leaders are looking for ways to curb Russia’s gas revenues, which help fund the invasion of Ukraine — and support new LNG investments. And poorer countries that built energy systems around cheap gas are now struggling to afford it.
The story goes on
“This is the 1970’s for natural gas,” says Kevin Book, executive director of ClearView Energy Partners LLC, a Washington-based research firm. “The world is now thinking about gas as it once thought about oil, and the vital role that gas plays in modern economies and the need for a secure and diverse supply have become very clear.”
Natural gas used to be a sleepy commodity that changed hands in fragmented regional markets. Well, although globalization appears to be on the wane in much of the world economy, gas trading is moving in the opposite direction. It’s globalizing fast – but maybe not fast enough.
Many countries have turned to natural gas as part of the clean energy transition as they seek to phase out dirtier fossil fuels such as coal and, in some cases, nuclear power. Big producers – like the US, which has quickly risen in the ranks of LNG exporters to compete with Qatar as the world’s largest – are seeing increasing demand for their production. 44 countries imported LNG last year, nearly double the number a decade ago. But the fuel is much more difficult to move around the planet than oil because it has to be liquefied at places like the Freeport facility in Texas.
And that’s why a small explosion at a facility considered by industry insiders to be nothing special — it’s not the largest or most modern of the seven terminals that ship LNG from American shores — had such outsized impact.
“The Current Crisis”
Gas prices in Europe and Asia have risen more than 60% in the weeks since Freeport was temporarily shut down, a period that also saw further supply cuts by Russia. In the US, on the other hand, prices for the fuel collapsed nearly 40% – because the outage means more gas remains available for domestic use.
There have already been many signs of extreme tightness in the market. War and Covid may roil every commodity from wheat to aluminum and zinc, but little compares to the stomach-churning volatility of global gas prices. In Asia, fuel is about three times as expensive today as it was a year ago. In Europe, this is one of the main reasons why inflation has just hit a new record.
Natural gas remains cheaper in the US — but even there, futures had more than doubled this year before Freeport closed. As key political allies from Germany to Ukraine are desperate to buy American gas, US manufacturers are warning that more sales abroad will mean higher costs domestically. The market reaction to the Freeport fire highlights a “clear correlation between LNG exports and the inflationary impact on domestic natural gas and power prices,” says Paul Cicio, president of Industrial Energy Consumers of America. That’s already underway and got a boost at last week’s meeting of the western world’s biggest economies, where G-7 leaders pledged to support public investment in gas projects – saying they were “necessary in response to.” the current crisis”.
Among the urgent infrastructure requirements:
Export Facilities: The LNG rush is accelerating projects in North America and beyond. Last month, Cheniere Energy Inc. gave the go-ahead for a terminal expansion in Texas. In April, a Canadian LNG project backed by Indonesian tycoon Sukanto Tanoto was given the green light to start construction. In Qatar, Exxon Mobil Corp. and Shell Plc among the energy giants involved in a $29 billion project to boost LNG exports. “Global gas prices are so high that they are incentivizing the signing of new long-term contracts,” says Samantha Dart, head of natural gas research at Goldman Sachs. “We see these announcements coming from left and right, with many US proposed liquefaction plants. “
Import Terminals: Plans for about 20 terminals have been announced or accelerated in Europe since the beginning of the Ukraine war. Germany, which has no LNG terminals, has committed about $3 billion to charter four floating terminals and connect them to the country’s network. The first is scheduled to go online at the end of this year. Vice Chancellor Robert Habeck stressed the need for speed, noting that Tesla Inc. had managed to build a factory near Berlin in just two years and said it was time to cut Germany’s bureaucracy. “First dig the trench where you want the pipe to go,” he said. “Then comes the approval.” China, the world’s largest LNG buyer last year, is in the midst of one of the biggest expansions the industry has ever seen. According to BloombergNEF, ten new import terminals are expected to come online in 2023 alone, and capacity will roughly double in the five years to 2025.
Pipelines: Even with more capacity to take LNG supplies and turn it back into gas form – a process known as regasification – Europe lacks the infrastructure to get it where it’s needed. Spain, for example, has the largest regasification plants in Europe – but it only has two pipeline links to France via the Pyrenees, which, according to Bloomberg Intelligence, can transport little more than a tenth of that amount.
Tankers: Shipyards in South Korea, where most of the world’s LNG tankers are built, are seeing a surge in orders resulting in a shortage of skilled workers. They were forced to look outside the country for welders, electricians and painters, for example in Thailand, and increased their quotas for migrant workers.
All of this means, in part, a reversal away from climate change policies – particularly in Europe. Government-backed lenders like the European Investment Bank and the European Bank for Reconstruction and Development, which had previously focused on financing renewable energy, have signaled a turnaround, saying they are now more willing to support gas projects. But Europe’s breakneck efforts are winning. That’s not enough, according to Bloomberg Intelligence, which calculates that LNG imports could meet 40% of the region’s gas needs by 2026 – twice as much as last year, but still far short of the volumes supplied by Russia.
“Never More Obvious”
For this reason, warnings of a gas-related slump in the European economy are escalating.
Last week, the German government said it was in talks to bail out energy utility Uniper SE, which is losing around 30 million euros ($31 million) a day from having to meet missing Russian gas at rising spot market prices. Companies like chemicals giant BASF SE say they may have to cut production. Deutsche Bank pointed to growing risks of an “imminent German recession due to energy rationing” and also pointed to rising electricity prices in Italy and France. Morgan Stanley forecasts that the entire euro area will be in a downturn by the end of the year.
For some emerging markets – which increasingly have to compete with rich countries like Germany in bidding for LNG cargoes as gas goes global – the consequences are already catastrophic.
In Pakistan, which has built its energy system on cheap LNG, planned power outages during the hot summer months plunge regions into darkness. Shopping malls and factories in major cities have been ordered to close earlier and government officials are working shorter hours.
Thailand is curbing LNG imports due to rising prices, potentially putting the country at risk of fuel shortages. Myanmar, which is struggling with political instability, halted all LNG purchases late last year as prices began to rise. India and China have also scaled back imports.
“Where once natural gas markets were largely regionally isolated, we now have a globalized spot market that has connected global exposure to the fuel that has become critical to many economies,” said James Whistler, Managing Director at Vanir Global Markets in Singapore. an energy and environmental broker. “That has never been so clear as in the past few months.”
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