Natural Gas in the Spotlight- Macro Meets Micro

With the hostilities in the Ukraine and the resultant drumbeats of economic measures, natural gas has moved to the top of the energy radar. The macro-economic and geopolitical aspects of “gas” were covered in a web conference hosted by Columbia University’s Center on Global Energy Policy (CGEP). Fittingly, the event was titled “Weaning Europe of Russian Natural Gas”. Like many CGEP events, policy and politics were infused into economics, making it a very worthwhile event. While markets for shipping and commodities are my “thing”, international law (think about treaties and sanctions, among other aspects) has always perplexed me, and the perspectives of diplomats and CGEP fellows (who have had careers formulating and implementing “all-things energy policy”, at very high levels) were invaluable in this conference, as with others.

Of most interest to me were the remarks of Dr. Pierre Noël, a Global Research Scholar at the CGEP, who has studied the intersection of the natural gas marketplace with the choices facing policy-makers in governments. The movement in the marketplace, the particular trade flows, will take a while to shake out; implicitly, all of the participants in CGEP webinar are thinking that changes put in motion during the past week (and presumably in the days going forward) will be of the permanent variety. At a high level, he said, “The European Union member states are making a strategic decision to, over time, move away from their gas relationship with Russia”. The impacts would be global.

What would reduced pipeline gas moving into Europe mean, in terms of maritime trade flows? As explained by Dr. Noël, Russian gas historically moving by pipeline over to Europe could be shifted to Asian receivers- with movements to China accelerating. Europe would then require more imports of LNG. “If we were to lose our Russian gas, we would of course turn to the LNG market,” he said Over time, more LNG would move from the U.S. over towards Europe. Indeed, multiple LNG terminals are already operating, and multiple new facilities will be constructed around Calcasieu/ Lake Charles. Though shipping markets were not discussed explicitly, the world trade backdrop for tankers (and other vessels) will figure prominently in the policy deliberations. Charter rates for gas carrier vessels will be impacted (recently, a number of the listed LNG names have moved into private hands so share investors may not follow this sector as closely as others).

Then there’s the “micro” side of the discussion. LNG is also seeing increased use as a fuel for shipping (not discussed by CGEP). Reductions in the “well to wake” levels of emissions (encompassing the production of gas, its transport, and then actual combustion in vessels) lower the potential “methane slip” and therefore make LNG more attractive for Greenhouse Gas Reduction (GHG). Engine retrofits to support burning of LNG on existing vessels have gained traction. So, where do the macro considerations intersect with the micro-economics, ie the pricing and the availability of LNG for marine fueling? Clearly, it will be impacted. It is too early to say exactly what molecules will go where, but less supply, at least in the “short term” (until trade patterns and vessel nominations re-arrange), would drive prices higher. We are already seeing further record high gas prices in Europe- this would likely reverberate to Asia (also a large LNG importer), in the analysis of Dr. Noël). At a 50,000 foot  level, it would seem that LNG fuel for shipping will be widely available.

Maybe the burgeoning European LNG bunkering business will feel a pinch if the pipeline throughput is ratcheted back.  As this whole situation becomes clearer, including the macro meets micro dynamics, it will be revisited here. But- not to worry. The maritime industry’s coping mechanisms (sometimes called “resiliency”) are well honed, so fuel consumers and suppliers will figure out “fixes”. Over time, though, the temporary hacks and work-arounds will likely take on some permanence- we’ll be watching from here.