Hello and welcome back to Energy Source.
China’s president Xi Jinping is in Moscow meeting with Vladimir Putin this week in a big show of political support as Russia’s stand-off with the west over its invasion of Ukraine intensifies. On the economic front, the country’s oil and gas ties will be at the top of the agenda, highlighting how the war is scrambling the global energy order.
Putin needs China to keep buying more of Russia’s fossil fuels to help offset the economic damage from western oil and fuel sanctions and the loss of Russia’s lucrative natural gas trade with Europe. Putin will probably press for firmer commitments from Xi on gas pipeline deals, or maybe assistance to help keep oil and gas flowing in the face of sanctions.
China’s rising oil and gas consumption means it is in the market for new supplies, and the country’s refiners have been taking advantage of western sanctions to hoover up cheap Russian crude. But Putin’s need for more Chinese customers will give Xi immense leverage in the negotiations.
Unlikely to be on the agenda between the leaders is climate change, despite an alarming United Nations report yesterday saying the Paris climate goals of limiting warming to 1.5C were all but out of reach. Amanda has more on that below.
Also, Myles talks to Jeff Martin, chief executive of Sempra Energy, which yesterday committed to building a new multibillion-dollar LNG export project on the Texas coast — another win for the US, and maybe also European energy security. But a tough notion to square on the same day the world’s leading climate experts warned that CO₂ emissions from already existing fossil fuel infrastructure would, if not abated, scupper efforts to prevent more than 1.5C of global warming.
Thanks for reading. — Justin
PS Join us for the FT’s Commodities Global Summit today and tomorrow to hear from executives at Trafigura, Gunvor, Mercuria, Vitol, and more. Register today to participate online or in-person.
Sempra hits the go button on Port Arthur LNG
America’s liquefied natural gas armada is about to get bigger (again).
Sempra Energy yesterday greenlighted its $13bn Port Arthur LNG export terminal on the Texas Gulf Coast.
The 13.5mn tonne per year “phase 1” facility — expected to come online by 2028 — will add another roughly 10 per cent to the capacity of existing projects and those under construction.
Here are some takeaways from my conversation with Sempra boss Jeff Martin:
The war in Ukraine has supercharged US LNG
Port Arthur is the third major project to reach “final investment decision”, the crucial LNG industry project milestone, since the Kremlin launched its full-scale invasion of Ukraine in February 2022.
Cheniere pushed forward with its Corpus Christi expansion last June. Venture Global greenlighted its Louisiana Plaquemines facility last week. And Next Decade is set to give the final go-ahead to its Rio Grande project by the end of June.
US LNG export capacity stood at about 87mn tonnes/year last December. By 2028 it will be more than 150mn t/y.
“The combination of the war in Ukraine and the second war really — which was on the energy markets of Europe — has really created a very significant role for LNG generally and US LNG specifically,” said Martin.
Private equity is piling into the LNG game . . .
Port Arthur will cost a chunky $13bn to build: $6.8bn in debt financing and $6.2bn in equity.
A big portion of the equity side, Sempra announced yesterday, will come from private equity giant KKR, which will take a stake of anywhere between 25 and 49 per cent of the project’s first phase (largely through its Global Infrastructure Investors IV fund). ConocoPhillips will hold another 30 per cent, leaving Sempra itself with 20 to 30 per cent.
It marks another big step into US LNG infrastructure for private equity, which has helped bankroll much of the sector’s expansion.
“The whole goal is to source the lowest cost of capital,” said Martin.
“So from our standpoint, we’ve really put together a model capital structure, where you’ve got the anchor participants with Sempra and ConocoPhillips and you’re able to source additional pockets of capital through the KKR brand.”
How long can the party last?
But even as US LNG hits its stride, a range of risks hang over its longer term prospects.
Is Russian supply to Europe gone forever, or could it start piping gas west again? When will Europe’s climate goals negate its desire to import natural gas — and its willingness to lock itself into long-term deals?
In Houston just two weeks ago, European LNG buyers and US sellers sparred over how “long-term” contracts needed to be. Europeans are loath to be locked in for the long haul. But without lengthy financial commitments the pricey economics of LNG projects don’t work.
Sempra has sold out its initial capacity through deals with big European buyers including Germany’s RWE and Engie in France. And Asian demand has a lot of headroom if coal-fired power is to be displaced.
But going forward, European buyers are looking increasingly skittish as they try to square energy security concerns with climate targets. It was just three years ago that Engie scuppered a $7bn LNG deal with Next Decade after the French government raised concerns about US gas’s methane emissions.
“It’s our job to make sure that we’re certificating natural gas upstream; we’re making sure we’re reducing fugitive emissions wherever possible; we’re sourcing renewables to power our liquefaction facilities; and even . . . sequestering carbon underground,” said Martin.
Yet whatever LNG’s efforts to clean up its image, the announcement of a major new fossil fuel export facility on the day the UN warned the world was on the brink of a climate catastrophe is likely to raise more than a few eyebrows. (Myles McCormick)
Data Drill
The window of opportunity to secure a liveable and sustainable future is rapidly closing, warns the latest report from the UN Intergovernmental Panel on Climate Change.
The report brings together six IPCC studies, which will serve as an important reference for leaders at the COP28 climate conference in November. With the next UN assessment not expected until the end of the decade, yesterday’s report has been hailed as a final warning to act swiftly on climate change.
The report found global warming will “more likely than not” exceed 1.5C even under the lowest emissions scenarios in the near-term. Current policies put the world on track for warming of 3.2C in 2100.
“Almost irrespective of our emissions choices in the near-term, we will probably reach 1.5C in the first half of the next decade,” said Peter Thorne, one of the authors of the report. “The real question is whether our will to reduce emissions quickly means we reach 1.5 degrees — maybe go a little bit over and then come back down — or whether we go blasting through 1.5 degrees, go through even two degrees and keep on going.”
No part of the world will be left unscathed by rising temperatures. The IPCC expects heatwaves, droughts, and wildfires to become more frequent. Once-in-a-century flooding is expected to occur at least annually on many coasts by the end of the century.
Still, the most vulnerable will disproportionately bear the brunt of climate change. The IPCC found that in the past decade, human mortality from floods, droughts, and storms were 15 times higher in highly vulnerable regions, which were often poorer, developing countries, compared to regions of low vulnerability.
The authors call for more political and financial commitments, but say inexpensive tools already exist for climate change adaptation and mitigation. Average annual adaptation and mitigation financing will need to scale up three to six times by 2030 to keep warming to 1.5C to 2C, the IPCC estimates.
UN secretary-general António Guterres called on G20 members yesterday to commit to fast-tracking efforts on climate, including commitments to stop building new coal plants and funding new oil and gas. Guterres also called on oil and gas executives to present transition plans with provisions to phase out fossil fuels and scale up renewables.
“The climate time-bomb is ticking, but today’s IPCC report is a how-to guide to defuse the climate time-bomb. It is a survival guide for humanity,” Guterres said. (Amanda Chu)
Power Points
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The banking crisis will inflict minimal damage to energy and metal markets, say the world’s largest traders.
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Europe’s energy-intensive industries survived a winter of peak power prices but economic challenges remain.
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European solar companies warn the EU’s industrial plan will hamper its clean energy transition.
Energy Source is written and edited by Derek Brower, Myles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg. Reach us at [email protected] and follow us on Twitter at @FTEnergy. Catch up on past editions of the newsletter here.
