With natural gas prices slumping to new lowsearlier this year, U.S. exports of liquid natural gas to Europe can’t come anytime too soon.
Facing unusually warm winter weather combined with record natural gas released as “fracking” continues despite a slowdown, natural gas prices during the first quarter hit a multiyear low of $1.70 per million Btu as that sector rushed its conversion facilities to produce LNG.
Simultaneously, ports are cropping up around the rim of the Gulf of Mexico to take advantage of alternative demand, especially in Eastern and Central Europe.
The latter is of particular geopolitical importance since former Soviet satellites, such as the Baltic states (Lithuania, Latvia and Estonia), as well as Central Europe (Czech Republic, Slovakia, Hungary, Bulgaria and Croatia) and Finland, have depended on most of their natural gas from Russian pipelines, which have commanded prices far above those made available by the U.S. These prices average $3.60 per million Btu vs. Russia’s delivered LNG of near $5.
While the Russians, who have enjoyed a monopoly on the fossil-fuel demand of their former satellites, as well as pro-Western nations such as Germany, France, Italy and Poland, the increasing incursion of America’s LNG opens up a new geopolitical confrontation between the U.S. and Russia.
While most European nations welcome potential U.S. LNG imports plus the light condensate American West Texas Intermediate oil shipments being planned, Moscow is taking a dim view of this competition. Although downplaying its significance, the Russians view America’s preferred political standing, in addition to most of its cost policies, as a threat to Russian political influence in their arena of forced domination.
Since Russia currently is struggling against low global fossil-
fuel prices, which it can ill afford, an oncoming American fossil-fuel incursion will be considered an act of hostility once it generates significant volume within the next two to three years.
It is entirely possible this dire alternative will force Russia, in conjunction with its Iranian ally, to take even more precipitous action in the Mideast. This is expected to forestall major economic losses that voluminous U.S./European-directed oil and natural gas will bring to bear.
The global shipping crisis
Although hardly mentioned in media reports of lagging world trade, a major crisis is ensnaring the world’s once mighty seafaring shipping industry.
For years, the key to massive worldwide commodity shipments has been China. It has been the recipient of untold tons of freight, including all types of dry bulk, in addition to oil and construction materials such as cement, iron ore and bauxite.
The Baltic Dry Bulk Index, a global measure of shipping prices for commodities, reached the lowest point in its 31-year history in February. While recovering intermittently since, it remains more than 50% below the peak it hit in the middle of last year.
With practically all major shipping companies hit hard by this calamity, most of the largest companies are cancelling the building of new units and are holding back completion of those now in various stages of production.
While bankruptcies at this point are still scarce, loans to all but the few shipping companies with the highest credit ratings are being withheld or offered at enormous interest rates.
This state of affairs has even encouraged a few “poachers” on the lookout for great “buys,” with an eye toward future recovery.
While the Chinese debacle stands at the center of this calamity, the accompanying slowdown of exports from the world-leading United States and the graphic downturn of “goods shipping” from Central and Western Europe, is adding to this worse-than-expected downturn.
If 2016 continues or worsens at the current unexpected downward pace, the experience of India’s Mercator Ltd, which sold its 67% stake to three Singapore investment companies for practically next to nothing, may become a guide mark for future ship-buying deals this year.
Oil sands price collapse and Canada
While it is well-known and readily observed that the minimal oil price recovery has undercut the national budgets of Russia, Venezuela and Nigeria, all primarily dependent on export revenues generated by the “black gold,” it also has caused a reversal of America’s fracking-generated oil production.
However, it is estimated this will result in a less than 1% per annum downturn in the 2016 expected gross domestic product of the U.S. — the world’s economic leader.
But little has been noted media-wise regarding Canada, whose buoyant economy had escaped the great financial crisis, but has heavily butted up against the fast-growing oil production reversal of its Alberta province’s Athabasca region. With oil sands costs appreciably higher than traditional crude, Canada’s oil capability has effectively stalled.
After surviving the U.S. administration’s blockage of the Trans-Canada XL oil pipeline and continuing record shipments to U.S. refineries along the Mexican/U.S. Gulf Coast, the 70% swoon in oil prices since mid-2014 has made oil sands extraction costs incapable of leaping over the $30-$40 per barrel cost base. This has severely reversed the prodigious volume that had increasingly covered Ottawa’s annual budget expenditures.
While Canada’s relatively small population (36 million on the world’s second-largest land mass) benefitted handsomely from oil sands in the past decade, America’s northern neighbor has faced the oil debacle, plus severe new economic regulations imposed by the recent majority election victory of Prime Minister Justin Trudeau.
To put it mildly, this son of former Prime Minister Pierre Trudeau is implementing economic programs that would be considered “populist” by objective observers and hauntingly similar to those pushed through by the U.S. Environmental Protection Agency.
Since the proposed regulatory changes could not have come at a worse time, they already have affected Canada’s previously record tourism to the U.S., and instigated the selling of hundreds of winter season homes in California and other winter respites.
From an anti-business point of view, Canada is facing more severe problems than those it was able to overcome during the great financial recession.
Saudi oil war aimed at renewables?
While Saudi oil minister Ali Al-Naimi’s war declaration seemed aimed at crushing global oil and natural gas competition, it also is undermining the multi-billions of dollars the current U.S. administration has poured into solar, wind, geothermal and ethanol expansion.
At prices well below $50 per barrel, which effectively undercuts fracking, oil sands and deep sea drilling, the Saudi all-out war for energy market domination has, in effect, endangered a massive global switch to which the U.S. and most European nations already have initiated a new direction.
Ethanol, which preceded the worldwide renewable declaration of the past eight years, also is on the resource chopping block, as cheap gasoline makes this gasoline supplement artifice non-competitive and unnecessary. This will be cheered by most automotive manufacturers that have indicated ethanol’s endangerment of motor transports’ mechanical systems.
While this shift also will negatively affect U.S. corn production and a flourishing expansive deep sea sector of Brazil’s already stuttering economy, it will likely expand global oil usage by those able to meet sub-normal crude oil pricing projected by Saudi Arabia’s dictum. Included in possible U.S. export expansion are lightweight WTI crude and LNG.
While Riyadh’s aggressive “oil war declaration” could prove disastrous for Brazil, Norway and U.S. deep sea drilling, it also will have increasingly serious budget effects on Russia and Venezuela’s finances — victims of OPEC’s previous price control uniformity.
Only time and geopolitical developments will provide the answer to the final outcome of Saudi Arabia’s challenge.
This article was originally titled “LNG exports to the rescue?” in the May 2016 print edition of Supply House Times.