Easwaran Kanason

Co - founder of NrgEdge
Last Updated: May 16, 2020
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Business Trends

Qatar, in size, is only 0.5% the land/ocean mass of Saudi Arabia. Yet, despite its size, it punches well above its weight in the international arena, just like its neighbour. Most of this is down to one thing: liquefied natural gas. Qatar is the world’s leading LNG producer and exporter in the world, and that vast wealth has fuelled the dramatic transformation of its economy since 1996 when the first shipment of Qatari LNG set sail for Japan.

But uneasy lies the crown. There are usurpers to the throne. Australia, after over a decade of overstuffed budgets and overextended deadlines, is hot on Qatar’s heels. In some months of 2019, Australian LNG production and exports actually exceeded Qatar’s. And coming up both Australia and Qatar’s back rapidly is the US. The shale revolution not only transformed US oil industry; it did the same for the US natural gas industry as well. The abundance of onshore natural gas liquids has fuelled an LNG export boom in the US, with some two dozen projects in various states of completion and development. In 2019, the US accounted for more than half of new liquefaction capacity added worldwide. In the same year, the US leapfrogged Malaysia as the third largest LNG exporter in the world, and by 2025, its LNG production capacity could reach almost 15 bcf/d – eclipsing both Qatar and Australia.

The competition may be heating up, but that will not diminish Qatar’s importance. With its recent moves to tap into the vast natural gas resources in its offshore North Field and securing infrastructure though new deals for LNG ships, Qatar is prepared to defend its market share, which props up its riches. It is, after all, the Saudi Arabia of the gas world.

However, the similarities end there. While Saudi Arabia is the largest swing oil producer and the de facto leader of the OPEC and OPEC+ oil clubs, no such co-operation platform exists for natural gas/LNG. There have been attempts in the past to create one, but they have all failed. Which means that while market control and supply deals will always be an option in the oil world, the natural gas/LNG world is a cut throat business. Producers compete by offering long-term contracts for 10 or more years, locking buyers into a fixed sales cycle. Qatar was a great benefactor of this, sealing ultra-long deals with key buyers in Japan and South Korea over the 90s and 2000s, tying the price of LNG to crude oil…. a mechanism that sent its revenues into the stratosphere when crude prices breached the US$100/b level in 2011.

That advantage is disappearing from Qatar, as the riches its reaped attracted a whole new generation of LNG producers – from Mozambique to Mexico. These additional supplies shifted the LNG world from a seller’s market to a buyer’s one. When Shell completed its Prelude project (though it was massively delayed) and Inpex finished its Ichthys site, Australia became a true rival to Qatar, with the US waiting in the wings. The abundance of new suppliers has had loyal old clients pressing for more flexibility in LNG contracts, with Japan leading the fray by demanding renegotiation of contractual terms as the world’s largest buyer. The entrance of US LNG exporters has also changed the nature of the game, shifting LNG buying from ultra-long contracts to shorter-term ones in the 2-5 year range, as well as offering a more liquid spot market.

That would be have been fine, as global LNG demand was growing rapidly, fuelled by China and India. A rising tide lifts all. But then the Covid-19 pandemic occurred. And just as it has done for oil, the pandemic shifted the LNG market from oversupply to supply glut. With very little visibility on the timeframe for improvement, global natural gas/LNG prices have more than halved. Qatar is especially vulnerable to this development, since many of its ultra-long contracts are near expiry. If this was OPEC, it could convince its fellow exporters to curb output to support prices. But there is no OGEC. And Qatar,  the vulnerable LNG king,  has only two options: voluntarily curb its output to prevent the glut from getting greate or initiate a battle for market share by lowering prices. Sound familiar? That’s exactly what Saudi Arabia and Russia did in March, destroying confidence in the crude market and briefly sending WTI prices into negative territory. There is a legitimate worry that this could happen in LNG as well.

Caught between and rock and a hard place, Qatar’s next move will determine the immediate future of LNG. It already has some of the world’s cheapest LNG production, but even it will not be immune from low prices if it decides to push for market share. Sure, initiating a price war could wipe up the US’ developing LNG export industry, but just as we saw with shale oil in 2014 and even today, the US shale patch will always bounce back through flexible entrepreneurship. It will likely have to throttle output. But that risks rivals overtaking it sooner than expected, and its vast North Field Expansion project is already underway, increasing its LNG capacity by 45% by 2025. At stake is not just Qatar’s grip on the throne, but the entire global LNG complex. Hot gas brings hot rewards, but is intensely flammable as well.

Statistics: World’s Largest LNG Producers (2019)

  • Qatar
  • Australia
  • USA
  • Malaysia
  • Nigeria

Market Outlook:

  • Crude price trading range: Brent – US$30-33/b, WTI – US$26-28/b
  • Saudi Arabia to slash production by an additional 1 mmb/d after talks with US
  • IEA report suggest the ‘beginning of a fragile recovery’
  • Reports from the US suggest shale producers are restarting rigs, as prices near US$30/b


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The New Wave of Renewable Fuels

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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Market Outlook:

  • Crude price trading range: Brent – US$71-73/b, WTI – US$68-70/b
  • Global crude benchmarks have stayed steady, even as OPEC+ sticks to its plans to ease supply quotas against the uncertainty of rising Covid-19 cases worldwide
  • However, the success of vaccination drives has kindled hope that the effect of lockdowns – if any – will be mild, with pockets of demand resurgence in Europe; in China, where there has been a zero-tolerance drive to stamp out Covid outbreaks, fuel consumption is strengthening again, possibly tightening fuel balances in Q4
  • Meanwhile, much of the US Gulf of Mexico crude production remains hampered by the effects of Hurricane Ida, providing a counter-balance on the supply side

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