With Laurent segle And from London and Gerard Reed from Berlin.
This is redefining energy today. On Redefining Energy, we're going to talk about the future of a liquefied natural gas energy leron.
And it's extremely important because the old global dynamics of the energy market creates a lot of hope on one side and a lot of challenges and it's really nexus for fixing the price of energy around the world.
Yeah, when you talk about energy Laurn particularly, I would say the power market persutely when we have these so called Dunkel flouter days. You know, the last power station on tends to be an old natural gas power station and it's pretty expensive.
We have decided to invite one of the top experts in the gas market, and I can name because I follow a lot of intelligent people. But those four i'm gonna name are the best. So I ride Joseph John Kemp, Greg Molnar, Tom marsek Menza. But the fifth one on our guest is in our opinion, the best. It's Ginnady.
For those of you who don't know. Sebbi is the editor of Energy Flux.
Which is an extraordinary market news data let's bring another show. Seb Welcome to the show.
Thanks for having me.
What's what we're going to do today is talk about gas, natural gas and a particular LNG, but I'd like to kick it off really and just talking about the macro level, about what's going on in natural gas across the world and how you see that going forward.
Global gas markets have been through a real rollercoaster half decade. We've had essentially five major phases in five years. So since twenty twenty. We had the COVID crash when demand was severely depressed by lockdowns and prices tanked all over the world. And then we had the post COVID inflationary pre Ukraine period when all commodities rallied gas and LNG included. And then we had the invasion in twenty twenty two, and that's when gas markets stepped up to a whole
new gear. We had price spikes sort of ten times the historical average in Europe and Asia was not far behind, with LNG spot prices rising really fast.
Really high.
And then after the destruction of the Norsetream two pipelines under the Baltic Sea, then that sort of led to a period of extreme demand destruction as the pricing just completely corrected off these extreme highs, and Europe and other gas consuming regions they really adjusted to the new price in paradigm and we saw demand go to a structurally lower level, which brought prices back down, and that continued
into twenty twenty four. We saw prices dip almost as low as kind of historical pre invasion averages, and then we started a new phase from sort of February March twenty twenty four when we saw demand recovery coming back into the European segment of the gas market, and we saw quite a strong bull run in prices throughout twenty twenty four, and a lot of that was predicated on the fear of the loss of Russian pipeline gas through the remaining entry routes through Ukraine and those There's a
lot of speculation about whether or not Europe would lose Russian gas through Ukraine, and eventually it did, so you know, Russian gas no longer flows through Ukraine into Eastern Europe and those flows halted on Year's Day this year, and that could possibly mark the start of yet another chapter in the European and global gas markets because it is a profound and dramatic change to the constructual supply base
of gas in Europe. And because Europe's turned to LNG to fill the gap from the loss of Russian gas, then it's also a potentially new chapter for the global energy market too.
And maybe you could just talk about that, right, So what you're saying is, listen, we're not getting Russian gas true plapeline.
That means you have to get it somewhere.
So what we're doing is we're taking it.
In by ship that's more expensive.
So that has huge repercautions, sirly for Europe going forward in terms of competitiveness and let's.
Say energy security. Right, yeah, it does.
Just look at the price differentials because people talk about the global gas market the global LNG market. Really the gas market is not fully global. There's not a single price for gas. You have regional prices. So the TTF, which is the kind of benchmark for northwest Europe, that's trading at four times or maybe more five times the price that you get in the United States. So in Henry Hub, which is the US benchmark, gas costs like like one quarter or one fifth of what we pay
in Europe. And that differential creates a trading opportunity. So if you can get your hands on Henry Hubb priced gas in the Gulf of Mexico, ship it across the Atlantic, and unload into an energy terminal at Northwest Europe, then the margins are pretty phenomenal. Now you can make about thirty million dollars ISH on a single LNG cargo, which is phenomenal.
I suppose it begs the questions why we're even doing this podcast We should be becoming an LNG trader as right.
Yeah, it's a good question. I mean who actually keeps that margin? I mean if there's like twenty or thirty million dollars and just to say, like during the price bikes of twenty twenty two, then we were seeing like ten times that the netbacks well that's what they call the profits on each cargo, what you pay for your cost of shipping and cost of production.
They were like up.
Into two one hundred or more million dollars per cargo. So we've come down a lot since then, but there's still a big margin on the table. Who gets to keep that and it's basically anybody who's taking ice risk. So if you're taking price risk, on a cargo, then you've also got the upside, whereas if you have like a kind of protection from that, then you're leaving that value on the table.
But if we take a stake back, the whole universe of gas has been totally appended by the rise of not only shale gas, but it's the whole story of Shivsuki and Shanier. He was the first guy fifteen years ago to realize that there was a crazy tsunami of gas coming on the market and it would be much cheaper. Because until I say, twenty years ago, the US thought that they would need to import gas, and now they are the biggest exporter. All the changes who are seeing
in the world. ELLERGI market which used to be a bit of a niche around Qatar, a bit of Australia and Asian play. There was not really Atlantic play. This has totally changed the past ten years. Maybe you'll talk a bit about Qatar expansion because Qatar is above the big gas feeding the world, whereas Australia seems to have maxed out. But you know, the US is absolutely crazy. Can you explain a bit the development of the LNG export industry in America?
Yeah, you're right, the US flipped from being a net importer of gas into being a net exporter. That's when LNG exports began in twenty sixteen, and the ramp up has been absolutely phenomenal. So the US went from a standing start to becoming the world's number one LNG exporter in the world in a space of five years or so, and they're not stopping there. The growth outlook for US
LNG is phenomenal. We're going to see another fifty percent growth spurt in liquefaction capacity this decade, and that's going to fundamentally change the kind of supply demand balance in global markets. And simultaneously, you're right, Katar, which was always the world's number one supply, was overtaken by the US.
But they're also expanding massively. I think they've got about a kind of forty percent capacity increase coming between now and twenty thirty, and that's going to exacerbate the kind of structural oversupply that we'll see hitting the market maybe from twenty twenty seven onwards. And so you've got to ask the question, like where is all this lergy going to go?
Right now, the US exports what fifteen percent of its gas production, and you started in US consumer instead of complaining. If the plan is to export thirty percent of their gas, maybe the price in the US is going to go out. Because make no mistake, at what two three do are mbtu, which is how we calculate on the unrehearb. You multiplied by six to get the oil equivalent. It's a battle of eighteen per barrel. I mean it's it's the cheapest ENLGA we've seen in his story history. One mbtu is
one d casule. So so you know dot gizule even dout twenty years ago when we're at five dollar gigazul, it was cheap energy. So now the prices of gas in the US is so damn cheap, So everybody wants a part of the action. So the question is does the US have enough gas to be able to not only fuel their data centers and everything, and also expot the represent of it. How do you see it?
There's a very lively debate about the upstream risks associated with US lergy export expansion. I'm not a geologist, so I'm not going to call it either way, but I can describe what's what people are saying. So some people are saying that the shale fields in the Permium are past their peak, that the decline rates are accelerating on new wells, that the best acreage has been maxed out, and that the kind of assumption that this kind of gargantuan shale gas supply base would always be there is
not one hundred percent robust. At the same time, the fact that we have this enormous gas supply base is testament to human innovation, technological innovation, and to kind of discount the possibility of innovation in the future is kind of betting against human nature in a sense, and people
have been stung by that in the past. Make the fact that the US flipped from importer to net export have required a visionary take on what was happening in gas markets and what's happening in particularly the US upstream patch. So it's interesting like the Trump administration has to deal with this question. They want to maximize energy exports and
they want to capitalize on global gas demand growth. But you're right, like opening liquefaction capacity, opening export capacity increases the potential for the US domestic gas markets to import those really really high global prices that we see in Asia, and there is the possibility of a risk emerging where there are like domestic price spikes which are kind of exacerbated by this kind of open gates policy towards USL and G. And if that manifests on consumer bills, if
it manifests in the industrial sector where you see a bit of a slowdown and job creation taking a hit, then there's the possibility of there being some sort of political consequences, maybe even a kind of small backlash against this policy of LNG. And we have seen like when we've had periods of extreme pricing in Europe, then Henry Hub does rise. It has risen as high as sort of eight or ten dollars, like kind of two or three times where it is today.
And we do see there's like a.
Small cabal of industrial manufacturers and large industrial consumers who who do have a lobbying presence in Washington saying hey, look, this LERG thing is a problem. The Biden administration just published it's a long awaited study on the impacts of USL ANDNG exports to kind of assess whether they're in the public interest or not. The report was kind of spun in a way which made it sound as if they are, but when you dig into the data then
it doesn't really tell that story. So it's kind of quite hard to read that report and say that the USL and J exports are categorically not in the public interest and will cause big price spikes. But what is kind of indisputable is that during periods of market tightness, so when you have like cold snaps, well had freeze offs, and you have this kind of open gates USL and J export policy, then the energy is only going to
exacerbate those spikes. It might not mean that price is a structurally higher for US consumers year round, but it does create this kind of risk of extreme scenarios arising that you don't currently have.
Two things I'd like to ask.
One is we're talking about the US, but that's really really clear. We haven't seen shale go across the world. If you take the case of for example, just Australia, they've huge share resources and at some point in time they're going to be taken out, and I'd be very interested to hear.
You you on that.
In other words, do we see other massive amounts of energy coming out from other regions? And so even if US gas production peaks. So what we've got all this all that stuff coming online.
Right, well, do we there are undeveloped resources around the world. The next big opportunity that people have started talking about is Guyana extoll Mobil has started producing vast amounts of crude from the Guyana offshore oil fields and they're talking about there being a lot of associated gas at the potential to potentially export that. Argentina has an enormous shale
patch in the Vakon Wetter Formation. Yeah, Argentina's pushing hard to build a big onshore liquefaction plants to start exporting from there. You have the East coast of Africa. Tanzania has enormous gas resources and a lot of the Western oil majors are sitting on development rights of those and they want to produce a Tanzanian LNG export industry. Mozambique is actually starting LNG exports from a little floating liquefaction plant.
And there's also like a much bigger onshore development where again you've got Western oil majors involved, and that's being kind of mired in pretty horrific humanitarian terror related setbacks and delays, and it's not moving forwards as quickly as many people hope. But that's often the story with that big LNG infrastructure projects. They are mammoth capital projects which
require enormous amounts of finance. They need their confidence to be short up in the investment, and you've got to ask yourself, like, where does that confidence come from?
If you're investing fifty.
Billion dollar LNG plants in an emerging market, how can you be confident that you're going to actually see a return on investment. And the only way to do that is to pre sell the LNG at a given price for a long term period. So you know, you need like credit worthy buyers that are going to commit and have the financial wherewithal to make a meaningful commitment to lift vast amounts of energy for fifteen twenty years and
to carry the can on those payments. And that's actually quite a hard thing to do because the energy transition is casting all sorts of question marks over long term
gas demand, particularly in Europe. You know, there's a reason Europe's not signing long term LLNG deals is because the companies involved they're not really sure about what their demand profile is going to look like in the twenty thirties plus the EU, of course, is there's a rule that says you can't have long term fossil fuel purchase contracts
beyond twenty fifty if I'm not mistaken. So if you're looking at like a kind of twenty five year LNG sales and purchase agreements, you've got to sign it the first of January just gone. Otherwise you're going to be running into that twenty fifty deadline, right can I?
Then I just follow on from that, it's back to Laurent Ce early Iran. Ultimately, what we've got in the US is you take three dollars for a gas in oil equivalent terms, that's eighteen dollars a barrel, and oils are sixty. So surely what that means is is that what we're going to just see is a huge shift from oil into gas.
I know what I mean by that is I'm talking about transport.
Here, not just putting gas into power stations for data centers, but surely transport's going to shift as well. And if I'm right, is that going to be a global trend or how do you see it?
Gas demand in the transportation sector does have growth potential, and LNG particularly because it's already liquefied, which means that it occupies like one tiny fraction of the space that the gaseous gas occupies. So it's good for transportation. That's why they liquefy. It makes it easy to transport, and once it's in liquid fuel form, you can then use it as bunker fuel. So in the maritime transportation sector
then LNG is growing. But I'd say that the major constraints against LNG as a transportation fuel is the same constraint against LNG demand more generally, which is the pricing structures just do not lend themselves for kind of break bulk mass consumption. What do I mean by that, Well, it's like you need these kind of big credit worthy off takers, and you also need a stable price and those big five phases of the last five years I described that is just tonight for demand growth and for
confidence in price levels. I'd say the biggest constraint on LERG demand growth in Asia particularly is that LNG has a kind of tarnished reputation for a reliable, stable fuel source. And if you look at people who are developing that hybrid systems or looking to get break bulk LERG into remote communities. They find it really really difficult. You know, you need a PhD to understand price risk, but guys they don't want to have to do that. They want
like a simple what's the single price? What's it going to be in five ten years? Can I invest in the infrastructure to supply and break that down and get it to consumers?
And energy just doesn't lend itself to that.
Everyone's kind of worried because LNG essentially prices off Europe now because of this European reliance.
Or an LNG.
People say, oh, you know, europe it now has to rely on volatile LNG. I'd say it the other way around. It's like LNG now has to price off volatile European sentiment in European gas hub pricing. And if you're like a big emerging economy in Asia, do you really want to tell your economic fortunes to the vagaries of what the European gas ups are going to do in the next few days because they're very febrile, and it's just it makes kind of importing a very kind of risky business.
So that's kind of what impinges the kind of whole demand growth story.
Well, I don't have a PhD myself, but twenty five years ago had a very interesting session with an on gas traders, and one of those guys, an old timer. He said, law, in gas and cold things that are very simple. Biro six dollars and in BT you everybody's going to switch to gas. Above six dollars, everybody's going to switch back to call. And of course in Asia it's double digit.
Now.
Maybe Japan and Koreak can allow it, but I'm sure that India, Bangladesh, Pakistan, Vietnam, they can't afford double digit price ever, and so there's always that upper limiting tom of volume where just people are going to switch back to oil or cool or whatever, Whereas I'm sure the market that below six are up meet you is much bigger. So the producers will always have to do the arbitrash between price and volume, and that's not simple. You share the seminarisis about price versus volume.
Well, you're right about the price ceiling for Asian consumers Asian importing nations. We've seen that in the price rollercoaster that we've had over the last few years. When LNG goes above sort of ten eleven dollars from a BTU which is actually below where it is now, then you do see procurement drops off.
It's just a fact.
Asian lng importers are opportunistic on the most part. I mean, they all want to have access to stable, long term priced contracts, but they just can't get them, so they'll buy opportunistically in the market. And this big glut that we're probably going to see around about twenty seven onwards, then it will have a demand response. The energy market always it always settles, right, it always balances out. The
question is at what price does it balance out? So, yeah, you're going to see that kind of six seven dollars for mbtu like half of today's price reflected in wholesale prices both in Europe and Asia from sort of twenty twenty seven onwards. But for the Asian importans in particular, then you've got to think that well, like who in an emerging market, like where do you get the credit
worthy buyer from? Who is really big enough has a deep enough pockets to take on the commitment to do these procurement exercises, And it's always kind of government backed dentities, state backed entities, and particularly that rests that tends to
rest with the finance ministry. And so the concern for these buyers is that, you know, when you have these inflationary commodity cycles, which inevitably happen and which we've seen like in twenty twenty two, then you know you've got this double whammy because not only the commodity itself becomes more expensive, possibly like multiples of today's price is more expensive, but you also have a devaluation of emerging market currencies
and that makes buying dollar denominated fuels even more expensive than they already are. And they're really wary of this. They don't want to be kind of on the hook for that. They don't want to, you know, sign up a kind of a ten or fifteen year deal and take all that price risk and then be obligated to take volumes of LERG that their economy simply can't absorb.
So can I ask you just if you look at the going forward right, I want to talk about the pricing of gas, because again, if I'm going to switch from oil to gas or whatever it is, I need to have some mechanism that neighbles to do it. And it used to be the gas price was tied to the oil price.
How do you see that going forward?
Is there going to be an alternative structure in place, or is it just going to be the free market that we've seen up to now?
There is a dual pricing regime in LNG, so we have a spot market, but that's actually only a small proportion of all LNG that's traded in the market. And even today, most LNG is traded under long term oil indexed contract so they're on a slope to Brent. Typically see contracts signed somewhere between sort of nine, ten, twelve, thirteen percent of Brent, and those contracts are very stable.
The pricing is very stable.
They often have a lag, so you have like a three to six month lag on the oil price, and you've got average pricing over a given period. It's not like a daily adjustment. And those contracts really were the kind of contractual foundation for the growth of LNG. It was very much like point to point long term relationships, oil indexation stability. That was the hallmarks of LNG one point zero, if you want to phrase it that way. Before the US entered the market with a radically new
contracting structure, and what is that structure. Well, that is completely different. It is by your gas on the water what's called free on board to FOB. You just pay the cost of the gas itself plus the cost of liquefaction, and then it's your job to find the ships, to pay for vessel bunkering, insurance, etc. And then you deliver it to any location of the world that you want to.
So suddenly, you know, everything became more flexible. It has accelerated the growth of spot trade of LNG, so you have much more kind of volatile, market responsive pricing for these kind of free destination unrestricted cargoes of LNG floating around the world. And we see cargo diversions regularly. You know, it used to be just like point to point trade. You knew that the cargo is going to go from
Qatar to Japan back again every few weeks. Now you see LNG vessels rediverting that they're signaling for northwest Europe, and then the price in Asia spikes because there's been a cold snap, and then they kind of redivert in the middle the Atlantic and they go around the Cape of Good Hope and then even like getting halfway around the Cape of Good Hope and going back up again. Traders are constantly analyzing where can they get the best netback,
where's the best profit follow the money. So this more flexible contracting structure is given way and enabled a degree of a lot of arbitrage, but also a lot of price volatility in the markets. And so that combined with the kind of gas phases in Europe and the loss of Russian gas and Europe turning to LNG, that's kind of what's really royaled the pricing structure for consumers all over the world.
So so your last question from our sign and that is, if you look forward, take your crystal ball out, are we entering the era of low cost gas or how do you see it?
Definitely, but we're not quite there yet, but we will be, Like I say, within the next kind of year or two, there will be a structural tip into a much looser lower pricing regime with the addition of fifty percent plus more supply than that's inevitably going to bring prices down. So what does that mean if wholesale prices are half where they are currently, that has massive implications across the energy space itself and also across the economies of gas
and LNG importing regions. So it's start on the LERG side the energy sector itself. Well, not all LNG is born equally. If you like, some LNG has a much lower cost profile than others, so you have a kind of merit order. And if you see like the hub price in Europe harving in the next two to three years, then that's going to obviously affect the margins. So we could possibly, depending on how deep the glut is, that we could see the profits vanishing and the going even
below the cost of production of USLNG. Whether we'll see American liquefaction plants kind of shut in because they're uneconomic to operate, that's a good question. It did happen during COVID. We saw a lot of shut ins occur because prices were just so low that it was better for the off takers to essentially pay the penalty for not taking the gas. And then council cargoes. We saw like hundreds of cargos were councled in twenty twenty. We might see that, we might not.
It depends.
But if there's one producer that's going to be fine no matter what the market does, that's Qatar. They do have the lowest cost based LNG in the world because they're sucking gas out of the world's biggest gas field and in the Persian Gulf, and no matter how low the market price goes, they will always be in the green.
They will always have positive netbacks on their cargoes. And you kind of look at this kind of coming supply glut and you've got to think, well, Qatar does look like it's going for a kind of volume over value play, like a market share play, because they know they can weather any storm. And it's a bit like what happened between Opek and shale oil sector. There's this kind of market share power play, and I wonder if it's the
same thing in LNG. Like guitar looks like it can kind of essentially win the race to the bottom, So that'll be a very interesting dynamic over the rest of this decade. But then it's also like, what does it mean for economies around the world, What does it mean for the energy transition? And there are lots of implications.
The first one is that cheaper gas, like structurally cheaper gas, makes it much harder to lodge gas from segments like heating when the cost of your heating your home goes down, then the payback time on a heat pump goes up, and that kind of generally erodes energy efficiency measures because it's much cheaper to use the energy in the first place, so there's not such an incentive to insulate your home,
et cetera. And like gas is going to be the marginal price setter for European markets increasingly as coal is taken off the system or put into capacity markets, then gas is the balancing price setter. And so like much lower price gas means less volatile power prices, And that's kind of double edged sword for renewables, particularly because I think that whenever price has become very volatile, then lots of people blame renewables. They say, oh, it's because you know,
you need gas to back up wind and solar. When it's not wind, you're not sunny. So if like power price has become less volatile because gas is cheaper, then renewables don't get the blame so much. But at the same time, it's really bad for renewables projects that have
merchant exposure. If you're like just selling without a contract for difference, then you're taking the kind of wholesale market price for power, and if it's kind of much lower and less spiky, then you're not going to be making so much on your investment in that wind firm or that solar farm. But I think the biggest impacts of cheap gas on the world will be just some long overdew reprieve for industry and households, and it will be
a boost for the global economy and for productivity. And you know, you might even see if it's like really really long and deep, then you could see LNG finally making inbroads into col dependent price sensitive economies, those like India, Pakistan, maybe even in Indonesia. Who knows, It depends just kind of how deep it really goes. And I guess we'll we'll just have to see.
And I guess on the top of that, the big question is what's going to happen in our relationship with Russia and Iran, which are also the biggest gas as are in the world. So that's another X factor on the top of your forecast.
Which put mean more gas.
Let's talk about that just briefly. If I wrote an energy flux, a kind of end of year piece, just crystal ball gazing, and yeah, you're right, Like, we've got these regimes they're essentially deemed to be kind of like frozen out of the global economy. Iran, Russia. They're sitting on just the world's biggest proven reserves, and like Russia particularly has all the upstream infrastructure to get it out and pump it into Europe, notwithstanding.
The destruction of North Stream too.
So, yeah, we've seen regime change in Syria, Like what's going to happen there? What's going to happen to the Iranian government there? They're extremely unpopular. Are we going to see potential regime change there? What happens to the like to Putin and the settlement over Ukraine? If we see more administrations that it deemed to be Western friendly coming into power in those gas hotspots, then we could see the massive increase in the kind of structural supply of
gas from those regions. Although the lead time and like getting investment into you know, I a newly liberated Iran is going to take quite a long time. It's not for the faint hearted, and I think the same probably for Russia.
Well, Seb, thank you so much for coming on the show and really explaining to us, which are not into the weeds. In simple terms, what's going on in the gas and energy market globally? We learn a thank you very.
Much, thanks a lot, thanks for having this pleasure.
Well job. I'm even more puzzled than I was at the beginning because I can't wrap my head around the future of energy. It's so complex. Yes, there's a.
Lot of variables out there laround, and I think when I sort of reflect on us, it's really what's going to happen in the Middle East, in particularly what's going to happen in Iran, what's going to happen in Syria, And then you got Russia as well. If that comes back, you know, the world's going to be a flood of the provide natural gas.
If it doesn't, you wouldn't know, you know. So it's up.
Yeah, it's a whole apology of politics there that make it really difference.
Yeah. And at the same time, Europe is in this web of contradiction between the energy transit, between energy security, between affordability, and of course the relationship with the US. So it's very complex, very complex. Now, if I look at the US, they have eight operational terminals, the last two open a few weeks ago, so you've got on the East coast, You've got Cove Point and Elby Island,
and all the rest are between Texas and Louisiana. So you have Plaquemine, celcashwe Pass, Cameron, Sabin Pass, free Port, and Corpus Christie and all of them have expansion plans. So it's absolutely crazy. The US want to export fifty percent more by the end of the decade. At the same time they are building gas plants like there's no tomorrow. So the question is is the gas going to remain cheap with all that extra export and consumption.
Yeah, it's a good question, Yeah, absolute right, Well, that's a right question.
The other thing about it is it used to be the smart was relatively easy to predict.
Anymore, that's the reality of it.
There's so many variables that can radically change, not just change a little bit radically.
Question, what do you do if you're a buyer of gas?
Yeah, and look, the avaidability is a huge, huge topic. I just saw a few weeks ago the news of Egypt, and Egypt was relying a lot on Ellengin ports, but then they look at the bill and they say, sorry, we can't afford it anymore. So we're going to go sol our big time. I know they're going to have a development to be Pakistan style, So all of a sudden, you've got some promising market to disappear all of a
sudden because it's just too expensive. Yeah, we may end up the podcast with more questions than answers, but at least I think we did the work to lay out the questions properly.
Well said, well said. I think that's a good way to end the show, my friend.
And thanks SB, Kennedy and Jeah. I'll talk to you when next week or into week's time.
Exactly the porter.
Thank you for listening to Redefining Energy. Don't forget to read the show and subscribe on Apple, Podcast, Spotify, or the platform of your choice.