Shell turned the lights back on at its Prelude offshore LNG facility just as Asia was being frozen by a cold spell that sent prices for liquefied natural gas sky-high. It couldn’t have timed the restart better. And it wasn’t the only Big Oil major that benefited from the price spike over commodity traders and independent producers of gas.
An analysis from Reuters points to Shell and Total as two examples of why Big Oil is better placed to benefit from such price spikes: the supermajors simply have access to more LNG and the flexibility to re-route cargos.
The coldest winter since 1966 in Asia sent gas and coal prices soaring earlier this month. At the same time, it exposed weaknesses in the supply chain that left Asian LNG buyers scrambling to secure all the gas they needed for suddenly spiking electricity and heating demand.
It also exposed some differences between commodity traders and oil supermajors that suggest the latter may be better placed to benefit from other price spikes as well.
“Some of our long-term contracts include possibilities for diversions. We are ‘reshuffling’ cargoes that are flexible to direct them to premium markets,” an unnamed source from one supermajor told Reuters.
“On the European market, we can still buy pipe gas and therefore substitute it for a commitment to supply LNG. Once your delivery commitments in Europe are covered in pipe gas, the cargoes that were planned for this area can be repositioned where there is demand,” the Reuters source added.
The comment suggests it is more difficult for commodity traders to do this kind of supply swap, apparently regardless of their size. It makes sense: those that produce the commodity and have integrated operations at every stage of the supply chain would be more flexible when it comes to directing cargos to the clients that need them most urgently. And they may be set to continue enjoying high gas prices for a bit longer.
For starters, the Polar Vortex has brought cold temperatures to Europe, too, boosting its gas demand. For seconds, some large suppliers are having problems with their production capacity. Then there is the tanker issue that always arises when there is a sudden increase in demand for a commodity. LNG tankers have become scarce, which has added fuel to the price rally.
The rally is unlikely to last long, however, as the reasons for the price spike are only temporary. This means that the LNG joy of supermajors are about to disappear as soon as the Polar Vortex lets up. Yet their advantage over commodity traders will remain. According to the Reuters sources, supermajors with exposure to Qatari gas—the cheapest in the world—stand to benefit particularly.
Yet even more expensive supply, like the one from the Prelude FSPO, whose cost has been estimated at up to $13 billion, will be a good thing to have even after the price spike subsides. After all, seasonal spikes in gas demand tend to repeat.
On the other hand, the spike in prices this winter was on the spot market, with prices in Asia almost reaching $30 per million British thermal units versus just $2.60 per mmBtu in the United States. This, according to industry sources cited by Reuters, may lead buyers to opt for long-term, oil-indexed LNG supply contracts to avoid another price spike.
The long-term contracts would also benefit Big Oil LNG producers, however. The supermajors are pouring billions in new LNG production capacity, and it cannot all be sold on the spot market in mid-winter. Like U.S. producers, the majors need the security of long-term supply commitments. It is this security that would distinguish between the winners and the losers in the long-term LNG game.
