We in Canada might think our natural gas prices are expensive, but they are cheap compared to much of the rest of the world.
Energy trade restrictions that supporters of Ukraine levied against Russia are causing a massive shakeup in natural gas trade, causing prices in Europe and Asia to soar. North American prices are less affected but even they have doubled from the pre-pandemic level.
The fallout from these disruptions will likely last for years and have wide-ranging impacts on industry and food production.
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Not the least will be the impact on nitrogen fertilizer manufacturing and trade. Natural gas is the key component in the traditional production of ammonia and nitrogen fertilizer.
I can think of many questions about the future of nitrogen fertilizer but have no answers.
Will high-cost European producers be priced out of the market? Will Russia wind up with a surplus of gas it can’t export and so will try to market more of it in the form of fertilizer? Will relatively low-cost natural gas in North America encourage more production here?
During a period of transition, will nitrogen fertilizer become too expensive for farmers in poor countries?
Will all this speed research and development into making nitrogen fertilizer from renewable energy?
As stated, I have no answers. But I can provide information on what is happening in the natural gas sector.
To make easy comparisons, let’s look at natural gas prices in American dollars per million British thermal units (MMBtu).
The spot Alberta natural gas price climbed up to around US$8 MMBtu in early June but had fallen to around $5 by July 8.
The U.S. spot price topped $9 in early June but is now down around $6.
The spot price for liquified natural gas (LNG) delivered by ship to the Netherlands was close to $55 per MMBtu and rising.
The benchmark price for LNG delivered to Japan and South Korea was close to $40 per MMBtu.
Europe is in an energy crisis and could be in for a miserable winter with inadequate energy supply.
It is scrambling to find replacements for Russian gas.
That includes liquified natural gas in ships from the Middle East and North America. However, the LNG infrastructure is not large enough to accommodate the sudden new demand.
International trade in LNG is relatively new, built up mostly in the last 10 years.
This system requires huge processing plants at ports to cool the gas to its liquid form, ships specially designed to carry the product and facilities at the receiving end to reconstitute the liquid into the gas.
European countries have plans to build more capacity and in the meantime the few receiving plants are working flat out to import LNG.
One result is that Asian LNG importers now must pay more to compete with European buyers. The high prices are forcing poor countries to restrict consumption and the new cost will be a drag on economic performance.
The United States has six LNG export facilities and is building two more but Canada has no significant export capacity. One plant is under construction in British Columbia.
U.S. LNG exports are still a fairly small compared to its total production but the rapid growth of shipments to Europe, combined with reviving domestic demand as the economy rebounded from COVID, lifted U.S. domestic natural gas prices to more than $9 per MMBtu this spring compared to a pre-pandemic level of $2.50 to $3.50.
But on June 8, there was an accidental release of gas, blast and fire at the huge Freeport liquefaction plant in Texas that handled 20 percent of America’s LNG exports.
The facility expects to be offline until September and then operate at reduced capacity for the rest of the year.
Since then, the price fell by $3 to about $6 MMBtu.
But once the Freeport plant resumes full operation, prices will rise again and there will be more upward pressure when the new plants are built.
Meanwhile, Russia is trying to redirect its energy exports. China is buying much more Russian oil and gas, but the export infrastructure to Asia is inadequate.
Indeed, the first major gas pipeline from Russia to China, the Power of Siberia project, opened only in 2019. Most of Russia’s Asian exports were of LNG.
According to the Center for Strategic and International Studies (CSIS), in 2021 Russia sold about 33 billion cubic metres of gas to all Asian buyers, compared to the typical 160 to 200 billion cubic metres sold to Europe.
Even with massive investment in new LNG plants and Asia-oriented pipelines, Russia will likely not be able to replace the demand from Europe, according to a CSIS commentary at www.csis.org/analysis/can-russia-execute-gas-pivot-asia.
