Thursday, 17 January 2019

Spot the molecule

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It was interesting to note where the first ever cargo from Russia’ Yamal LNG showed up - Boston, USA. Given the current political stand-off between the two countries, with the US imposing heavy energy related sanctions on Russia, the ultimate destination of the LNG hit the headlines earlier this year.

A lot has been written about fake news, etc, over the last year or two. But this story did appear to be true. And the Russians, hit by those sanctions, made the most of it.

The cargo arrived in January during a tough New England winter. The ship carrying the LNG from Europe, Engie’s Gaselys vessel, actually teased the market by turning around in mid-Atlantic, seeming to go back to Europe before then carrying on to Boston.

How did the LNG get into the US? Apparently, the Yamal LNG cargo was shipped to the Isle of Grain terminal in the UK by a Total ship, the Christophe de Margerie, before being transferred to the Gaselys. The actual source of the gas molecules travelling off to the US was therefore hard to determine given that the Yamal gas could have been mixed with other LNG.

In January this mixing up of the molecules was one reason given why the LNG was let into Boston. But last month the Russian Foreign Ministry said three more Yamal cargoes had entered the US.

If true (who knows these days!), so much for sanctions and indeed for the US plan to stop Nord Stream gas coming into Europe via a third and fourth pipeline.

Of course, the US could employ similar tactics going the other way. China has imposed its own 10% tax on US LNG during this year’s trade war spat. So the US could send some US LNG over to the Isle of Grain, mix it with some Russian LNG and ship it off to China without having to pay the 10% tax. Simples!

But as anyone in the energy market knows, destination clauses can cause heated debates. In the old LNG days, LNG project sponsors and bankers insisted on tight destination clauses. Now in the global LNG trading market, such clauses would be laughed out of court. As the first Yamal shipment shows, the final destination of a cargo might not be certain until near final delivery.

Until now, the earth’s energy has come from subsurface sources. Ownership was easy to determine, just look at a map and see which nation controls the area.

As the globalisation of LNG shows, determining where energy sources have come from is becoming harder. And now, with the renewables revolution, it has become impossible. Instead of looking to the ground, we are now looking to the sky – to the wind and the sun. Not so much spot the molecule as take the temperature.

Of course, you could say the wind has to originate somewhere – the beast from the east from Siberia for example – and it could have some ownership.

Russia’s energy strategy over the last decade has been to use its energy resources as political, as well as commercial, bargaining chips in the global geopolitical sphere. If could genuinely move up a gear in this strategy if it could change the climate every so often, rather than spending money on new nuclear weapons.

But in the real world Russia, like all other political and commercial participants in the global energy market, is facing massive disruption from the renewables revolution. No one wants to get caught like the German utilities that were wrong-footed by the end of nuclear power in Germany after 2011. That was a relatively small example of what can happen when energy markets shift.

So this year we are seeing some major shifts in the activities of the players. Saudi Arabia has procured its first solar-powered project and it intends to buys a lot more. Indeed, all the oil and gas-rich states in the Gulf are moving headlong forwards with major renewable energy programmes.

International oil companies (IOCs) are doing the same. It was back in 1997 that the then head of BP Sir John Browne gave a speech at Stanford University on Beyond Petroleum (ie, BP). That new green strategy fell by the wayside, particular after BP encountered its Deepwater Horizon problems in 2010.

Now IOCs are reaching out to developers and bankers to see how they can adopt renewables strategies to ensure their long-term survival over the next decades. Beyond Petroleum is not now a clever marketing strategy but a looming threat.

For bankers and investors, turning BP is not such a challenge. Buy green loans and bonds and voila. However, finding a decent amount of green financial product is a challenge. Hence the huge demand for offshore wind deals among the banks and institutions. Folks cannot get enough of them.

But, of course, existing business – thermal energy – still needs to carry on. Environmental activists are now playing spot the molecule on the balance sheets of financial services companies, which is leading to hotter temperatures on the streets.

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