Global markets have become more connected as LNG shipments grow more flexible

Utilities across Europe are enjoying a windfall, as a gas glut caused by excess liquefied natural gas shipments from Asia drives prices to multi-year lows.

A mild Asian winter coupled with nuclear-plant restarts in Japan and ample supplies from the US and Russia have cut down deliveries of LNG to large buyers in the region. As prices for the supercooled fuel have fallen, hitting a three-year low, cargoes have been directed instead to Europe.

That is pushing down prices there, too: the UK wholesale day-ahead gas price, for example, is trading just above 31p per therm, the lowest seasonal level since 2016 and below a 5-year average of 46p per therm.

The price moves show how gas markets around the world have become more connected thanks to increasing volumes of LNG cargoes moving the gas from one continent to another, freed from an old regime of rigid contracts with fixed destinations.

“In the future, gas prices in Europe will be driven by LNG,” said Niall Trimble, managing director of oil and gas consultants The Energy Contract Company.

LNG will also gain greater influence on European and UK gas markets as volumes from the region’s production areas in the North Sea, Netherlands and Norway decline. The UK became a net importer of natural gas in the mid-2000s as North Sea production fell.

The UK is among the leading destinations for LNG cargoes thanks to plentiful terminal storage capacity. The amount of LNG used in the UK gas pipeline system quadrupled in the fourth quarter of 2018 from the previous year and jumped 4.5 times in the first quarter of this year.

Asia and Europe are the two main LNG importing regions, and until recently, robust demand from China, South Korea and Japan have kept the Japan-Korea Marker (JKM), the Asian benchmark, higher than the European equivalent.

He said any resolution of the trade spat between Washington and Beijing would likely see more oil and LNG flow from the US to Asia, tightening supplies available to Europe.

National Grid, which plays a role in ensuring UK energy supply matches demand, said in a recent report that it was expecting much higher deliveries of LNG this summer than in 2018. This was because LNG shipping costs had risen over the winter, making Europe, which is a closer destination, a more profitable market than Asia for cargoes from the US and Russia.

However, some analysts said that the weakness in the Asian price was encouraging some producers to shut down their facilities for maintenance. Meanwhile, the LNG flows to Europe could push prices down in the region, making the Asian markets more attractive again.

Samer Mosis, LNG analyst at S&P Global Platts, said that the Asian discount to European price benchmarks was unsustainable. He noted that Qatar had already “swung its flexible production towards Europe alongside continued US and Russian deliveries, which is threatening to lead to oversupply”.

Copyright The Financial Times Limited . All rights reserved. Please don’t copy articles from FT.com and redistribute by email or post to the web.

It is not every day that a company asks to borrow money while at the same time explicitly stating that it has absolutely no need for it.

Then again, it is not every day that the most profitable company in the world emerges from a shroud of secrecy, to tap international bond markets for the first time.

Saudi Aramco’s debut bond sale is just days away, prompting the jewel in the crown of the desert kingdom to open its books and reveal some staggering numbers. The Saudi Arabian oil company booked $111bn of net income in 2018, more than that of Apple and Alphabet combined.

Companies that make that much money do not usually have much cause to borrow more.

Apple, for example, has only ever raised bonds to cover its mountains of cash trapped offshore. Since President Donald Trump introduced a new tax code at the end of 2017, encouraging companies to bring money back home, the US tech group has been conspicuously absent from the bond market. Google’s owner, Alphabet, meanwhile, which has an equity value of $845bn, has a grand total of $300m in bonds.

Saudi Aramco’s treasurer has been clear that the company does not need the funding, telling investors that it has a “fortress-like corporate position”.

The bond sale has very little to do with corporate finance, therefore, and everything to do with the grand plans of Saudi Crown Prince Mohammed bin Salman.

The wheels may have come off Prince Mohammed’s aim to sell shares in the Saudi oil giant but he has not abandoned the idea entirely. And opening Aramco to the rigours of disclosing its balance sheet is seen as a stepping stone to that bigger prize of an initial public offering.

At one point last year, bankers and advisers were even talking about Aramco issuing $70bn of bonds in one shot. That was before the grisly killing of Jamal Khashoggi at the Saudi consulate in Istanbul last October.

But Khashoggi’s death has had no long-term impact on fund managers’ desire to load up on Saudi bonds. (That $70bn number was only ever floated because it would have been a record-breaking corporate debt sale.)

Nor have investment banks shied away from the kingdom. In October, Jamie Dimon, the JPMorgan chief executive, was the first bank boss to pull out of Prince Mohammed’s “Davos in the Desert”. Less than six months later, the US investment bank is leading Aramco’s bond sale.

LONDON (Bloomberg) — U.S. gas companies at the LNG2019 conference in Shanghai this week have announced deals to sell a combined 4.5 million tons of LNG a year from proposed multi-billion dollar projects. Nearly all of that was sold without a link to the U.S. Henry Hub benchmark, the most- widely traded gas price in the world.

The novel price links for U.S. gas included:

Japan-Korea Marker: Tellurian Inc. agreed to sell Total 1.5 million tons a year from its Driftwood LNG venture in Louisiana linked to Asian spot LNG marker, which has traded as much as $9 above Henry Hub in the past year. Brent oil: NextDecade Corp. will supply Royal Dutch Shell with 1.5 million tons annually, for 20 years, linked to the global crude benchmark, which U.S. exporters in the past argued has no connection with gas fundamentals.

LNG has traditionally been priced against oil, since the gas market lacked a liquid, global benchmark. The rise of U.S. exports, and the ease of pricing against Henry Hub, was a way to break the link with oil, but left costs dominated by factors unique to North America.

Not Willing

“Nobody wants Henry Hub” pricing in Europe, Mark Gyetvay, CEO for Russian LNG developer Novatek, told reporters on the sidelines of the conference. “Most of these people are not willing to take Henry Hub because they can’t hedge it” against European benchmarks.

No global marker has been established amid the robust growth in spot LNG demand and trading, reflecting a desire by buyers and sellers to secure a diversity of pricing options. Trading of JKM futures on the Intercontinental Exchange Inc. grew 10-fold between January 2017 and December 2018, while trading of Dutch Title Transfer Facility futures has grown nearly five times faster than U.S. trading in the past two years.

Europe has long had domestic gas markets that set prices LNG producers are willing to sell against. But that hasn’t been the case in Asia, where gas markets are typically disconnected and regulated by governments.

That’s started to change in the past two years as spot LNG trading in the region increased, bolstering confidence in the JKM price, assessed by S&P Global Platts. Nearly two-thirds of the world’s LNG was bought by Japan, China, South Korea or Taiwan last year, according to the International Group of LNG Importers.

Asian Index

“We don’t believe LNG should continue to trade on an index to something else. It should be buying and selling on an LNG index,” said Meg Gentle, Tellurian’s chief executive officer. “Today JKM is really the market clearing index. Over time there will be additional LNG price points.”

The pricing mechanism that raised eyebrows this week in Shanghai was NextDecade’s Brent-linked deal with Shell. NextDecade CEO Matt Schatzman said he wanted to sell against Brent because his Rio Grande LNG venture will rely on gas that’s a byproduct of oil drilling in the Permian Basin, where output will likely increase along with oil prices.

Total CEO Patrick Pouyanne said he didn’t understand that logic.

“Continuing to price gas linked to oil is somewhat the old world,” Pouyanne said on Wednesday. “I was most surprised to see new contracts linked to Brent, especially from the U.S. Someone will have to explain this to me.”

What a difference just a few years can make. After more than a decade of uncertainty for Egypt’s natural gas sector, leading even to importing LNG for years, Cairo is heading to a much brighter gas future. Two weeks ago, Egypt re-joined the ranks of global LNG exporters when its state gas company EGAS tendered to sell four cargoes of LNG for loading in April from the Idku liquefaction plant on the Mediterranean coast. Bloomberg said the tender marked a revitalizing of its gas industry, where sagging domestic production forced it to halt most exports of LNG in 2014. Around the same time period, LNG producers, especially Qatar and Australia, looked to Egypt to help soak up extra production as well as cargoes not linked to off-take agreements. Moreover, Egypt was seen as a bright new spot for LNG producers to sign new supply deals as the ongoing LNG supply overhang gathered momentum.

Mid-year goals

Cairo recently said the Idku facility would be operating at full capacity by mid-year on the back of an ongoing surge in local gas production. However, Egypt’s second LNG plant remains offline, pending resolution of a financial dispute with the operators relating to the earlier breach of the government’s gas supply commitments.

In addition to the four cargoes commissioned by EGAS for April, another four and three cargoes are being marketed for May and June respectively. The offer is the largest since the country’s two liquefaction plants at Idku and Damietta were gradually taken offline in the early years of the decade. February exports were around 390 mcm, with Turkey emerging as the main buyer. These initial tenders are viewed as a means for EGAS to test the market before embarking on term contracts.

Egypt began importing LNG in 2015 and received its last cargo in September 2018. In the last quarter of 2018, the country regained its position of self-sufficiency, according to several reports. This rapid turnaround was made possible due to the discovery and rapid exploitation of the offshore Zohr field. First discovered in August 2015, the field began producing in December 2017. Production reached 12.2 bcm in 2018 and, as of late January, was running at around 56.6 mcm per day. It is expected to reach 76 mcm per day by the end of 2019.

A presentation from Eni two weeks ago said the field should ramp up to 580,000 boepd (92.8 mcm per day). Progress at Zohr has been backed up by other gas fields as well. British oil major BP commissioned the second phase of the company’s West Nile Delta (WND) project in February, raising output by around 19.8 mcm per day.

The Idku plant, owned through a joint venture between Shell, Malaysia’s Petronas, France’s Total, and several Egyptian owned firms, has 7.2 million tons per annum (mtpa) of liquefaction capacity and is located about 50 km east of Alexandria. Speaking in an interview in mid-March, Egyptian Petroleum Minister Tarek el-Molla said Idku’s backers aimed to reach full throughput capacity of 32 mcm per day by the end of June, from around 22.7 mcm per day at present. Moreover, the supply outlook for Egypt continues to improve.

New gas synergies

Yesterday, Bloomberg reported that the companies, Delek Drilling, Noble Energy, and Ratio Oil Exploration, developing Israel’s largest natural gas field are in discussions to increase the amount of supply to Egypt beyond the $15 billion deal inked last year. “The potential in the Egyptian market is endless,” Chief Executive Officer Yossi Abu said. “We’re going to clear up a lot of question marks in the coming months, once we start flowing gas through the EMG pipeline,” which will transport gas to Egypt, he added.

Saudi Aramco may be the world’s most profitable company, but that likely still won’t be enough to persuade investors the energy behemoth is worth $2 trillion.

New financial details, disclosed today by Moody’s Investors Service, show a company that paid $58.2 billion in dividends to the Saudi government last year. Working back from that, the valuation would be closer to $1.2 trillion if investors judge Aramco by the same metrics as other giant oil companies.

Saudi Arabia has stuck to its original $2 trillion aspiration, even after some investors made it clear in the early stages of the mooted initial public offering that they didn’t share that view. Aramco instead pushed back the timeline for its IPO to 2021, from 2018, and embarked on the acquisition of a majority stake in petro-chemical group Sabic worth about $69 billion.

It’s in the context of that purchase that Aramco’s financials are being released to prospective bondholders funding the acquisition. They may look for comparisons with other energy companies such as Exxon Mobil Corp., Royal Dutch Shell Plc, Chevron Corp., Total SA, and BP Plc, who on average offer a dividend yield of 4.9 percent. Applied to Aramco’s dividend payout last year, that implies a valuation of about $1.2 trillion.

Potential Bondholders

If however investors demand a higher yield to compensate them for the risks involved with the government continuing to control a majority stake, then they might set the valuation even lower. For example, if they were to seek a similar yield to that of Shell, 6 percent, the valuation would drop to just short of $1 trillion.

It will all depend on what metrics investors choose to focus on. Those favoring price to earnings or enterprise value to underlying earnings, for instance, might well value Aramco higher. But right now in an era of vanishing yields, dividends are king, particularly in the hydrocarbons sector where worries about stranded assets are multiplying, even if they aren’t shared by Aramco’s management.

Aramco declined to comment via a spokesperson.

While Moody’s gave a dividend figure of $58.2 billion, Aramco itself in a presentation to potential bondholders said its “ordinary dividend” was $52 billion last year. There wasn’t an immediate explanation for the discrepancy.

Saudi Arabia has a few options to boost the valuation before resuming efforts on the IPO. One way would be to cut the amount of tax the company pays, something the government already did in 2017. Aramco paid $102 billion in income tax last year, almost double the dividend amount, according to the presentation to potential bondholders. A further cut would reduce tax revenue at a time when the state is already struggling to cover its budget.

Aramco’s acquisition of a stake in Sabic and the subsequent IPO are cornerstones of Crown Prince Mohammed bin Salman’s economic agenda to move the nation away from its dependence on hydrocarbons.

CO2 is a powerful warming gas but there’s not a lot of it in the atmosphere – for every million particles of air, there are 410 of CO2.

The gas is helping to drive temperatures up around the world, but the comparatively low concentration means it is difficult to design efficient machines to remove it.

But a Canadian company, Carbon Engineering, believes it has found a solution.

Air is exposed to a chemical solution that concentrates the CO2. Further refinements mean the gas can be purified into a form that can be stored or utilised as a liquid fuel.

A C$60mln fund raise last year to help develop the field was heavily backed by UK institutions.

Energy security is a sensitive topic in Europe. Too much dependence on Russian imports has made Western politicians twitchy.

That makes Valeura Energy Inc’s (TSX:VLE) plan to develop a potentially huge new deep gas field in Turkey looks very well-timed.

The Vatican has invited Big Oil bosses for the second time in a year as part of Pope Francis’s campaign to counter climate change, according to people familiar with the plan.

Top executives from BP Plc and Eni SpA are among those invited to attend a two-day meeting from June 13, the people said, asking not to be identified before a formal announcement. The officials could meet the Pope on the second day, they said.

Chief executive officers of Exxon Mobil Corp., Eni and BP, along with asset manager BlackRock Inc.’s Larry Fink, attended a similar meeting last year, in which they agreed the world needed to transition to lower-carbon fuels while ensuring adequate supply. Since then, little progress has been made on some of the key points agreed at that meeting, such as carbon pricing.

The Pope’s spokesman declined to comment when asked about this year’s meeting.

The interest of Pope Francis, who has made climate change a cornerstone of his papacy, adds to the pressure companies are already facing on emissions. Royal Dutch Shell Plc gave in to demands from investors last year to set short-term climate targets, while BP has said it will disclose more information about the alignment of its business model with the Paris accord. Exxon Mobil has successfully blocked a measure from investors on climate change.

In its strategy update last month, Eni said it will plant 20 million acres of forest in Africa to help offset all carbon dioxide emissions from its oil and gas exploration and production operations by the end of the next decade.

The Pope said in an encyclical letter in 2015 that the science around the topic is clear and that the Catholic Church should view it as a moral issue. The Vatican, which has diplomatic relations with over 180 countries and has permanent observer status at the United Nations, has also fervently backed the Paris climate agreement.

The world wants US natural gas. American prices, though, it can do without. US gas companies at the LNG2019 conference in Shanghai this week have announced deals to sell a combined 4.5mn tonnes of liquefied natural gas a year from proposed multibillion dollar projects. Nearly all of that was sold without a link to the US Henry Hub benchmark, the most-widely traded gas price in the world. The novel price links for US gas included: Japan-Korea Marker: Tellurian Inc agreed to sell Total SA 1.5mn tonnes a year from its Driftwood LNG venture in Louisiana linked to Asian spot LNG marker, which has traded as much as $9 above Henry Hub in the past year. Brent oil: NextDecade Corp will supply Royal Dutch Shell Plc with 1.5mn tonnes annually, for 20 years, linked to the global crude benchmark, which US exporters in the past argued has no connection with gas fundamentals. LNG has traditionally been priced against oil, since the gas market lacked a liquid, global benchmark. The rise of US exports, and the ease of pricing against Henry Hub, was a way to break the link with oil, but left costs dominated by factors unique to North America. “Nobody wants Henry Hub” pricing in Europe, Mark Gyetvay, chief financial officer for Russian LNG developer Novatek PJSC, told reporters on the sidelines of the conference. “Most of these people are not willing to take Henry Hub because they can’t hedge it” against European benchmarks. No global marker has been established amid the robust growth in spot LNG demand and trading, reflecting a desire by buyers and sellers to secure a diversity of pricing options. Trading of JKM futures on the Intercontinental Exchange Inc grew 10-fold between January 2017 and December 2018, while trading of Dutch Title Transfer Facility futures has grown nearly five times faster than US trading in the past two years. Europe has long had domestic gas markets that set prices LNG producers are willing to sell against. But that hasn’t been the case in Asia, where gas markets are typically disconnected and regulated by governments. That’s started to change in the past two years as spot LNG trading in the region increased, bolstering confidence in the JKM price, assessed by S&P Global Platts. Nearly twothirds of the world’s LNG was bought by Japan, China, South Korea or Taiwan last year, according to the International Group of LNG Importers. “We don’t believe LNG should continue to trade on an index to something else. It should be buying and selling on an LNG index,” said Meg Gentle, Tellurian’s chief executive officer. “Today JKM is really the market clearing index. Over time there will be additional LNG price points.” The pricing mechanism that raised eyebrows this week in Shanghai was NextDecade’s Brent-linked deal with Shell. NextDecade CEO Matt Schatzmansaid he wanted to sell against Brent because his Rio Grande LNG venture will rely on gas that’s a byproduct of oil drilling in the Permian Basin, where output will likely increase along with oil prices. Total CEO Patrick Pouyanne said he didn’t understand that logic. “Continuing to price gas linked to oil is somewhat the old world,” Pouyanne said yesterday. “I was most surprised to see new contracts linked to Brent, especially from the US Someone will have to explain this to me.

Wind turbine installations are likely to accelerate in the next five years as new markets open across Asia and Africa, jump-starting an industry that to date enjoyed steady but unspectacular growth. Led by China, the US and new markets in South-East Asia, wind installations may grow by 50% in total in the next five years and add 300 gigawatts of power generation capacity, the Global Wind Energy Council, an industry group, said yesterday in its annual report. The South-East region including Vietnam may grow to a 4-gigawatt wind market by 2023, up from 1.5 gigawatts last year, GWEC said. The group identified several new drivers for the industry’s growth in addition to lower turbine prices and government commitments to reduce pollution set out in the Paris Agreement on climate change. It said developers and investors are increasingly tapping finance outside government support wind power. Those include power purchase agreements, enabling a faster roll out of projects both in mature and fledgling markets. The cost of turbines has fallen sharply in recent years, although that trend will probably stabilise in 2019, said GWEC. Global installations of on- and off shore wind will increase by as much as 65.4 gigawatts this year from 51.3 gigawatts in 2018, the group said. South-East Asia states like Vietnam, Indonesia, Thailand and the Philippines are markets to watch, said GWEC in its report. Urbanization, rapid industrialisation and population growth are encouraging the region’s governments to access clean power, it said.