Natural Gas

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Renewables are not normally a core topic of ours. In recognition of the growing importance of the sector and the legal and incentive landscape that is encouraging investment in such technologies, MetalMiner does produce a Renewables Monthly Metals Index (MMI) that tracks metal input costs to the sector.

But, as a rule, we tend not to cover the sector directly, so see this as a stroll off the reservation today as two posts this week in the Financial Times present both short-term negative issues and longer-term positive issues that some readers may find of interest.

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This morning in metals news, Indiana again led the way in U.S. steel production last year, Tesla is in talks to use cobalt-free batteries in its cars made in China and the Energy Information Administration (EIA) projects U.S. natural gas production will continue to rise over the next 30 years.

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In the short term, a new five-year gas transit agreement between Russia and Ukraine, agreed just 12 days before the current agreement is to expire, is good news for Europe, Russia and Ukraine — a rare example of pragmatism and compromise in today’s winner-takes-all approach to diplomacy.

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But in the longer term the agreement, heralding as it does a waning of the Russian-Ukrainian interdependency, removes an issue that demands a degree of cooperation and opens to the possibility that bilateral tensions could rise in the future.

Still, for now, as a Stratfor Worldview report observes, Europe will not have to worry about keeping the lights on or heating their homes this winter and nor will Ukraine (so economically dependent as it is on gas transit revenues).

The deal is the result of compromise on both sides.

As part of the deal, Russia will gradually reduce its use of Ukrainian pipeline infrastructure over the next five years as it expands its access to the European natural gas market through the Nord Stream 2 and TurkStream pipelines.

Ukraine, meanwhile, will use the next five years to continue its efforts to reduce its dependence on natural gas that comes directly from Russia by ramping up domestic gas production and searching for alternative routes for imports.

As gas volumes decrease through the Ukrainian system — decreasing from the current volume of 90 bcm to 65 bcm next year and just 40 bcm in 2021 — and the infrastructure continues to age, income would be expected to decrease and maintenance expenditure to rise. However, as part of the deal, Russia has agreed to fix transit fees over the next five years at a higher level to allow Ukraine to sustain its roughly $3 billion in revenue even though volumes will halve, Stratfor reports.

It will be interesting to see whether pragmatism and compromise can prevail over the completion of the new Nord Stream 2 and TurkStream pipelines — not between Europe and Russia but between Europe and the U.S.

According to Reuters, President Donald Trump signed a bill late this month imposing sanctions on the Nord Stream 2 gas pipeline project led by Gazprom, Russia’s state-controlled gas company. The project aims to send gas under the Baltic Sea, bypassing Ukraine and doubling the capacity of the existing line.

Source: Stratfor

The threat of sanctions blocking access to the U.S. financial system forced Allseas, a Swiss-Dutch company that lays deep-sea pipe, to suspend work on the project. All but a 100-mile (160-kilometer) stretch remains to be completed, the article states.

Most European countries are furious at the U.S. action, seeing it as interference in an internal European project. The U.S. has been against Europe’s greater reliance on Russian gas since the Obama administration on the grounds it strengthens Putin’s economic and political grip on Europe. Europe suspects the U.S. simply wants to substitute cheap Russian gas for more expensive U.S. liquefied natural gas (LNG) shale gas exports, arguing that if the U.S. were really concerned about Russian influence over Europe, the president would be a stronger advocate of mutual defense and, in particular, NATO.

For now, work toward completion of the last 130 kilometers of the Nord Stream 2 pipeline has been stopped by the sanctions threats, but Russian state media reported Gazprom’s pipe-laying vessel Akademik Cherskiy, currently in the far east, would be brought to the Baltic to complete the pipeline regardless.

Europe’s desire to see dialogue and cooperation with Russia, as opposed to distrust and detachment, may yet prove naive.

Europe relies on Russia for something like half its natural gas supplies and Russia has shown it is not above restricting supplies to achieve its political ends, as happened in 2014 after the Russian annexation of Crimea and Moscow’s attempts to pressure Ukraine — and, hence, Europe — by cutting off gas supplies.

Some European countries agree with the U.S. that diversification, whether to the U.S. or elsewhere, would make more sense, however convenient and cheap Russian gas is. Over-reliance is clearly a risk, however strongly many on the other side argue Russia needs the revenues even more than Europe needs the gas.

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Mark it down as yet another item on the world’s agenda to be resolved in 2020 requiring compromise and pragmatism all round.

Futures markets are suggesting the currently benign level of natural gas price volatility may not remain through the winter months.

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According to the Financial Times, market volatility this year has been the lowest on record despite inventory levels falling 19.5% below average and by the time winter starts are set to be at their lowest in more than a decade.

Source: Bloomberg (via Financial Times)

The Financial Times puts this down to investors being lulled into complacency by a seemingly unstoppable wave of new supply from the shale market rising inexorably to meet rising demand. The government last week forecast 81.1 billion cubic feet per day in dry gas production for 2018 — a record high — and up by 7.5 billion cu ft/d from 2017, the Financial Times reports.

But is the market safe to assume shale gas will supply regardless of demand?

Natural gas producers are systematically hedging their sales throughout next year, often a sign they plan to continue an aggressive policy of drilling and expansion. That activity has contributed to a dipping of forward prices, as there are more sellers in the futures market than buyers.

But inventory levels are low — some would suggest dangerously low — after a high summer demand due to hot weather increasing demand for air conditioning. Natural gas “power burn” surged to a record 37.7 billion cubic feet per day during July, the Financial Times reports.

Such strong demand comes after a cold winter depleting stocks to unusually low levels. Inventory levels were low at the end of the summer and have not managed to be replaced during the normally slacker summer months. High demand is not helped by exports of natural gas and distillates running at record levels, aided by strong international demand and low U.S. domestic prices relative to global markets.

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Forward market spreads suggest there is already competition between companies buying gas for anticipated stronger winter-month demand are meeting power companies also trying to hedge their requirements.

Volatility is traditionally lower in the slacker summer months and rises as demand ramps up in the winter. If inventory levels are high, investors are less prone to panic, rightly seeing ample supply.

But when inventory levels are low, volatility is placing complete faith in the shale producers to meet rising demand — a faith that may yet prove misplaced.

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India and the United States may be at loggerheads over the recently announced trade tariffs on the import of metals, but that has not stopped the two nations from talking cooperation in other fields like oil and gas or renewable energy.

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On Tuesday, U.S. Secretary of Energy Rick Perry and the Indian Minister of Petroleum and Natural Gas Dharmendra Pradhan co-chaired the inaugural meeting of the U.S.-India Strategic Energy Partnership in New Delhi. This was a meeting following up on the announcement of the tie-up by U.S. President Donald Trump and Indian Prime Minister Narendra Modi in June 2017, in Washington, D.C.

The two countries will jointly look at ways to increase energy security; expand energy and innovation linkages across respective energy sectors; bolster strategic alignment; and facilitate increased industry and stakeholder engagement in the energy sector, the government said in a statement.

The Indian minister was quoted by the news agency Press Trust of India (PTI) as saying that the U.S. and India will pursue four primary pillars of cooperation: oil and gas; power and energy efficiency; renewable energy and sustainable growth; and coal.

A joint statement issued after the meeting reaffirmed the commitment by both sides to an early and full implementation of their civil nuclear partnership, including the planned supply of six Westinghouse reactors for the proposed nuclear power station in the Indian province of Andhra Pradesh. The cooperation in nuclear energy is being pursued through relevant bilateral mechanisms, the Times of India reported.

According to the PTI report, Perry indicated that recognizing the significance of civilian nuclear energy for meeting the growing global energy demands in a cleaner and more efficient manner, India and the U.S. were engaged in the implementation of the 2008 agreement for cooperation concerning peaceful uses of nuclear energy. Read more

Fracking as a technology has been a spectacular success in transforming the energy landscape in the U.S., Elsewhere, however, it has failed to catch on, largely due to concerns about the environmental consequences of ground water pollution or sometimes, as in the U.K., by illogical worries about fracking causing tremors or earthquakes, concerns that environmental groups are only too keen to stoke up.

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Of all places, the Middle East would not spring to mind as an obvious place for fracking to catch on. The region is blessed with some of the most extensive oil and natural gas reserves in the world, even after decades of extraction.

But that is precisely where BP’s largest new project is starting this year, according to a Telegraph report.

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You would think that a stiffening of Washington’s backbone when it comes to Russia would be welcomed by Europe. After all, it was Germany’s Angela Markel that has led the tough stand taken against Moscow following the Russian-sponsored uprising in eastern Ukraine and annexation of Crimea.

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But on the contrary, cross-party support in the U.S. House of Representatives led to a 419 to 3 vote in favor of new financial sanctions against Russia this week, a move that has faced fierce criticism from Bonn and considerable debate about the wider implications.

The EU probably does not care about the inclusion of North Korea in the proposed sanctions, although it has taken a distinctly different and more tolerant line on Iran (the third regime included in the action).

But it is Russia that is really raising the hackles in Bonn according to Carnegie Europe, a Brussels-based think tank.

Impact on Europe

A post on the site reports the action could not only severely impact many European companies who have already invested heavily in projects, particularly in the oil and gas sector, but that it could also precipitate a political divide among Europe’s partners. Seen in the context of this development, President Donald Trump’s focus on Poland during his recent visit to the continent for the G-20 summit takes on a more sinister slant — at least, that is the view many Europeans are taking.

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The strike at Chile’s Escondida, the world’s largest copper mine, is ending after workers decided to invoke a rarely used legal provision that allows them to extend their old contract, the union said on Thursday.

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Hours earlier, talks between the two sides failed, and Escondida, which is operated by BHP Billiton, said it would attempt to restart production, presumably with replacement workers. The workers said they would present their decision to the government on Friday and return to work on Saturday.

Escondida produced 5% of the world’s copper last year.

Asian LNG Buyers Come Together

The world’s biggest liquefied natural gas buyers, all in Asia, are clubbing together to secure more flexible supply contracts in a move which shifts power to importers from producers as oversupply grows.

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Korea Gas Corp. said on Thursday it had signed a memorandum of understanding in mid-March with Japan’s JERA and China National Offshore Oil Corp (CNOOC) to exchange information and “cooperate in the joint procurement of LNG.”

You may feel it cynical to say anyone would engage in a blue sky thinking if someone else is going to pay for it, but you have to question whether Voestalpine AG and its partners would be embarking on a research program that appears to have little prospect of economic viability in the next 20 years if the European Union was not funding the lion’s share of €18 million.

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The Austrian steelmaker Voestalpine, Siemens of Germany and Austrian renewable energy company Verbund party are building an experimental facility to economically produce hydrogen from water, which would then be used in place of coking coal for steelmaking. You may remember that my colleague, Jeff Yoders, noted that Voestalpine touted research into using hydrogen to reduce iron ore at its new DRI facility in Texas when the facility opened last year.

Voestalpine Corpus Christi

Voestalpine’s $750 million direct-reduced iron ore facility in Corpus Christi, Texas, could one day be fueled by hydrogen and not natural gas. Image: Jeff Yoders.

By the consortium’s own admission, an economically viable hydrogen process could take 20 years but should it eventually prove successful the benefits in decarbonizing a range of energy intensive industries such as ceramics, aluminum, glass, and cement in addition to steel could dramatically reduce emissions from one of the largest sources of industrial CO2 emissions. Read more

Our Renewables MMI was flat this month. While solar and wind still remain hot investment markets, the political discussion going on right now about the next four years greatly overestimates their abilities to provide jobs or a one-for-one replacement of the production of natural gas.

Renewables_Chart_October-2016_FNL

The metals that go into wind turbines, solar panels and other green energy producing instruments are not seeing the fruits of increased adoption. Part of that is still the individual metals markets. Steel, for instance, saw a small increase this month, but it wasn’t enough to make up for losses by silicon and the other metals in the Renewables MMI. Check our our Raw Steels MMI for more on that.

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Democratic nominee Hillary Clinton even walked back her support of solar as a jobs program.

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