Biggest energy firms still dominate, with Total’s billion-dollar Engie deal
Berlin/Paris — Total’s billion-dollar deal to buy liquefied natural gas (LNG) assets from Engie shows how much size matters in the industry.
After Royal Dutch Shell’s takeover of BG Group in 2016, industry consultant Wood Mackenzie says the latest accord is evidence that the biggest energy companies with access to large volumes of diverse supplies will continue to dominate, even as commodity traders from Glencore to Trafigura Group are expanding.
Trade in the $90bn market for the superchilled gas is poised to double by 2040, underpinned by surging demand from Pakistan to China to generate power instead of burning dirtier coal. The biggest advantage that integrated energy companies have is that they own the chain from gas fields to cooling terminals, and giant ships crisscrossing the oceans.
"Because of their scale, scope and flexibility" such players are "best positioned to serve emerging-market buyers with complex needs," Frank Harris, vice-president for LNG consulting at Wood Mackenzie in Edinburgh, said by e-mail.
Since the Shell-BG deal, prices for fuel to Japan, the biggest consumer, fell to the lowest level since 2005. Rates have more than halved since a 2012 peak as a glut may linger until at least early next decade. Engie is exiting LNG to reduce its exposure to commodity price swings, focus on downstream gas operations, energy-efficiency services and renewables.
"Shell took BG at a time when market prices were very high," Philippe Sauquet, head of Total’s gas, renewables and power business, said in an interview on Thursday in Paris. "We’re seizing the opportunity to grow at a time when prices are low. This is the right timing for us."
While Japan, South Korea and China will remain the biggest buyers, suppliers are targeting new markets in Asia and the Middle East. Combined demand from emerging nations will surge to as much as 61-million tonnes a year by 2030 from about 3.2-million tonnes in 2016, or about 12% of the global market, according to Bloomberg New Energy Finance.
"All eyes are on emerging players right now, all traders are looking at new markets that can be opened," said Jean-Christian Heintz, who was in the LNG trading industry for nine years before founding Wideangle LNG, an industry consultant in Lugano, Switzerland. "The big advantage Total has is its upstream oil and gas position."
The capital-intensive nature of LNG also means international and national oil companies will dominate because they probably have an easier job financing multibillion dollar projects than trading houses, said Claudio Steuer, director of SyEnergy, an England-based energy consultant.
With Engie’s assets and its own growth strategy, Total will double output, quadruple trading volumes and control as much as 10% of the market by 2020. That will give the company more credibility, Sauquet said.
Much more complex
LNG trading began more than five decades ago, as Engie’s predecessor, Gaz de France, pioneered deals to bring the fuel across the Mediterranean from Algeria. Since then, it’s become much more complex and is no longer just about moving cargoes from A to B. Traders are constantly rerouting and swapping shipments from one continent to another.
And that’s where the commodities houses come in. Gunvor Group will expand with a deal to buy all supply from a project off Equatorial Guinea. Trafigura plans to build a second import terminal in Pakistan. Glencore said in October that it had "appetite for investments" after entering the market four years ago.
Modern LNG trading means that cargoes may be bought multiple times before they reach the final customer, akin to how the oil market has worked for decades. But Total isn’t afraid of increasing competition.
"In oil trading, we’re one of the main players, with nothing to envy from Trafigura, Glencore and others who are interested today in LNG trading," Sauquet said. "We’ve been in LNG trading for at least 10 years, so we don’t have to fear this competition."