Following Russia's brutal invasion of Ukraine, Europe is trying desperately to reduce dependence on Russian hydrocarbons. Sending Vladimir Putin billions of dollars for shipments of energy seems a very bad idea when Russian soldiers have slaughtered hundreds of civilians in the outskirts of Kyiv, and continue to bomb train stations, hospitals, and apartment blocks in Mariupol and elsewhere.
The US and UK have banned the import of Russian oil and gas, easy to do because they hardly use any. Russian supplies make up just eight per cent of overall oil imports into the UK, and the US is a net exporter of both oil and gas. This is very much gesture politics from Joe Biden and Boris Johnson, so no surprise there.
However, Russian gas supplies to the European Union amounted to approximately 155 billion cubic meters (bcm) in 2021, including 14 bcm of LNG. Germany, Italy, and the Netherlands are the largest markets for Russian gas.
Speaking in Oslo at Nor Shipping last week, former NATO secretary general and former Danish prime minister Anders Fogh Rasmussen called for western democracies to completely prohibit importing what he called "autocratic oil and gas" (more of his views here). Mr Rasmussen argues that funding dictatorial regimes in Russia, Kazakhstan, Iran, Venezuela and Saudi Arabia only encourages them to continue their human rights abuses, and their disrespect for what he describes as "democratic values".
Russia's state-owned gas producer Gazprom sold 45.8 bcm of gas in Germany in 2020, and increased sales by 10.5 per cent last year, implying a total of 50.6 bcm in 2021, according to S&P Global Insight (here). Gazprom accounted for some 60 per cent of German gas demand last year. So far, it has not enforced its demands that buyers purchase their gas in roubles.
The International Energy Agency reckons that replacing Europe's volumes of imported Russian gas completely within one year would be impossible. However, by the end of this year, based on lowering gas demand and finding alternative gas supplies half of Russian gas imports could be replaced.
How?
Both the IEA and the European Commission expect an additional 10 bcm from domestic gas production and pipeline gas suppliers. Anne-Sophie Corbeau of Colombia University reckons (here) that this will be based on the following:
The Netherlands is allowing the giant Groningen field to produce almost twice as much gas as initially planned for 2022 (7.6 bcm, instead of 3.9 bcm).
Norway is currently the second placed European gas provider, with 16 per cent of supplies behind Russia's 41 per cent. Norway could increase its production by another three bcm compared to current NPD forecasts for 2022. Indeed, analysts are openly discussing whether every jackup in the North Sea could be fixed by the end of the year, as North Sea operators seek to add quick and easy step-out production of both oil and gas.
Already, the North Sea working rig count was 12 per cent higher in March than a year ago. Offshore noted (here) that Equinor recently exercised options for both jackups and an ultra-deepwater semisubmersible for offshore Norway, while Aker BP contracted Saipem's Scarabeo 8 for three years plus two one-year options at US$297,000 per day. There's never been a more favourable environment to own rigs or platform supply vessels (PSVs) in the North Sea since 2014. Spot rates for PSVs touched £25,000 (US$35,600) earlier this month.
Azerbaijan's pipeline exports to the EU stand at eight bcm annually, and the country is keen to send more. However, any additional amount cannot exceed two bcm due to the size of the TAP pipeline (10 bcm). Incremental volumes would require an expansion of the pipeline, Ms Corbeau points out, which would be neither quick nor easy.
Algeria is currently third placed supplier with eight per cent market share of gas in Europe. Algeria's pipeline exports to Europe reached 35 bcm in 2021, and the country will likely direct more exports to Italy, allowing Spain to import more LNG from West Africa and elsewhere. Spain has nearly half of Europe's LNG regasification capacity, but is not well connected to the rest of Europe by pipeline – therefore, it can reduce its Algerian pipeline imports and free up Algerian gas for Italian use. However, Algeria's ability to export more gas to Europe is constrained by its production capacity and its rapidly growing domestic needs.
Other savings will come from energy conservation and from demand destruction – when prices are high, consumers use less gas. They shiver with cold, and their factories shut, but they use less gas. This is not desirable (apart from a greenhouse gas reduction point of view).
Clearly, the invasion of Ukraine will also spur further investment in the red-hot renewables market, spurring an accelerated development of floating wind projects in Northern Europe, and in Japan and Korea too.
But offshore wind alone will not fill the gap due to its variability (or unreliability in the words of its opponents).
Elon Musk said last month that it is critical for Europe to restart dormant nuclear power plants and increase the output of existing stations after Russia's invasion of Ukraine.
"Hopefully, it is now extremely obvious that Europe should restart dormant nuclear power stations," Mr Musk commented, highlighting the disastrous energy legacy of former German chancellor Angela Merkel.
However, Germany's Economy Minister Robert Habeck has ruled this out, and said instead that the country's first LNG terminal should be ready within two years, and Germany has hurried to order three regasification units, to the delight of Greece's Dynagas (here).
Last week, Lithuania become the first EU nation to completely halt all Russian gas imports, switching entirely to foreign LNG shipments (here).
There's a big shortfall between what the existing domestic gas fields can produce and what Europe needs to reduce its dependence on Russian gas. Even if Russia declares a ceasefire and withdraws from Ukrainian territory, something which seems very unlikely today, would it be wise to continue to be dependent on Russian oil and gas so long as Vladimir Putin is in power? And even if Putin is not in power, what are the chances that he will be succeeded by a mild-mannered democrat who holds free and fair elections, dismantles the mechanisms of repression that Putin instigated, and allows the rule of law and a free press?
Let's be clear: whoever eventually succeeds Putin is unlikely to be a peace-loving combination of Mohandas Gandhi and Nelson Mandela. When Russia's first and most brutal tsar, Ivan the Terrible, died in 1584, four decades of instability began, culminating in the Time of Troubles (here).
If LNG is to replace Russian gas, where will it come from, without creating a fierce battle with existing Asian LNG customers that will drive up prices further?
New Fortress Energy reckons that global LNG demand is expected to exceed supply by up to 164 million tonnes per annum by 2030 unless additional liquefaction capacity is constructed.
New supplies are urgently needed.
Firstly, the existing big LNG producers are likely to step up to the task, but it will take time. After a seven-year hiatus in new LNG projects following the binge of schemes that went disastrously over budget in the earlier part of this decade, Australia is finally adding new capacity.
Last year, Woodside announced (here) that the final investment decision had finally been taken for the Scarborough project in Western Australia, with first LNG exports projected in 2026. Shell is likely to follow suit with approval for the Crux project this year. That project will see Crux field tied back to Shell's massive Prelude Floating LNG (FLNG) plant. Crux has proven reserves of over 1.6 trillion cubic feet (tcf) (45.3 billion cubic metres) of gas, and finally last month the Prelude FLNG system cranked back into action after an extended period of downtime following a series of operational misfortunes, which we covered here.
The development of Crux will be based around a large production platform and a 165-kilometre subsea pipeline to the Prelude FLNG facility. Great news for South East Asian fabricators. Other Australian projects like Equus, operated by Western Gas, will also likely win funding and approval to proceed. The Equus Gas Project comprises eleven gas and condensate fields in the Carnarvon Basin, about 200 kilometres north-west of Onslow in Western Australia. These fields contain an independently certified resource of more than two tcf (5.663 billion cubic metres) of gas and 42 million barrels of condensate.
One can only hope that the decisions to proceed with Crux and Scarborough will be quickly followed by approval for Inpex's massive but very remote Abadi gas project in the Arafura Sea, which has been stalled after years of arguments with the Indonesian government over how the field should be developed. Similarly, the Russian invasion provides an excellent opportunity for East Timor's Sunrise offshore gas field to finally get the green light for development after two decades of wrangling between lenders, the cash-strapped government in Dili, Woodside, and various other stakeholders.
For Japan and Korea, sourcing LNG from Australia, Indonesia, and East Timor is a no-brainer.
This year Qatar will host the FIFA World Cup, further highlighting the Gulf state's rise to global influence, and its rather inhumane labour laws.
Qatar is already a key LNG supplier to the European market, and delivered around 23 bcm in 2021, around one sixth of Russian deliveries, according to data from S&P Global Commodity Insights. Last year, Qatar met around five per cent of total European gas consumption. Now it wants more.
Asia is Qatar's biggest market for LNG deliveries, with a total of 78.5 bcm delivered in 2021, with India, South Korea, China, and Japan being the biggest buyers, according to S&P.
Qatar is on track to expand its LNG production capacity from its current 106 bcm/year to 174 bcm/year by 2027. Qatar will add a total of six new LNG trains to boost its capacity, and carry it ahead of Australia in the LNG export stakes.
However, Qatari LNG supplies remain vulnerable to geo-political tensions in the Gulf and to the nightmare scenario of the Strait of Hormuz being closed by the Iranians. The Russian invasion of Ukraine has shown us that risks that were previously unthinkable may in fact come to pass.
With the Houthis lobbing explosives into Jeddah and elsewhere, and with Qatar still smarting from the Saudi Arabian and Emirati embargo on the nation in 2018, it makes little sense for Europe to replace dependence on Russia with dependence on another unstable region ruled by autocrats.
Anders Fogh Rasmussen would not approve. FIFA's Gianni Infantini probably would, however.
One of the more surprising developments in the rig market has been American privately held player New Fortress Energy snapping up old rigs to converted to mobile FLNG units.
New Fortress uses modular, mid-size liquefaction technology that it places on jack-up rigs or floating units, which it says enable it to develop LNG projects at much lower cost and with a much faster deployment schedule than the larger FLNG units like Shell's Prelude. Prelude notoriously cost up to US$20 billion to bring on line.
Earlier this year, New Fortress purchased the cylindrical drilling units Sevan Driller and Sevan Brasil — long laid up and originally destined for scrap – from Seadrill for US$22 million. In 2021 New Fortress bought the jackups Maersk Guardian and Maersk Gallant out of lay-up for a total price of US$31 million.
New Fortress has also designed its ISOFlex system, which it says enables standard LNG carriers to discharge LNG into ISO storage containers that can be transported on the back deck of offshore supply vessels and offloaded at container ports or onto trucks for inshore transport.
This vision of smaller LNG production offshore and modular transport ashore is revolutionary, but it is unlikely to be able to compete in terms of scale with the massive gas trains that Qatar and Australia are building.
But the scope of New Fortress' ambition is impressive. It has already signed an agreement (here) with ENI to deploy its innovative "Fast LNG" facility to produce up to 1.4 million tonnes per year of LNG in ENI's associated gas fields off the coast of the Republic of the Congo using the two former Maersk rigs as the production platforms. Using module units removes the construction risk from difficult, high-cost areas like Congo – where skilled labour is in short supply and facilities are limited – to the US.
In December, New Fortress signed a deal to develop Banda gas field with Mauritania's Ministry of Petroleum, Mines and Energy, which would revive a gas-to-power project using the 1.2 tcf (33.98 billion cubic metres) of gas reserves Woodside discovered 60 kilometres off the country's capital in less than 300 metres of water in 2002 (Hawilti coverage here). In 2008, Banda was successfully appraised by Tullow Oil, which declared it commercial in 2012, just before the oil price collapsed, nearly taking down Tullow too. Nobody could get the economics of Banda to stack up before the Russian invasion. It's not an LNG project but I wouldn't be surprised if it became one if the onshore power plant proves problematic.
The gas that New Fortress plans to exploit in Congo and Mauritania has long been known about. Politics and economics stopped it being developed. The Russian invasion has transformed the political and economic landscape for LNG projects.
Stranded gas fields lie everywhere, unloved and undeveloped. With Russia potentially eliminated as a supplier, there's a lot more frontier players who can step up to fill the gap, away from established players.
Upstream is reporting (here) that New Fortress plans to take over the Fortuna gas field in Equatorial Guinea. This field contains potentially 2 tcf (56.63 billion cubic metres) of gas reserves and was originally discovered in 2008. Operator Ophir Energy spent a decade trying to finance development – and failed.
Equatorial Guinea cancelled Ophir's licence in 2019 and efforts to get the field into development ground to a halt. Ophir was subsequently acquired by Medco Energi and in 2019, Fortuna was awarded to Russia's Lukoil.
Now Upstream claims that New Fortress is considering becoming the new operator of Block R in conjunction with Golar.
When Russia invaded Ukraine, New Fortress shares raced up 90 per cent in the course of a few days. Last week, Golar LNG sold one third of its shares in New Fortress Energy for around US$250 million, suggesting it was looking to free up liquidity for a new investment, like in the conversion of an LNG carrier to FLNG, similar to the Hilli Episeyo project that it operates in neighbouring Cameroon, which we covered here.
In a few months, ENI expects to bring the Coral Sul FLNG project on line in deepwater off Mozambique. Last week, Saipem announced (here) that it has been awarded a US$150 million maintenance contract over nine firm years plus one option year for the Coral Sul FLNG.
The success of Coral Sul only highlights the failure of Total and Exxon to develop the rest of Mozambique's deepwater gas discoveries. Total suspended development of its LNG train onshore a year ago. This decision came after Islamic insurgents attacked the town of Palma, just ten kilometres away from the construction site of Total's US$20 billion LNG plant on the Afungi peninsula. The project remains postponed and under force majeure.
ExxonMobil hasn't even approved investment to start its almost identical pair of LNG trains adjacent to Total's site. It wants Total to proceed first with its LNG project to prevent the two projects running simultaneously and overwhelming the limited supply chain and skilled personnel available in the country.
Now that Russia's brutal Wagner Group of mercenaries have been supplanted in Cabo Delgado province by the significantly more competent and less brutal Rwandan Army, assisted by Western special forces, the security situation in northern Mozambique has improved. With gas prices at record highs, there has never been a better time to develop a new LNG plant in East Africa. But first, Total must lift force majeure. Our bet is this will happen this year.
It is not just Mozambique that has massive reserves of stranded deepwater gas. In Tanzania, a decade ago, Shell and Equinor and their partners discovered around 40 tcf (1.13 trillion cubic metres) of gas just north of the Mozambiquan discoveries. Unfortunately, Tanzania's erratic head of state John Magufuli was not able to reach agreement with the European oil companies and spent much of his rule expropriating existing foreign investors in Tanzania. He died of Covid in 2021, after denying it existed.
Magufuli was quickly succeeded by Samia Hassan, who proved a breath of fresh air. She soon made it clear that she wanted to move forward with the LNG development as quickly as possible and kicked off negotiations within a few months of assuming power. There is an excellent interview with Tanzanian Energy Minister January Makamba in Dar-es-Salaam's The Citizen here, which sets out why the government now considers it a priority to secure the US$30 billion project.
Multiple LNG trains will be built at Lindi with capacity to produce 10 million tonnes per annum of LNG. First gas will likely be in 2027 if the government can reach agreement with Shell and Equinor.
There are also big undeveloped deepwater gas resources in the Mediterranean basin, where Israel and Egypt are moving to increase both offshore oil and offshore gas production, whilst Turkey and Cyprus both have large undeveloped discoveries, with geologists believing that there is significant potential for further finds.
Indeed, the Turkish state oil company has invested in four state-of-the-art deepwater drillships to explore, appraise, and develop gas reserves in both the Mediterranean and the Black Sea.
There's no shortage of gas in the world, and we didn't even mention Canada, Namibia or Malaysia. Breaking European dependence on Russia is going to be expensive and painful, especially for Germany. Once new supplies are developed, Russia faces a nightmare scenario that it may only be able to sell its gas to India and China, rather than to its largest existing export market.
Worse, high prices today may result in a glut of gas in 2030, threatening to impoverish Russia and other exporters in future years. Russian democracy in the 1990s was undermined by low commodity prices that left the government of Boris Yeltsin teetering on bankruptcy and dependent on oligarchs for cash, even as they plundered state assets. At the same time, the Russian people suffered a dramatic fall in their standards of living, which made Vladimir Putin's appeal to Russian greatness all the more attractive.
If and when Putin leaves office, it would be bitterly ironic if a gas glut caused by his bloody invasion were to lead to further instability in Russia and prevent a prosperous and vibrant society developing.
Whatever happens, his awful decision to invade Ukraine will shape the energy industry for decades to come, as well as the millions of lives he has impacted directly.
Background Reading
For an excellent paper on the interplay between autocratic regimes and oil revenues see here – Joseph Wright and his co-authors show that when oil wealth increases, autocratic regimes become more resilient to the threat of a new dictatorship, and that oil income increases spending on the military in dictatorships. They also find evidence that higher average oil wealth is associated with reduced prospects for democratisation.
One very useful piece on different gas and LNG measurement units is here. Remember, one million tonnes (LNG) = 48.7 billion cubic feet (gas) = 1.379 bcm (gas), whilst one bcf (gas) = 45,000 cubic metres (LNG).
In case you missed it, last week (here) we covered new developments in subsea mining, the biggest take-over so far this year in the Abu Dhabi marine scene, and the increasingly precarious nature of Eneti's balance sheet as it ramps up investment in wind turbine installation vessel.
More on the Equus gas project of WA is here.
Golar LNG's March presentation gives a lot more detail into the company and into LNG generally here.
