Energy Markets Endure Tumultuous Times

By Neil Campbell

This is a feature story from Issue 3, 2023 of Breakbulk Magazine. Issue 4 – a Latin America special edition – will be published online in mid-July.

A year on from Russia’s invasion of Ukraine and energy markets seem to have weathered a volatile situation – a “global energy crisis” says the International Energy Agency – to establish a new normal, albeit a delicate one. But they remain vulnerable to cross currents of political tension, an unpredictable global economy and erratic demand.

Crude prices, which spiked to over US$120 per barrel after the invasion, have eased to around US$70-80 per barrel for U.S. marker West Texas Intermediate, amid ample stocks and still-tepid demand. And gas prices, which threatened even more volatility given Europe’s reliance on Russian supplies, have settled from a peak of €340 per MWh to €40/MWh for Dutch marker TTF.

A mild winter and increased liquefied natural gas imports, chiefly from the U.S., left continental markets with ample gas in storage as winter ended, easing supply fears for this summer at least.

Demand destruction was also a factor, with OECD European consumption in 2022 down by 70 billion cubic meters, or bcm, nearly 15 percent, on the year. But “the global gas balance is fragile and a number of uncertainties in 2023 exist,” cautioned the IEA.

In oil, the IEA expected demand to bounce back and “accelerate sharply” in 2023, to reach a record 102 million barrels per day. Oanda senior market analyst Craig Erlam saw potential for prices rising in tandem, saying “if most countries avoid recession, then coupled with a strong Chinese recovery, we could see prices rally from here,” but noted that there is “immense uncertainty around the economic outlook.”

Erlam saw potential for OPEC+ countries to meet recovering demand, having trimmed output by 2 million barrels per day last year: “There’s certainly scope for it to meet additional demand, but that ultimately depends on how strong that demand is.” The IEA sees enough output for the first half of the year as OPEC+ production bounces back and U.S. and Canadian output recovers from winter storms, but warned that the market could be tighter in the second half as Chinese demand and seasonal trends boost demand to record levels.


Slowdown in Gas Demand

The IEA’s outlook for gas is for a slight decline in 2023, with OECD Europe seeing a fall of 3 percent as consumption by the gas-fired power sector is displaced by greater renewable and nuclear power output. The agency saw U.S. gas demand easing by around 5 percent in 2023, but Asian demand rising by 3 percent on recovering Chinese demand.

For gas supply, the great unknown is how much gas will come into Europe from Russia. Exports to Europe from Russia fell by 50 percent in 2022, putting “unprecedented pressure” on both European and global gas markets, the IEA said. Falls were even greater in Q422, at nearly 70 percent. LNG supply offset lower Russian volumes in 2022, along with a sharp fall in consumption by energy-intensive users and power generators. Russian flows to Europe over the next few years are impossible to predict – they could even drop to zero. One bank analyst told Breakbulk he expected a “cold war” in energy relations with Russia, with volumes taking years to recover, and probably only partially at best.

Despite the upheaval of global energy markets and the threat of recession in 2022, investment remained robust. The industry saw upstream oil and gas spending rise to just under US$500 billion, up nearly 40 percent on 2021, said a report by the International Energy Forum, or IEF, and S&P. This was partly driven by higher costs, but activity such as drilling was also up.

The IEF/S&P report stressed, however, that investment needs to rise further to meet supply needs and avoid a shortfall that would risk higher energy prices and endanger security of supply. It said investment of US$4.9 trillion will be needed by 2030 to match demand, or US$640 billion per year by 2030.


Money in the Coffers

Oil and gas companies certainly have funds. High energy prices generated bumper profits last year – and the issue now is moving from availability of capital to allocation of capital. Shell and BP earned US$40 billion and US$28 billion in 2022 respectively, for example, but were outstripped by state-owned oil company Saudi Aramco, which made net profits of US$161 billion, up from US$121 billion in 2021.

Aramco has increased capital expenditure in energy projects accordingly, by 18 percent to US$36 billion. The firm said: “Given that we anticipate oil and gas will remain essential for the foreseeable future, the risks of underinvestment in our industry are real – including contributing to higher energy prices.” Saudi Aramco said it is investing in extra oil, gas and chemical production, but also US$1.5 billion in new lower carbon technologies. It expected to invest US$45-55 billion this year and increase capex until mid-decade.

Key investments including increasing productivity at existing fields, the completion of the Hawiyah Unayzah gas storage reservoir, and investments Energy in refinery and petrochemical projects in China and Saudi Arabia. The firm also began construction on its US$7 billion Shaheen petrochemical plant in South Korea through subsidiary S-Oil.

But oil and gas were not the only projects. With the Saudi energy ministry, Aramco also announced plans to build one of the world’s largest carbon capture and storage hubs at Jubail on the east coast of Saudi Arabia, with partners Linde and Schlumberger. When complete in 2027, it will be able to store 9 million tons per year of carbon dioxide, and the country eventually aims to capture 44 million tons per year by 2035.

The kingdom is also boosting spending on renewables as it targets generating half of its electricity from green sources by end-decade. It is spending US$9bn on 13 renewable energy projects with total capacity of 11.4 GW.


LNG Powering Middle East Projects

Elsewhere in the Middle East, Qatar is embarking on the LNG industry’s largest ever project – the North Field Expansion, which will cost up to US$50 billion. This will see production from Qatar rise by two-thirds from its current 77 million tons per annum (mtpa) to 110 mtpa by 2025 in a first phase – the US$28.75 billion North Field East (NFEast) project, which includes four mega-trains of 8 mtpa each alongside carbon capture to reduce emissions. State-owned Qatargas has a 75 percent stake in NFEast and will partner with Shell, ExxonMobil, TotalEnergies and Eni in this stage.

Qatari LNG output will then increase to 126 mtpa by 2027 on completion of the second, North Field South (NFS) LNG project, which centres on two mega trains. Although this is still pre-Final Investment Decision (FID), the decision is expected in the first half of the year. Qatargas will hold 75 percent in NFS, with partners TotalEnergies, Shell and ConocoPhillips.

Alongside Qatar’s North Field Expansion in the first half, ADNOC’s Fujairah LNG in the UAE could reach FID in the second half of 2023, WoodMac said. This would add 9.6 mtpa of output to the country’s existing 6 mtpa plant at Das Island, with production set to start in 2027.

Global LNG output is set for a wave of FIDs in 2023-24, said WoodMac, after around 28 mtpa of liquefaction projects reached that stage last year. Some 200 mtpa of capacity is seeking FID, which with capacity costing around US$10 billion per 10 mtpa of output suggests investment of US$200 billion.


U.S. Ready for Project Boom

The U.S. also has several mega LNG projects that have just reached or are nearing FID as they have gained offtake commitments sufficient to raise debt.

Key U.S. developments are Sempra’s 13 mtpa Port Arthur LNG facility in Texas, which Sempra said on March 6 had reached FID for its first US$13 billion phase. This will involve two 6.5mtpa LNG trains and two LNG storage tanks, plus related facilities. The trains are due on stream in 2027-8. Some 10.5 mtpa of the total 13 mtpa already has offtake commitments. Sempra said it is also “actively marketing and developing” a second phase of the same size. Another U.S. LNG mega project to reach FID in March was the second phase of Venture Global’s Plaquemines $21bn LNG export project in Louisiana, which will produce 20 mtpa once on stream.

The U.S. is also forging ahead with a mega project in the oil sector, not without controversy. President Biden in March approved ConocoPhillips’ $8bn Willow development on Alaska’s North Slope, which will produce 576 million barrels of oil over 30 years. Environmentalists have dubbed the project “a carbon bomb.”

Other key oil investments include TotalEnergies’ $10bn Lake Albert project in Uganda, which reached FID last February and involves development of the Tilenga and Kingfisher upstream projects in Uganda and the 1,400-kilometre East African Crude Oil Pipeline in Uganda and Tanzania. Output of up to 230,000 barrels per day is due in 2025. TotalEnergies and Uganda have also signed an MOU to develop 1GW of renewable energy.

In the UK, the US$9bn Equinor-operated Rosebank project in the West of Shetland area – the largest undeveloped field in the North Sea – is set to reach FID in 2023. It is due to produce first oil in Q426, with subsea installation starting in 2024, well drilling in 2025 and the floating production and storage and offloading vessel arriving in Q226. It will produce up to 69,000 barrels per day at peak, with gas exported via a new pipeline link.

PHOTO: Qatar’s NFE gas development. CREDIT: TotalEnergies