The idea is to establish a full network of storage and pipeline infrastructure – possibly around Tokyo Bay – with full third-party access and transparency by 2025, the first LNG trading hub in the world.
That’s the idea, anyway, as Japan flexes its muscle as the largest consumer of liquefied natural gas (LNG) in a bid to move the LNG market in Asia forward. The end goal is to establish Japan as the centre of Asian trade, creating a Japan benchmark price as a reference for the rest of continent; but for now, the current LNG supply glut is enabling Japan to take some bold steps forward today.
Japan’s hunger for LNG has driven much of the market over the past two decades, establishing long-term contracts locked in over decades at premium prices over the rest of the world, creating the so-called Asian premium for LNG. Japan was largely happy to pay this, but the contracts also locked in long-term price tags – requiring rates of, say, US$12-16 mmBtu for a 20-year Qatar LNG contract. Meanwhile, in the spot market, new gas from Australia and US shale has driven Asian spot prices down to US$4 mmBtu. That’s a huge gap and Japan is not happy about it.
It has clout. As the largest LNG importer for the foreseeable future, Japan can (and has) demanded revisions to contracts, beyond just lower prices. Also on the chopping block are clauses restricting shipments to specific ports, resale of shipments and removing the long-standing tradition of pegging LNG to crude prices. It also wants to move away for multi-decade contracts to shorter ones linked to spot LNG prices. All these little moves are setting the stage for an eventual Japan LNG hub – freeing up the market away from a restrictive, opaque one to being more transparent and dynamic. Japan’s moves have also emboldened other Asian LNG buyers – China, India and South Korea have all renegotiate long-term supply contracts recently.
The option to re-sell is particularly important, as it underpins the entire idea of a trading hub. In May, Tokyo Electric Power and Chubu Electric Power’s joint venture Jera Co inked a deal to re-sell up to 1.5 million metric tons of LNG to France’s Electricite de France for a period of 30 months beginning June 2018 at (cheaper) European prices. Instead of merely absorbing surplus fuel as required by their long-term contracts, the deal allows the two Japanese buyers to become sellers (albeit at a loss). It is the first such deal for a Japanese buyer, and there is more to come according to Jera.
Sellers, particularly in the Middle East, aren’t happy, but the current supply glut has switched the power dynamics to side of the buyers. With the gas flood expected to continue for three to four years, Japan has a small window to fundamentally shift the market now, before the supply/demand dynamics change again. And it is taking full advantage of that opportunity.
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In 2021, the makeup of renewables has also changed drastically. Technologies such as solar and wind are no longer novel, as is the idea of blending vegetable oils into road fuels or switching to electric-based vehicles. Such ideas are now entrenched and are not considered enough to shift the world into a carbon neutral future. The new wave of renewables focus on converting by-products from other carbon-intensive industries into usable fuels. Research into such technologies has been pioneered in universities and start-ups over the past two decades, but the impetus of global climate goals is now seeing an incredible amount of money being poured into them as oil & gas giants seek to rebalance their portfolios away from pure hydrocarbons with a goal of balancing their total carbon emissions in aggregate to zero.
Traditionally, the European players have led this drive. Which is unsurprising, since the EU has been the most driven in this acceleration. But even the US giants are following suit. In the past year, Chevron has poured an incredible amount of cash and effort in pioneering renewables. Its motives might be less than altruistic, shareholders across America have been particularly vocal about driving this transformation but the net results will be positive for all.
Chevron’s recent efforts have focused on biomethane, through a partnership with global waste solutions company Brightmark. The joint venture Brightmark RNG Holdings operations focused on convert cow manure to renewable natural gas, which are then converted into fuel for long-haul trucks, the very kind that criss-cross the vast highways of the US delivering goods from coast to coast. Launched in October 2020, the joint venture was extended and expanded in August, now encompassing 38 biomethane plants in seven US states, with first production set to begin later in 2021. The targeting of livestock waste is particularly crucial: methane emissions from farms is the second-largest contributor to climate change emissions globally. The technology to capture methane from manure (as well as landfills and other waste sites) has existed for years, but has only recently been commercialised to convert methane emissions from decomposition to useful products.
This is an arena that another supermajor – BP – has also made a recent significant investment in. BP signed a 15-year agreement with CleanBay Renewables to purchase the latter’s renewable natural gas (RNG) to be mixed and sold into select US state markets. Beginning with California, which has one of the strictest fuel standards in the US and provides incentives under the Low Carbon Fuel Standard to reduce carbon intensity – CleanBay’s RNG is derived not from cows, but from poultry. Chicken manure, feathers and bedding are all converted into RNG using anaerobic digesters, providing a carbon intensity that is said to be 95% less than the lifecycle greenhouse gas emissions of pure fossil fuels and non-conversion of poultry waste matter. BP also has an agreement with Gevo Inc in Iowa to purchase RNG produced from cow manure, also for sale in California.
But road fuels aren’t the only avenue for large-scale embracing of renewables. It could take to the air, literally. After all, the global commercial airline fleet currently stands at over 25,000 aircraft and is expected to grow to over 35,000 by 2030. All those planes will burn a lot of fuel. With the airline industry embracing the idea of AAF (or Alternative Aviation Fuels), developments into renewable jet fuels have been striking, from traditional bio-sources such as palm or soybean oil to advanced organic matter conversion from agricultural waste and manure. Chevron, again, has signed a landmark deal to advance the commercialisation. Together with Delta Airlines and Google, Chevron will be producing a batch of sustainable aviation fuel at its El Segundo refinery in California. Delta will then use the fuel, with Google providing a cloud-based framework to analyse the data. That data will then allow for a transparent analysis into carbon emissions from the use of sustainable aviation fuel, as benchmark for others to follow. The analysis should be able to confirm whether or not the International Air Transport Association (IATA)’s estimates that renewable jet fuel can reduce lifecycle carbon intensity by up to 80%. And to strengthen the measure, Delta has pledged to replace 10% of its jet fuel with sustainable aviation fuel by 2030.
In a parallel, but no less pioneering lane, France’s TotalEnergies has announced that it is developing a 100% renewable fuel for use in motorsports, using bioethanol sourced from residues produced by the French wine industry (among others) at its Feyzin refinery in Lyon. This, it believes, will reduce the racing sports’ carbon emissions by an immediate 65%. The fuel, named Excellium Racing 100, is set to debut at the next season of the FIA World Endurance Championship, which includes the iconic 24 Hours of Le Mans 2022 race.
But Chevron isn’t done yet. It is also falling back on the long-standing use of vegetable oils blended into US transport fuels by signing a wide-ranging agreement with commodity giant Bunge. Called a ‘farmer-to-fuelling station’ solution, Bunge’s soybean processing facilities in Louisiana and Illinois will be the source of meal and oil that will be converted by Chevron into diesel and jet fuel. With an investment of US$600 million, Chevron will assist Bunge in doubling the combined capacity of both plants by 2024, in line with anticipated increases in the US biofuels blending mandates.
Even ExxonMobil, one of the most reticent of the supermajors to embrace renewables wholesale, is getting in on the action. Its Imperial Oil subsidiary in Canada has announced plans to commercialise renewable diesel at a new facility near Edmonton using plant-based feedstock and hydrogen. The venture does only target the Canadian market – where political will to drive renewable adoption is far higher than in the US – but similar moves have already been adopted by other refiners for the US market, including major investments by Phillips 66 and Valero.
Ultimately, these recent moves are driven out of necessity. This is the way the industry is moving and anyone stubborn enough to ignore it will be left behind. Combined with other major investments driven by European supermajors over the past five years, this wider and wider adoption of renewable can only be better for the planet and, eventually, individual bottom lines. The renewables ball is rolling fast and is only gaining momentum.
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