Welcome to another Energy Source. Derek Brower here in New York.
Energy prices are on the skids. Brent fell again yesterday, threatening to drop below $80 a barrel. Chinese lithium prices are down. And natural gas prices on both sides of the Atlantic are tumbling: in Europe, they’re now well below the levels since Russia began slashing supplies just before its full-scale invasion of Ukraine. And in the US, the Henry Hub gas benchmark sank below $2 per mn British thermal units at one stage yesterday. And that’s even with the return to action of the Freeport LNG export plant in Texas, a big domestic consumer of the fuel. (If you missed Justin’s lovely piece on the troubled gas factory, do have a read.)
For US natural gas, that marks a 79 per cent fall in the past six months: a record.
I guess that’s what happens when winter doesn’t happen — an alarming notion, for obvious climate reasons.
If you’re a petro-tyrant relying on high prices for all this stuff to help finance your brutal invasion of a neighbouring country, it should be bad news. And yet, with tomorrow marking one year since the eve of Vladimir Putin ordering his forces into Ukraine (again), signs of an end are scant. (We’ll be running a special live blog on FT.com to mark the anniversary on Friday so stay tuned for that.) And Europe should not get too comfortable with its energy disposition yet, the International Energy Agency’s chief told the Financial Times this morning.
“Russia played the energy card and it did not win . . . but it would be too strong to say that Europe has won the energy battle already,” Fatih Birol said.
Russia and energy, a year on, is the subject of our main note from Justin.
In Data Drill, Amanda tots up all the investment coming down the pipeline for new American LNG export capacity. Developers will hope those cheap natural gas feedstock prices stick around for a few years.
Do send in pictures of winter where you are. — Derek
Energy markets: a year into the war in Ukraine
It has been a year since Russia launched its full-scale invasion of Ukraine, plunging Europe into war and throwing energy markets into disarray.
The war caused crude prices to jump, sent natural gas prices to all-time highs and scrambled decades-old energy trading routes that transmitted enormous economic and geopolitical power. While energy markets have calmed after the initial disruption, big questions remain about the lasting impacts of the war. Here are three on our mind:
1. What is the future of Russian oil?
After rising sharply in the months after the invasion, Brent crude prices have stabilised at about $80 a barrel in recent weeks.
The post-invasion price surge did not endure in large part because Russian crude has continued to flow without the big disruptions feared at the onset of the war. This is mostly because European and US policymakers were clear-eyed about the global economy’s reliance on oil from Russia, one of the world’s top three producers along with the US and Saudi Arabia. Sanctions have been designed to keep oil flowing, although largely to Asian markets, while trying to limit the amount of petrodollars available to Putin’s war effort.
The Russian president is still profiting from the oil trade, more so than many would like, but the blowback has been contained for western economies.
And there are cracks starting to show in Russia’s oil supply system. The country said earlier this month that it was cutting 500,000 barrels a day of output, or about 5 per cent of the total.
The big question is whether this marks the opening salvo in a weaponisation of oil supplies or something that was forced on Moscow.
A top Biden administration official told me last week that their view is that Russia was forced into the cuts because the nation “can’t find customers” for all of its production and has “tens of millions of barrels of unsold oil”. The official added that Russia was “desperate for revenue” and not in a position to weaponise oil.
Oil markets have been relatively calm since the announced cuts, indicating there is not a broad fear that oil markets are about to become a new battleground.
Why? The problem for Putin is that Russia is not able to target the oil cuts in the way it has with gas, making it far riskier to deploy. Soaring oil prices hurt Beijing at least as much as Washington.
Longer term, there is a risk that Russian oil output will suffer after the exodus of western investment and expertise. If its supply does start to slide, it will in theory free up market share for other major oil suppliers such as the US and big Middle East Opec-plus countries Saudi Arabia and the UAE.
2. What’s going to happen to all of that Russian gas?
Early in the war, Putin hoped that cutting off most of Europe’s gas supply would trigger a crippling energy crisis and weaken support for Ukraine.
The gambit has backfired. The mostly balmy winter has helped keep storage levels elevated, while painfully high prices have kept demand down. Europe still faces a challenge keeping itself supplied, but liquefied natural gas deliveries from the US, Qatar and elsewhere should do the job for the foreseeable future. In other words, Europe has shown it can get by, if not exactly thrive, without Russian gas.
Putin, meanwhile, has lost his most important customer for his most important industry. It’s unlikely Russia will ever fully make up for the loss of the European gas trade, which delivered tens of billions of dollars into the Russian economy.
Russia is looking to China as the most obvious replacement. There is already a major pipeline from eastern Russia into China, called the Power of Siberia. But the gasfields that fed the European pipelines are not linked to Chinese markets. Russia wants to change this, but Beijing now has enormous leverage over any such project and it’s not clear it has the appetite to significantly increase its reliance on Russian gas. Does it see Russia’s weaponisation of fuel as an opportunity or cautionary tale?
Could gas flows resume into Europe? Potentially after the war ends, and Putin is pushed out of power. But even then probably only at significantly lower levels. Europe is reconstituting its energy mix around long-term LNG commitments and renewables, not Russian fuel.
3. How will it influence the shift to cleaner fuels?
Russia’s war in Ukraine has fundamentally changed the conversation around energy and climate change, pushing energy security to the fore in a way it had not been for decades.
That has undoubtedly helped fossil fuel suppliers. US President Joe Biden acknowledged in his State of the Union address in January that the US would be burning fossil fuels for many years to come — a reversal in rhetoric. The oil majors, newly flush with cash from high prices, are now finding a more receptive audience among policymakers and investors in arguing that their core oil and gas businesses not only remain viable but have room to grow.
Yet the focus on energy security is also accelerating clean energy development. Creating homegrown clean energy is as much at the heart of the Biden administration’s Inflation Reduction Act as combating climate change. That law is set to pump hundreds of billions of dollars into new green projects in the US. Europe is boosting its own clean energy incentives to keep companies from fleeing to the US — and to plug the gap left by lost Russian gas.
More than $100bn in spending on new US LNG projects is in the pipeline for the next five years, according to an analysis by Wood Mackenzie.
The flood of investment will help drive US LNG production to more than 280mn tonnes per year by the end of the decade, more than triple its current capacity and well ahead of second-place Qatar.
The US is expected to become the largest exporter of LNG in 2023. Last year was a record for long-term contracts in the country, with 65mn tonnes per year in exports agreed to, more than triple the 2021 amount. Despite the growth in supply, the global market will remain tight through to the end of 2030 as Asia and Europe increase their consumption of the fuel.
While the outlook for US LNG is strong, inflation and competition among developers to keep prices low are squeezing returns. Project costs in the Gulf Coast are up 20 per cent compared with the past five years, according to Wood Mackenzie.
“As developers continue to push more projects forward, competition for service contracts will rise, creating a squeeze on both workforce and material prices,” said Sean Harrison, an analyst at Wood Mackenzie. “This could cause further cost inflation, along with delays to some projects.”