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A Year of Disorder | Financial Times

by SuperiorInvest

This article is a version of our Energy Source newsletter. Register here to receive the newsletter every Tuesday and Thursday directly to your email inbox

Welcome to another power source. Derek Brower here in New York.

Energy prices are on the slide. Brent fell again yesterday and threatened to fall below $80 per barrel. Lithium prices fall in China. And natural gas prices are falling on both sides of the Atlantic: in Europe, they are now well below levels since Russia began cutting supplies just before its all-out invasion of Ukraine. And in the US, the Henry Hub gas benchmark fell below $2 per million British thermal units at one stage yesterday. And this with the return to operation of the Freeport LNG export plant in Texas, which is a large domestic consumer of the fuel. (If you missed Justin nice piece about a troubled gas plantread.)

For US natural gas, that means a 79 percent decline over the past six months: a record.

I guess that’s what happens when winter doesn’t come – an alarming thought, for obvious climate reasons.

If you’re a petro-tyrant relying on high prices for all these things to help finance your brutal invasion of a neighboring country, this should be bad news. And yet, as tomorrow marks one year since the eve of Vladimir Putin (again) ordering his forces into Ukraine, there are few signs of an end. (We’ll be launching a special live blog on FT.com to mark Friday’s anniversary, so stay tuned.) And Europe shouldn’t be too complacent about its energy disposition just yet, the head of the International Energy Agency said said the Financial Times this morning.

“Russia played the energy card and did not win.” . . but it would be too strong to say that Europe has already won the energy battle,” said Fatih Birol.

Russia and energy is the subject of our keynote from Justin after a year.

In Data Drill, Amanda adds up all the investment coming into new US LNG export capacity. Developers will hope that these cheap natural gas prices will remain for several years.

Send pictures of winter where you are. — Derek

Energy markets: a year to the war in Ukraine

It’s the year since Russia launched its all-out invasion of Ukraine, plunging Europe into war and throwing energy markets into chaos.

The war sent oil prices soaring, natural gas prices to record highs and disrupted decades-old energy trade routes that carried enormous economic and geopolitical power. While energy markets have calmed after the initial disruption, big questions remain about the lasting effects of the war. We mean three:

1. What is the future of Russian oil?

After surging in the months following the invasion, Brent crude prices have stabilized at around $80 a barrel in recent weeks.

The post-invasion surge in prices was largely short-lived as Russian oil continued to flow without the major disruptions feared at the start of the war. This is mainly because European and American policymakers have been clear-eyed about the global economy’s dependence on oil from Russia, one of the world’s top three producers along with the US and Saudi Arabia. The sanctions were designed to keep oil flowing, albeit largely to Asian markets, while also seeking to limit the amount of petrodollars available for Putin’s war effort.

The Russian president still benefits from the oil trade, more than many would like, but the negative effects have been muted for Western economies.

And cracks are beginning to appear in Russia’s oil supply system. The country said earlier this month it was cutting output by 500,000 barrels a day, or about 5 percent of total output.

The big question is whether this represents the opening salvo in the weaponization of oil supplies or something imposed on Moscow.

A top Biden administration official told me last week that their view is that Russia has been forced into the cuts because the nation “can’t find customers” for all its production and has “tens of millions of barrels of unsold oil.” The official added that Russia is “desperate for revenue” and is in no position to weaponize oil.

Oil markets have been relatively calm since the announced cuts, suggesting there is no widespread concern that oil markets will become a new battleground.

Why? The problem for Putin is that Russia is unable to focus on curtailing oil the way it did with gas, making deployment much riskier. Rising oil prices have hurt Beijing at least as much as Washington.

In the long term, there is a risk that Russian oil production will suffer following an exodus of Western investment and expertise. If its supply begins to decline, it will theoretically free up market share for other major oil suppliers, such as the US and major Middle Eastern OPEC nations, plus Saudi Arabia and the United Arab Emirates.

2. What will happen to all that Russian gas?

At the start of the war, Putin hoped that cutting off most gas supplies to Europe would trigger a crippling energy crisis and weaken support for Ukraine.

This gambit failed. A mostly mild winter helped keep inventory levels high, while painfully high prices kept demand low. Europe still faces the challenge of keeping up with supplies, but LNG supplies from the US, Qatar and elsewhere should get the job done for the foreseeable future. In other words, Europe has shown that it can do without Russian gas, if not outright thrive.

Meanwhile, Putin lost his most important customer for his most important industry. It is unlikely that Russia will ever fully replace the loss of the European gas trade, which has injected tens of billions of dollars into the Russian economy.

Russia looks to China as the most obvious replacement. There is already a large gas pipeline from eastern Russia to China, called the Power of Siberia. But the gas fields that supplied European pipelines are not connected to Chinese markets. Russia wants to change that, but Beijing now has enormous leverage over any such project, and it’s unclear whether it has the appetite to significantly increase its dependence on Russian gas. Does Russia see fuel arms as an opportunity or a cautionary tale?

Could gas flows to Europe be restored? Potentially after the war is over and Putin is pushed out of power. But even then, probably only at significantly lower levels. Europe is rebuilding its energy mix based on long-term commitments to LNG and renewables, not Russian fuel.

3. How will this affect the transition to cleaner fuels?

Russia’s war in Ukraine has fundamentally changed the conversation about energy and climate change, bringing energy security to the fore in a way it hasn’t been in decades.

This has undoubtedly helped fossil fuel suppliers. US President Joe Biden admitted in his State of the Union address in January that the US will be burning fossil fuels for many years to come – a turn in rhetoric. Oil majors, newly flush with cash from high prices, are now finding a more receptive audience among policymakers and investors who argue that their core oil and gas businesses not only remain viable but have room to grow.

However, the focus on energy security is also accelerating the development of clean energy. Creating domestic clean energy is as much at the heart of the Biden administration’s inflation-reduction bill as fighting climate change. This law is supposed to pump hundreds of billions of dollars into new green projects in the US. Europe is boosting its own clean energy incentives to prevent companies from fleeing to the U.S. — and plug the gap left by lost Russian gas.

Data drill

More than $100 billion is planned to be spent on new LNG projects in the US over the next five years, according to Wood Mackenzie analysis.

The flurry of investment will help boost U.S. LNG output to more than 280 million tons a year by the end of the decade, more than tripling current capacity and well ahead of second-place Qatar.

The U.S. is expected to become the largest exporter of LNG in 2023. Last year was a record year for long-term contracts in the country, with 65 million tons annually exported, more than triple the amount from 2021. Despite the growth in supply, the global market will remain until end of 2030 tense as Asia and Europe increase fuel consumption.

While the outlook for US LNG is strong, inflation and competition among developers to keep prices low are squeezing yields. Project costs on the Gulf Coast are up 20 percent compared to the past five years, Wood Mackenzie reports.

“As developers continue to push more projects forward, competition for service contracts will increase, putting pressure on both labor and material prices,” said Sean Harrison, an analyst at Wood Mackenzie. “This could cause further cost inflation along with delaying some projects.”

Line graph of liquefaction capacity, million tons per year, showing the US to be the largest exporter of LNG from 2023

Power Points

Energy Source is a bi-weekly energy newsletter from the Financial Times. Writes and edits Derek Brower, Myles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg.

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