Energy Market Madness Leads To Record-Breaking Coal Consumption

By ZeroHedge - Jul 23, 2022, 

• Coal-fired electricity generation has surged to a record high.
• 
  
• The rise in coal use is being fueled by the ongoing war in Ukraine and booming electricity demand.
• 
  
• Coal-fuelled generation is on course to set an even higher record in 2022 as generators in Europe and Asia minimize the use of expensive gas.

Global coal-fired electricity generators are producing more power than ever before in response to booming electricity demand after the pandemic and the surging price of gas following Russia’s invasion of Ukraine.

The world’s coal-fired generators produced a record 10,244 terawatt-hours (TWh) in 2021 surpassing the previous record of 10,098 TWh set in 2018 (“Statistical review of world energy”, BP, July 2022).

Coal-fuelled generation is on course to set an even higher record in 2022 as generators in Europe and Asia minimise the use of expensive gas following Russia’s invasion and U.S. and EU sanctions imposed in response.

By contrast, mine output was still fractionally below the record set between 2012 and 2014 because older and less efficient coal generators have been replaced by newer and more efficient ones needing less fuel per kilowatt.

Global coal mine production was 8,173 million tonnes in 2021 compared with 8,180-8,256 million per year between 2012 and 2014.

But mine production is also likely to set a new record this year as the surging demand for coal-fuelled generation overtakes efficiency improvements.

Coal Resilience

Coal’s resurgence has confounded U.S. and EU policymakers who expected it to diminish as part of their plan for net zero emissions.

Between 2011 and 2021, generation from coal grew more slowly (1.2% per year)...

... than hydro (2.0%), gas (2.8%), wind (15.5%) and solar (31.7%).

As a result, coal’s share of total generation worldwide has declined 36.0% in 2021 from a recent peak of 40.8% in 2013.

But the enormous growth in electricity demand (2.5% per year) ensured there has been growing demand for all sources of generation.

Coal production and generation is set to continue rising through at least 2027 as the rising demand for electricity overwhelms efficiency improvements in combustion and the deployment of gas and renewables as alternatives.

Turbocharged

Rapid recovery after the pandemic has turbocharged these trends, boosting electricity demand and the dependence on coal-fired generation, and lifting coal consumption to a record high.

Russia’s invasion of Ukraine and the resulting reduction gas exports has stimulated demand even further as generators try to minimise consumption of expensive gas and countries try to indigenise their energy supplies.

In Europe, governments are encouraging coal-burning generators to remain in service for longer rather than closing in case gas flows from Russia cease in winter 2022/23.

Responding to shortages and security concerns, China and India are encouraging domestic miners to raise output to record levels to ensure adequate fuel stocks and cut their reliance on expensive imported coal and gas.

China’s coal production climbed to a record 2,192 million tonnes between January and June compared with 1,949 million in the same period a year earlier and 1,758 million before the pandemic in 2019.

India’s production climbed to a record 393 million tonnes between January and May compared with 349 million a year ago.

Fuel Shortage

Despite the rapid growth in domestic coal production in China and India, there is still a worldwide shortage of fuel, which has sent coal prices to their highest level in real terms for more than 50 years.

U.S. and EU sanctions have intensified upward pressure on prices by re-routing Russian coal to Asia and coal from Australia and Indonesia to Europe, resulting in longer and more expensive voyages.

Coal is the bulkiest and most expensive commodity to transport relative to its value so longer voyages have a direct and significant impact on the landed price paid by power producers.Related: Germany Agrees To $15 Billion Bailout For Uniper

Higher gas prices in Europe are pulling coal prices up in their wake as coal-fired generators scramble to secure fuel in order to be able to run their units for as many hours as possible.

Front-month futures prices for gas delivered in Northwest Europe have climbed to €157 per megawatt-hour from €41 at the same point in 2021 while coal prices have risen to €53 from €16.

If the northern hemisphere winter of 2022/23 is colder than normal, shortages of coal, gas and electricity are likely to become severe and are likely to force some form of energy rationing or allocation. The global coal shortage is part of a wider shortage of energy evident across the markets for crude, diesel, gas and electricity.

In each case, the shortage stems from the strong cyclical rebound from the pandemic and has been intensified by Russia’s invasion of Ukraine and sanctions imposed as a result.

Record prices are sending a strong signal to producers to increase output and to consumers to conserve as much fuel as possible.

Like crude and diesel, however, rebalancing the coal market will likely require a significant slowdown in the major economies to ease the immediate pressure on inventories and give production time to catch up with consumption.

By Zerohedge.com 

Guyana Poised To Break $1 Billion In Oil And Gas Revenue This Year

By Rystad Energy - Jul 24, 2022, 

• Guyana’s government oil and gas revenue is set to surpass $1 billion in 2022.
• Guyana may see $7.5 billion in annual oil and gas revenues by 2030.
• Guyana is the global leader in total offshore discoveries since 2015, with 11.2 billion barrels of oil equivalent.

As the burgeoning Guyanese offshore oil and gas industry goes from strength to strength, powered by the Stabroek block, government revenue from domestic production is on track to break the $1 billion mark this year and accelerate to $7.5 billion annually in 2030, according to Rystad Energy research. This year is set to be a turning point for the Georgetown government to start capitalizing on the vast reserves in the offshore field, with revenues more than doubling over 2021 levels.  Low breakevens and below-average emissions intensity in the Stabroek will propel Guyana from a relatively small producer to a global leader in the coming years, solidifying the country’s position as a competitive and policy-friendly player for offshore production. 

The government’s take* from the production is expected to increase until 2025, reaching $4.2 billion annually. Triggered by a forecasted drop in oil prices and continued spending on the field’s development, government revenues will fall to $2.4 billion in 2027. Still, production growth is set to accelerate, with revenue momentum resuming as new pre-Final Investment Decision (FID) projects are sanctioned and brought online, leading to peak government revenues of $16 billion in 2036. These projections do not factor in as-yet undiscovered resources. 

The recent spate of prolific discoveries and the steady pace of FIDs position the Guyanese government to reap the rewards of these finds with cumulative revenues totaling $157 billion by 2040. 

Guyana is the global leader in total offshore discoveries since 2015, with 11.2 billion barrels of oil equivalent, amounting to 18% of discovered resources and 32% of discovered oil. Of the total, a whopping 9.6 billion barrels are oil, far outpacing the US in second place with a comparatively small 2.8 billion barrels. The Stabroek block accounts for all of these finds, but recent discoveries in other areas show the potential for growth elsewhere.  

Guyana is forecasted to produce 1.7 million barrels per day (bpd) of oil by 2035 – not accounting for as-yet undiscovered volumes – propelling the country to the fourth position on the list of the largest global offshore oil producers, leapfrogging the US, Mexico and Norway.

“Guyana is just starting to extract and monetize its vast resource wealth, and the coming years will be a financial windfall for the Georgetown government. The country has played the long game after several decades of elusive exploration. The country’s offshore production is finally ready to take off,” says Schreiner Parker, senior vice president and head of Latin America and the Caribbean. 

Comparing the fiscal regimes of other offshore leaders, Guyana’s is on the higher end, with the government take clocking in at 59% of total value. In contrast, applying the US fiscal regime to the Stabroek block would result in a government take of only 40%. Nigeria and Brazil align more with Guyana’s fiscal policies, with 58% and 61%, respectively. 

The cost of supply is a significant factor in considering the desirability of assets and comparing them to other sources and regions. Helping to transform Guyana into a global heavyweight in offshore production is its competitive breakeven costs, which average $28 per barrel across all projects and less than $20 for producing projects. Guyana’s offshore oil fields are some of the most competitive supply sources outside of the Middle East and offshore Norway and are cheaper than the US onshore heavyweight the Permian, Russia and many other sources.  

In addition, emissions intensity from offshore activity in Guyana is lower than the global average for oil and gas production and deepwater offshore production, further strengthening the country’s position through the energy transition. Upstream emissions from Guyana’s deepwater activities average 9 kilograms of CO2 per boe, comparable to Brazil and slightly higher than Norway. 

Although tensions with neighboring Venezuela and Suriname have been an issue in the past, warming relations have allowed for increased drilling along the borders and boosted overall investor sentiment in Guyana.  

Still, it may not be all plain sailing. Strong institutional governance, transparency and regulatory practices will be vital to unlocking the full potential of Guyana’s resource wealth for its society. Although the government has taken steps to improve governance, including establishing a sovereign wealth fund and improving fiscal policy transparency, there are still improvements to be made. For instance, the Extractives Industries Transparency Initiative (EITI), which champions strong resource management and governance practices, recently found several weaknesses in Guyana’s company reporting and tax processes. However, their EITI score will likely grow in the coming years as recent improvements take effect. 

*Government take refers to the value received by the government over the life of a license in the form of royalties, profit sharing and taxes. 

By Rystad Energy

Chaos In Commodity Markets Draws Attention From Regulators

By Ag Metal Miner - Jul 24, 2022,

• Recently, the London Metal Exchange quietly withdrew its precious metals contracts due to low liquidity.
• Supply chain issues and uncertain demand has fueled volatility in commodity markets. 
• The chaos has put commodities of all kinds under an international regulatory microscope.

MetalMiner follows the LME (London Metal Exchange) very closely, as it remains the largest commodities exchange for base metal options and futures. Recently, we mentioned how the LME had quietly withdrawn its precious metals contracts due to low liquidity. However, that’s only part of the story when it comes to dwindling LME stock.

Both LME Stock and Prices are in Freefall

Last week, Reuters published an article detailing how LME warehouses held only 696,109 tons of registered metal at the close of June. It’s the lowest amount of available LME stock this century, and it should be pushing prices into bullish territory. However, ongoing fears of a looming recession are having the opposite effect. In total, the LME index has slumped 31% from its April high point. According to experts, LME inventories were cut in half over the first two quarters of the year. In fact, that June report represents a year-over-year drop of 1.67 million tons. Depending on who you as, it’s unlikely stocks or prices have hit bottom just yet. As of the time of the report, over 300,000 tons of the aforementioned estimate was still waiting to be offloaded. In terms of readily available supply, this means the LME sits at just around 390,000

A Rare Rift Between Price and Supply 

It doesn’t take an economics degree to see what’s happening with prices and inventories is rare. One of the first things traders learn is that when stocks of a commodity decline, the price should rise. With the LME stock, we have the opposite happening. As mentioned, recession fears are a big part of this. However, it would be nearly impossible to list out all the factors contributing to this “perfect storm.”

Related: Energy Market Madness Leads To Record-Breaking Coal Consumption

What does remain to be seen is whether or not this rare rift between price and supply will correct itself in the coming weeks. Back in June, Reuters reported that zinc stocks had all but disappeared from LME warehouses. Simultaneously, the price fell to a brand new low. As of this writing, they are hovering even lower – around $2,950.

One place we can look for an explanation is the supply chain, which has remained tight throughout the pandemic. In terms of lead, zinc, and tin, you can trace very significant supply disruptions for each metal. For instance, zinc smelters in Europe are shutting down due to energy costs. A major lead plant in Germany has yet to recover from a 2021 flood. Tin, on the other hand, has been in short supply for months due to coronavirus lockdowns.

Commodities in General Are Under the Microscope

Markets around the globe have been taking hits from all directions since the pandemic first appeared on the scene. Now, more than two years later, we’ve seen unprecedented inflation, spikes in grain and energy prices, and countless disruptions in supply and demand. Just recently, the LME suspended nickel trading after a spike in volatility, prompting at least two lawsuits.

The chaos has put commodities of all kinds under an international microscope. So far, it seems many regulators don’t like what they see. While metal and oil futures boast a lot of tracking and transparency, the same can’t be said of other important products. This has led some organizations to seek new rules that would give them more leeway to predict market vulnerabilities.

So far, the Financial Stability Board, based out of Switzerland, has started scrutinizing commodities markets with renewed gusto. The same goes for The Bank of England, which is seeking more transparency on commodities trading in general. However, the investigations and any regulations stemming from them will take years.

In the meantime, the bulk of the pressure is on suppliers to fill those LME warehouses before the year’s end.

By AG Metal Miner

The Companies Taking Advantage Of America’s LNG Boom

By Alex Kimani - Jul 21, 2022, 

• While oil pipeline capacity in the U.S. currently exceeds production, the country’s booming LNG and natural gas markets mean demand for infrastructure is soaring.
• The United States is projected to become the world’s largest exporter of LNG this year, and new LNG terminals and natural gas pipelines will be needed to continue this growth.
• Nearly all midstream companies in the U.S. are racing to take advantage of this opportunity, with new projects coming online and final investment decisions being made.

Over the past few years, dozens of U.S. midstream companies have set their sights on natural gas pipelines and export terminals as the U.S. natural gas and LNG markets explode while crude oil pipeline capacity continues to exceed production.

Natural gas projects are expected to be the fastest growing pipeline sector as production rises and shippers find new customers in Europe and Asia. Now, as analysts tell Reuters, it's all about boosting U.S. capacity and adding new pipelines to transport natural gas to LNG export terminals. 

"Everybody has pretty much given up on ever doing another long-haul pipeline anywhere outside of Texas and, maybe, Louisiana," Bradley Olsen, lead portfolio manager for Recurrent Investment Advisors' midstream infrastructure strategy, has told Reuters.

Europe's natural gas demand has skyrocketed as the EU tries to lower its reliance on Russian natural gas following its invasion of Ukraine. Europe has displaced Asia as the top destination for U.S. LNG, and now receives 65% of total exports. The EU has pledged to reduce its consumption of Russian natural gas by nearly two-thirds before the year's end, while Lithuania, Latvia, and Estonia have vowed to eliminate Russian gas imports outright.

The European gas crisis has only deepened after Russia cut off the gas supply to Poland and Bulgaria, ostensibly for failing to pay for gas in roubles, sending European gas prices soaring. The move marks a ratcheting up of tensions and could reduce supplies to Europe, as many pipelines pass through Poland en route to the rest of the continent. Adding to supply woes, Russia's Nord Stream 1 pipeline that supplies Germany has gone offline for scheduled maintenance. While it partially resumed operations on July 21st, Europe feared that it could be delayed for political leverage. 

Not surprisingly, Europe has become the top importer of U.S. LNG, taking about 65% of U.S. exports. 

The U.S. Energy Information Administration (EIA) has forecast that the United States will surpass Australia and Qatar to become the world's top LNG exporter this year, with LNG exports continuing to lead the growth in U.S. natural gas exports and average 12.2 billion cubic feet per day (Bcf/d) in 2022. The United States currently ranks second in the world in natural gas exports, behind only Russia.

According to the EIA, annual U.S. LNG exports are set to increase by 2.4 Bcf/d in 2022 and 0.5 Bcf/d in 2023. The energy watchdog has forecast that natural gas exports by pipeline to Mexico and Canada will increase slightly, by 0.3 Bcf/d in 2022 and by 0.4 Bcf/d in 2023, thanks to more exports to Mexico. 

In contrast to natural gas, crude oil pipeline capacity continues to far exceed production. Currently, there are ~8 million barrels per day of Permian crude pipeline capacity, significantly more than the 5.5 million bpd of production, according to EIA and Morningstar figures.

Natural Gas and LNG Projects

The pivotal Permian Basin is preparing to unleash a torrent of gas and gas projects to meet exploding LNG and natural gas demand - coming just in time, given that limited takeaway capacity is expected to start being keenly felt in 2023, which could lead to negative pricing in the basin.

Energy Transfer LP (NYSE: ET) is looking to build the next large pipeline to transport natural gas production from the Permian Basin. Energy Transfer has also started building the Gulf Run pipeline in Louisiana to move gas from the Haynesville Shale in Texas, Arkansas, and Louisiana to the Gulf Coast.

Energy Transfer is expected to report Q2 earnings on 3rd August 2022. The consensus EPS forecast for the quarter, based on five analysts as per Zacks Investment Research, is $0.28 compared to $0.20 for last year's corresponding period.

Back in May, a consortium of oil and natural gas firms, namely WhiteWater Midstream LLC, EnLink Midstream (NYSE:ENLC), Devon Energy Corp. (NYSE: DVN), and MPLX LP (NYSE: MPlX) announced that they had reached a final investment decision (FID) to move forward with the construction of the Matterhorn Express Pipeline after having secured sufficient firm transportation agreements with shippers.

According to the press release, "The Matterhorn Express Pipeline has been designed to transport up to 2.5 billion cubic feet per day (Bcf/d) of natural gas through approximately 490 miles of 42-inch pipeline from Waha, Texas, to the Katy area near Houston, Texas. Supply for the Matterhorn Express Pipeline will be sourced from multiple upstream connections in the Permian Basin, including direct connections to processing facilities in the Midland Basin through an approximately 75-mile lateral, as well as a direct connection to the 3.2 Bcf/d Agua Blanca Pipeline, a joint venture between WhiteWater and MPLX."

Matterhorn is expected to be in service in the second half of 2024, pending regulatory approvals. 

WhiteWater CEO Christer Rundlof touted the company's partnership with the three pipeline companies in developing "incremental gas transportation out of the Permian Basin as production continues to grow in West Texas." Rundlof says Matterhorn will provide "premium market access with superior flexibility for Permian Basin shippers while playing a critical role in minimizing flared volumes."

Matterhorn joins a growing list of pipeline projects designed to capture growing volumes of Permian supply to send to downstream markets. 

Early this month, WhiteWater revealed plans to expand the Whistler Pipeline's capacity by about 0.5 Bcf/d, to 2.5 Bcf/d, with three new compressor stations.

Source: Natural Gas Intelligence

Although the companies have not divulged the cost and revenue estimates of the Matterhorn, a project of that magnitude is likely to provide years of predictable cash flows to these producers--which, incidentally, are all high-dividend payers.

Oklahoma-based Devon, one of the Permian's top producers, recently said it expects Permian production to reach nearly 600,000 boe/d in the second quarter. The new pipeline will help support the company as it increases its production in the Permian in the coming years. DVN stock currently yields (Fwd) 7.3% and has returned 54.3% year-to-date.

MPLX has several other expansion projects under construction. The company says it expects to finish construction on two processing plants this year, and recently reached a final investment decision to expand its Whistler Pipeline. MPLX stock yields a juicy 9.2% (Fwd), but the stock has only managed a 2.1% YTD return.

Devon Energy is expected to report Q2 2022 earnings on 1st August 2022. The company is expected to report EPS of $2.29, good for 281.67% Y/Y growth. Enlink will report on 3rd August 2022 with consensus EPS being $0.06 vs. $-0.04 for last year's comparable quarter, while MPLX LP is expected to do so on 2nd August, 2022, whereby it has a consensus EPS of $0.82 compared to $0.66 a year ago.

Meanwhile, EnLink's cash flow has been rising thanks to higher commodity prices. The company has increased its capex range from $230 million-$$260 million up to $280 million-$310 million, which should drive growth in the near-term. 

Back in May, Kinder Morgan Inc. (NYSE: KMI) subsidiary launched an open season to gauge shipper interest in expanding the 2.0 Bcf/d Gulf Coast Express Pipeline (GCX).

Meanwhile, KMI has already completed a binding open season for the Permian Highway Pipeline (PHP), with a foundation shipper already in place for half of the planned 650 MMcf/d expansion capacity.

On Wednesday, KMI reported Q2 Non-GAAP EPS of $0.27, beating by $0.01; GAAP EPS of $0.28 was in-line while revenue of $5.15B (+63.5% Y/Y) beat by $1.34B. 

For the full FY 2022, KMI expects to generate net income of $2.5B and declare dividends of $1.11 per share, a 3% increase from the 2021 declared dividends. 

In the LNG space, in May, the U.S. Department of Energy authorized additional LNG exports from the planned Golden Pass LNG Terminal in Texas and Magnolia LNG Terminal in Louisiana as the U.S. seeks to boost LNG exports to Europe.

Jointly owned by Exxon Mobil (NYSE: XOM) and Qatar Petroleum, the $10B Golden Pass LNG export project is expected to become operational in 2024, while Magnolia LNG, owned by Glenfarne Group, will come online by 2026. The two terminals are expected to produce more than 3B cf/day of natural gas, although Magnolia is yet to sign contracts with customers. 

Previously, American LNG developers were unwilling to construct self-financed liquefaction facilities that are not secured by long-term contracts from European countries. However, the Ukraine war has exposed Europe's soft underbelly and the harsh reality is forcing a rethink of their energy systems. To wit, Germany, Finland, Latvia, and Estonia recently expressed the desire to move forward with new LNG import terminals.

Exxon is slated to report Q2 earnings on 29th July whereby the United States' largest independent oil company is expected to post EPS of $3.41 per share, reflecting a year-over-year increase of 210%.

In May, the DoE approved expanded permits for Cheniere Energy's (NYSE: LNG) Sabine Pass terminal in Louisiana and its Corpus Christi plant in Texas. The approvals allow the terminals to export the equivalent of 0.72 billion cubic feet of LNG per day to any country with which the United States does not have a free trade agreement, including all of Europe. Cheniere says the facilities already are making more gas than is covered by previous export permits.

Cheniere is expected to report Q2 earnings on 4th August, with EPS expected to clock in at  $2.76, good for a 411.11% Y/Y increase.

By Alex Kimani for Oilprice.com