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Business Last Updated: Oct 8, 2021 - 11:11:36 AM


Power grab: who’s hoarding all the gas?
By Seb Kennedy, Spectator, 9 October 2021
Oct 7, 2021 - 11:11:45 AM

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Before Britain started worrying about a shortage of lorry drivers and petrol, we were fretting about a spike in wholesale gas prices. A couple of weeks and news cycles later, it would be easy to imagine that crisis had gone away. It hasn’t. On the contrary, global gas markets are preparing for a volatile winter. Britain, along with the rest of Europe, will face the full force of the crisis, raising the prospect of factory closures, if not general power cuts.

Like Covid, the energy crisis came from China but has spread worldwide. Last week, Xi Jinping’s government raised the stakes by ordering its state-owned energy companies to secure winter supplies ‘at all costs’, in effect declaring a global bidding war for increasingly scarce seaborne cargoes of liquefied natural gas (LNG) and thermal coal. For Britain, that has consequences. We are heading towards a bidding war for gas that China is determined to win.

The queues for petrol have been a headache for Britain but China has been in crisis for several weeks now, leading to power-rationing for industrial consumers and blackouts in some residential areas. There are reports of disruption to water supplies and mobile phone services, even traffic lights and streetlamps losing power, while fearful householders rush to empty the shelves of candles.

Initially, the Chinese government responded by ordering factory closures (or four-day weeks) and calling for homes and offices to limit use of heating and cooling systems. Emergency coal mines have been opened to feed the many thousands of furnaces across northern China that keep residential tower blocks warm, factories running and power grids energised throughout the darkest, coldest months of the year.

A Chinese state mandate to outbid other gas and coal importers will have especially wide-reaching repercussions in the UK and Europe, which rely on secure and affordable imports of gas and coal to keep their economies running too. China’s three state energy giants — PetroChina, Sinopec and CNOOC — can pay more than publicly traded western energy suppliers that are constrained by market economics and, in the case of the UK, the ‘energy price cap’, which prevents costs being passed on to end consumers. If there is to be an energy war, China starts with a huge advantage.

The UK price cap keeps an artificial lid on household bills at the expense of independent gas and electricity retailers who found themselves caught out by the sudden spike in wholesale prices. Wholesale gas prices have now reached the equivalent of an oil price of $230 per barrel. Dozens of small and medium suppliers have already ceased trading and more will follow if wholesale prices go up further. With presidential elections looming in France, President Emmanuel Macron, too, has moved to limit increases in household fuel bills.

Unfortunately for governments, ballooning wholesale gas and power prices show no sign of deflating. Gas futures in the UK and EU are trading at record levels, six times the price of this time last year. Imports of globally traded LNG into north-west Europe are much lower than usual. Why? Because the ships sail towards the highest bidder and Asia always pays more. China, Japan, South Korea and Taiwan have far less gas storage capacity than Europe, so their state-backed energy suppliers fork out to avoid running out. A painful reality is that north-west Europe is the market of last resort for LNG. Those huge oceangoing vessels carrying enormous payloads of gas chilled to liquidform will always follow the money.

Europe’s predicament of high gas prices and low LNG imports is the opposite of what happened last year, when the first wave of lockdowns crashed global demand for natural gas. China could not absorb the resultant glut, sending an armada of tankers to the UK and Europe. EU storage facilities filled to the brim, and wholesale prices imploded.

Then winter arrived, thermostats were dialled up and prices quickly recovered. The cold weather lasted longer than usual, keeping prices high into early summer. And because traders had expected gas to start flowing down Russia’s new Nord Stream 2 pipeline by now, the forward price of gas was depressed, so there was no incentive to refill depleted gas stocks. Now, EU gas stores are emptier than at any pre--winter point in the past decade.

Never one to let a good crisis go to waste, the Kremlin saw this coming a mile off. Gazprom has been accused of constraining flows into gas-starved Europe to coerce Germany’s regulator to approve the start-up of Nord Stream 2, which will pipe Russian Arctic gas under the Baltic Sea into Germany and onwards. Gazprom denies this and has been on a PR offensive, claiming it has fulfilled its contractual obligations and is piping more gas westward than previously.

But it is also ramping up supplies to China through Power of Siberia, a 3,000km gas network spanning Russia’s vast far east. Vladimir Putin has reacted with glee to Europe’s problems, speaking of ‘smart alecks in the previous European Commission’ who had devised market-based gas pricing in the misplaced expectation that it would work out cheaper than indexing gas to crude oil prices. Brussels and Washington are not amused and the White House has pledged to help the Commission ‘stand up’ to Russia’s gas price ‘manipulation’.

As wholesale gas prices surged in Europe, utilities began switching back to cheap, dirty coal for power generation. This meant utilities have had to buy more EU carbon allowances, which drove up the price of carbon, pushing electricity prices even higher. The price of thermal coal has tripled this year and is now trading above $200 per tonne, while EU carbon allowances cost over €60 per tonne — both all-time highs.

Shortages are being felt the world over. India’s coal-fired power generators have just a few days of fuel to hand. China, which for political reasons has stopped buying Australian coal, resorted to buying expensive coal from Kazakhstan, which must be transported by rail and sea. And a German power station closed last week citing a lack of coal.

European officials might be wondering what happened to their ‘freedom gas’ — the term Donald Trump used to describe exports of LNG to America’s overseas allies. Actually, the US is exporting more LNG than ever, but growth is constrained by capacity. LNG plants in greenfield sites take many years to gain permits, to finance and to build. The LNG that is leaving the US is heading primarily to Asia and Latin America.

But the biggest winner from the current crisis is Qatar, the world’s most competitive LNG producer and neck-and-neck with Australia as its largest by volume. Qatar is a major LNG supplier to the UK, but the emirate is tilting eastwards. This week, state-run Qatar Petroleum signed a major long-term LNG supply agreement with China’s CNOOC and ordered four new LNG carriers from a state-owned Chinese shipyard.

All of this paints a difficult picture for the UK, which closed its last remaining seasonal gas storage facility in 2017 because, as ministers said at the time, global LNG supplies were plentiful. Household electricity and gas demand are ‘inelastic’ in industry speak, meaning ordinary UK consumers will pay the going rate rather than go without. To compound our problems, France’s Europe Minister, Clement Beaune, this week made a veiled threat to cut off French electricity exports to Britain — already compromised by a fire at a converter station earlier this year. If this winter is bitterly cold, it will fall primarily upon energy-intensive factories and manufacturing plants to balance the market by temporarily shutting down. Ministers can do little more than pray for a mild winter in China.


Source:Ocnus.net 2021

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