The history of OPEC and how it came to wield such power is one of two entities. On one hand, is OPEC – a coalition of the world’s largest oil producers. On the other, America, and to a lesser extent Europe, dependent on the former for energy. It worked in the 1970s, when the oil shocks proved the potency of supply restrictions. In the decades since then, OPEC has lost a lot of power. Sources of oil and gas have diversified. The USA is now on track to be a net exporter of crude and natural gas. Europe is charging towards a future that diminishes the need for hydrocarbons. And OPEC is no longer the biggest boy in town; Russia is now the world’s single largest oil producer – and has been China’s top oil supplier for several years now.
Back in 2015, as the energy industry was grappling with the aftermath of plunging prices, Russia stated that it had ‘no intention of cooperating with Saudi Arabia.’ Yet, just last week, the Saudi King Salman visited Russia. A joint US$1 billion fund was announced to invest in energy projects. In the space of two years, Russia has gone from OPEC’s main competitor to an unofficial co-president, brokering the current supply deal that has been credited for keeping oil prices stable (or at least, not plunging).
With Donald Trump’s presidency in the USA, former allies and enemies are looking to form new alliances. Even Angela Merkel was forced to admit that the EU now had to consider ‘a future without the USA.’ For Russia, the American presidency has been extremely challenging to work with, especially with the recent Congress-led sanctions. This bites down hard on Russia’s ability to do business. With the EU also threading a delicate relationship, Russia has to find new friends.
King Salman of Saudi Arabia does not do courtesy visits. His arrival in Russia – the first ever for a Saudi monarch – is a geopolitical earthquake.
It seals a strategic energy partnership that began a year ago, which has since blossomed into a new bromance – with Saudi Energy Minister Khalid al-Falih and Russian Energy Minister Alexander Novak presenting a united front. The announced US$1 billion fund is reportedly merely the ‘tip of the iceberg’, with more cooperation and joint ventures to be announced. Russia could use a lot of financial help in exploiting Arctic hydrocarbon resources – and with financial flows disrupted by American sanctions, can turn to Saudi Arabia’s deep pockets. This fits into the Saudi roadmap to expand its own infrastructure and industrial sector to diversify the economy. It also extends far beyond energy – Saudi Arabia agreed to a massive military equipment purchase from Russia, a fundamental shift in its military policy that has always sourced from the US and UK.
For Saudi Arabia, it is also an opportunity to win back power for OPEC. Cooperation with Russia is cooperation with OPEC by proxy. There are rumblings that this Saudi-Russia friendship could eventually lead to Russia becoming an official member of OPEC. It is halfway there already. The current OPEC supply freeze would not have been possible without Russian cooperation, and their help in convincing other major non-OPEC producers in Central Asia to reduce production. With the March 2018 expiry looming for the current deal, Russia is already signalling that it would like to extend the deal.
Alone, Saudi Arabia would face a challenge in this – there is a lot of conflict with other members like Iran, Iraq and Qatar. But add in Russia, and suddenly Saudi Arabia’s position becomes a whole lot more powerful, as it is able to throw its weight around like the good ol’ days in the 1970s. With US crude production rising, the main threat to Russian and Saudi oil fortunes is no longer each other, but America. A cooperation pact makes perfect sense. Which is exactly why this is now happening.
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Headline crude prices for the week beginning 9 September 2019 – Brent: US$61/b; WTI: US$56/b
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Detailed market research and continuous tracking of market developments—as well as deep, on-the-ground expertise across the globe—informs our outlook on global gas and liquefied natural gas (LNG). We forecast gas demand and then use our infrastructure and contract models to forecast supply-and-demand balances, corresponding gas flows, and pricing implications to 2035.Executive summary
The past year saw the natural-gas market grow at its fastest rate in almost a decade, supported by booming domestic markets in China and the United States and an expanding global gas trade to serve Asian markets. While the pace of growth is set to slow, gas remains the fastest-growing fossil fuel and the only fossil fuel expected to grow beyond 2035.Global gas: Demand expected to grow 0.9 percent per annum to 2035
While we expect coal demand to peak before 2025 and oil demand to peak around 2033, gas demand will continue to grow until 2035, albeit at a slower rate than seen previously. The power-generation and industrial sectors in Asia and North America and the residential and commercial sectors in Southeast Asia, including China, will drive the expected gas-demand growth. Strong growth from these regions will more than offset the demand declines from the mature gas markets of Europe and Northeast Asia.
Gas supply to meet this demand will come mainly from Africa, China, Russia, and the shale-gas-rich United States. China will double its conventional gas production from 2018 to 2035. Gas production in Europe will decline rapidly.LNG: Demand expected to grow 3.6 percent per annum to 2035, with market rebalancing expected in 2027–28
We expect LNG demand to outpace overall gas demand as Asian markets rely on more distant supplies, Europe increases its gas-import dependence, and US producers seek overseas markets for their gas (both pipe and LNG). China will be a major driver of LNG-demand growth, as its domestic supply and pipeline flows will be insufficient to meet rising demand. Similarly, Bangladesh, Pakistan, and South Asia will rely on LNG to meet the growing demand to replace declining domestic supplies. We also expect Europe to increase LNG imports to help offset declining domestic supply.
Demand growth by the middle of next decade should balance the excess LNG capacity in the current market and planned capacity additions. We expect that further capacity growth of around 250 billion cubic meters will be necessary to meet demand to 2035.
With growing shale-gas production in the United States, the country is in a position to join Australia and Qatar as a top global LNG exporter. A number of competing US projects represent the long-run marginal LNG-supply capacity.Key themes uncovered
Over the course of our analysis, we uncovered five key themes to watch for in the global gas market:
Challenges in a growing market
Gas looks the best bet of fossil fuels through the energy transition. Coal demand has already peaked while oil has a decade or so of slowing growth before electric vehicles start to make real inroads in transportation. Gas, blessed with lower carbon intensity and ample resource, is set for steady growth through 2040 on our base case projections.
LNG is surfing that wave. The LNG market will more than double in size to over 1000 bcm by 2040, a growth rate eclipsed only by renewables. A niche market not long ago, shipped LNG volumes will exceed global pipeline exports within six years.The bullish prospects will buoy spirits as industry leaders meet at Gastech, LNG’s annual gathering – held, appropriately and for the first time, in Houston – September 17-19.
Investors are scrambling to grab a piece of the action. We are witnessing a supply boom the scale of which the industry has never experienced before. Around US$240 billion will be spent between 2019 and 2025 on greenfield and brownfield LNG supply projects, backfill and finishing construction for those already underway.50% to be added to global supply
In total, these projects will bring another 182 mmtpa to market, adding 50% to global supply. Over 100 mmtpa is from the US alone, most of the rest from Qatar, Russia, Canada, and Mozambique. Still, more capital will be needed to meet demand growth beyond the mid-2020s. But the rapid growth also presents major challenges for sellers and buyers to adapt to changes in the market.
There is a risk of bottlenecks as this new supply arrives on the market. The industry will have to balance sizeable waves of fresh sales volumes with demand growing in fits and starts and across an array of disparate marketplaces – some mature, many fledglings, a good few in between.
India has built three new re-gas terminals, but imports are actually down in 2019. The pipeline network to get the gas to regional consumers has yet to be completed. Pakistan has a gas distribution network serving its northern industrial centres. But the main LNG import terminals are in the south of the country, and the commitment to invest in additional transmission lines taking gas north is fraught with political uncertainty.
China is still wrestling with third-party access and regulation of the pipeline business that is PetroChina’s core asset. Any delay could dull the growth rate in Asia’s LNG hotspot. Europe is at the early stages of replacing its rapidly depleting sources of indigenous piped gas with huge volumes of LNG imports delivered to the coast. Will Europe’s gas market adapt seamlessly to a growing reliance on LNG – especially when tested at extreme winter peaks? Time will tell.
The point-to-point business model that has served sellers (and buyers) so well over the last 60 years will be tested by market access and other factors. Buyers facing mounting competition in their domestic market will increasingly demand flexibility on volume and price, and contracts that are diverse in duration and indexation. These traditional suppliers risk leaving value, perhaps a lot of value, on the table.
In the future, sellers need to be more sophisticated. The full toolkit will have a portfolio of LNG, a mixture of equity and third-party contracted gas; a trading capability to optimise on volume and price; and the requisite logistics – access to physical capacity of ships and re-gas terminals to shift LNG to where it’s wanted. Enlightened producers have begun to move to an integrated model, better equipped to meet these demands and capture value through the chain. Pure traders will muscle in too.
Some integrated players will think big picture, LNG becoming central to an energy transition strategy. As Big Oil morphs into Big Energy, LNG will sit alongside a renewables and gas-fired power generation portfolio feeding all the way through to gas and electricity customers.
LNG trumps pipe exports...
...as the big suppliers crank up volumes