Business
The ships with gas waiting off Europe’s coast
The huge tankers are waiting. Off the coasts of Spain, Portugal, the UK and other European nations lie dozens of giant ships packed full of liquefied natural gas (LNG).
Cooled to roughly -160C for transportation, the fossil fuel is in very high demand. Yet the ships remain at sea with their prized cargo.
After invading Ukraine in February, Russia curtailed gas supplies to Europe, sparking an energy crisis that sent the price of gas soaring. That led to fears of energy shortages and eye-watering bills for consumers.
“It’s built up for about, I would say, five to six weeks,” says Augustin Prate, vice president of energy and commodity markets at Kayrros, one of many observers who has watched the situation unfold.
He and colleagues track ships via AIS (Automatic Identification System) signals, which are broadcast by vessels to receivers, including on satellites.
“Clearly it’s a big story,” he says.
So why are ships loaded with LNG just hanging around Europe, exactly? The answer, as you might have guessed, is a little complicated.
Someone else who has watched the accumulation of vessels is Fraser Carson, a research analyst at Wood Mackenzie. This month, he counted 268 LNG ships on the water worldwide – noticeably above the one-year average of 241. Of those currently at sea, 51 are in the vicinity of Europe.
He explains that European nations plunged into a gas-buying spree over the summer that aimed to fill onshore storage tanks with gas. This was to ensure that heaps of fuel would be available to cover energy needs this winter.
The original target was to fill storage facilities to 80% of their total capacity by 1 November. That target has been met, and exceeded, far ahead of schedule. The latest data suggests storage is now at nearly 95% in total.
Imported LNG has played a key role in getting Europe to this point.
But as LNG continues to be brought ashore, demand for facilities that heat the liquid and turn it back into gas remains high. There aren’t very many such plants in Europe, partly because the continent has long relied on gas delivered via pipelines from Russia instead.
So that’s one reason why LNG ships are waiting around – some are queuing for access to regasification terminals. In the meantime, Germany and the Netherlands have invested in new regasification facilities. Some, rapidly built using converted LNG ships pinned to docksides, are expected to become operational within months.
On top of this bottleneck, less gas is getting used up in Europe than it otherwise might at present because the weather has been very mild well into October.
Plus, as Antoine Halff, co-founder of Kayrros notes, industrial activities that rely on gas have relaxed. This is something he and his colleagues track by scouring satellite images of factories.
“There’s been a very dramatic reduction in cement and steel production in Europe,” he says.
It all means that a market situation called contango has emerged for LNG, says Mr Carson. That is, when the future price of a commodity is higher than today’s price.
“You would get a higher price for a delivery for January than you would in November,” he explains.
Michelle Wiese Bockmann, markets editor and analyst at the shipping journal Lloyd’s List, says that just by waiting to deliver in December rather than November, the difference in profit could be in the order of tens of millions of dollars per shipment.
While it is possible that buyers elsewhere in the world could snap up the cargoes of some waiting ships, meaning they might leave and head to Asia, for example, it may yet benefit Europe to have a glut of LNG literally floating around.
Some observers say having the ships wait around is partly a good thing – you want the gas to be available when you need it.
The only spanner in the works is the sobering sums involved. Feverish demand for gas means that countries have already paid extraordinary amounts to secure it.
Germany spent 49.5bn euros (£43.25bn) on imports between January and August, according to the Reuters news agency. That’s compared to 17.1bn euros during the same period in 2021.
This is “market forces” at work, says Ms Bockmann. But she emphasises that European nations are “in the best possible position that they could be [in], given the geopolitical situation”.
Mr Carson agrees, adding: “In terms of what can actually be done at the moment, the market has responded appropriately.”
The real question is what happens next. With gas secured for the coming weeks at least, the price of the commodity in Europe has begun to fall.
Benchmark gas prices in Europe have fallen dramatically since August, but are still more than twice the price they were this time last year.
However, further disruptions to supply and very cold winter months could potentially change the picture yet again.
There’s also the global situation to consider. Heightened demand for LNG imports in Europe has boosted competition for gas around the world. Countries such as Pakistan and Bangladesh that rely on LNG, but which have less financial leverage in the market, have been stung by the current situation.
In general, some LNG that might traditionally have gone to Asia has this year sailed to Europe. It has effectively been “a huge game of musical chairs”, says Mr Halff.
But some Asian nations, notably China, Japan and South Korea, which also use a lot of LNG, will likely seek significant imports in the colder months, potentially fuelling competition between continents.
For Corey Grindal, chief operating officer and head of worldwide trading at LNG producer Cheniere, what’s happening in the LNG market is “a very short-term phenomenon”.
Diversification of energy supplies in Europe should ease things in the coming years.
He adds that the vast majority of his firm’s LNG output this year has already been sold and that Cheniere’s production should rise from 45 million tonnes to 55 million tonnes by around 2026.
The current bonanza over gas has concerned some who argue that pivoting to renewables would be better for the planet and possibly more reliable.
“Renewable deployments is great. I am [all] for doing the right thing for the planet that we live on,” says Mr Grindal.
However, he argues that the need for gas to heat people’s homes and generate electricity is immediate. “We need it today,” he says.
What happens tomorrow depends, in varying degrees, on the war in Ukraine, the weather, the rise of renewables, global demand for gas – and hundreds of ships full of LNG sailing either east or west.
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The prospective new owner of Royal Mail has said he will not walk away from the requirement to deliver letters throughout the UK six days a week, as long as he is running the service.
“As long as I’m alive, I completely exclude this,” Czech billionaire Daniel Kretinsky told the BBC.
Mr Kretinsky has had a £3.6bn offer for Royal Mail accepted by its board.
Shareholders are expected to approve the deal in the coming months, but the government also has a say over whether it goes ahead.
Currently the Universal Service Obligation (USO) requires Royal Mail to deliver letters six days a week throughout the country for the same price. But questions have been raised over whether the service could be reduced in the future.
In an exclusive interview with the BBC, Mr Kretinsky also said he would be willing to share profits with employees, if given the go-ahead to buy the group.
However, he appeared to reject the idea of employees having a stake in Royal Mail, which unions have called for in exchange for their support.
The Royal Mail board agreed a £3.6bn takeover offer from Mr Kretinsky in May for the 500-year-old organisation, which employs more than 150,000 people. Including assumed debts, the offer is worth £5bn.
But because Royal Mail is a nationally important company, the government has the power to scrutinise and potentially block the deal.
As well as keeping the new government on side, Mr Kretinsky also faces the task of convincing postal unions that the proposed deal will benefit employees.
The USO is a potential sticking point for both the government and unions.
Royal Mail is required by law to deliver letters six days a week and parcels five days a week to every address in the UK for a fixed price.
How well this has actually been working in practice is a different matter. Ten years ago, 92% of first class post arrived on time. By the end of last year it was down to 74%, according to the regulator Ofcom.
Last year the regulator fined Royal Mail £5.6m for failing to meet its delivery targets.
Royal Mail has been pushing for this obligation to be watered down. It wants to cut second class letter deliveries to every other weekday, saying this will save £300m, and lead to “fewer than 1,000” voluntary redundancies.
‘Unconditional commitment’
Mr Kretinsky has committed in writing to honouring the USO, but only for five years.
And after that, in theory, the new owners could just walk away from it.
However, Mr Kretinsky told the BBC: “As long as I’m alive, I completely exclude this, and I’m sure that anybody that would be my successor would absolutely understand this.
“I say this as an absolutely clear, unconditional commitment: Royal Mail is going to be the provider of Universal Service Obligation in the UK, I would say forever, as long as the service is going to be needed, and as long as we are going to be around.”
Mr Kretinsky added that the written five-year commitment was “the longest commitment that has ever been offered in a situation like this”.
Another potential stumbling block for the deal, however, is how the company will be structured.
Unions would like to see the company renationalised, but Dave Ward, general secretary of the Communication Workers Union (CWU), told the BBC that would be “difficult in the current political and economic environment”.
Instead, what the CWU is pushing for is “a different model of ownership” – that is, where the employees part-own the business.
To get its support for the takeover, the union wants employees to share ownership of the company, along with other concessions including board representation for workers.
It says profit sharing is “not going to be enough to deliver our support and the support of the workforce”.
If the union doesn’t get what it wants, it won’t rule out industrial action, Mr Ward said. Its members went on strike in 2022 and 2023.
Although Mr Kretinsky said he is “very open” to profit sharing, he is not in favour of shared ownership.
“I don’t think the ownership stake is the right model,” he said. “The logic is: share of profit, yes, [but an] ownership structure creates a lot of complexity.
“For instance, what happens if the employee leaves? He has shares, he is leaving, he is not working for the company, he [still] needs remunerating.”
Mr Kretinsky said he didn’t want to create “some anonymous structure” but instead “remunerate the people who are working for the company, and creating value for the company”.
The union is also concerned about job losses and changes to the terms and conditions of postal workers’ contracts.
Mr Kretinsky has guaranteed no compulsory redundancies or changes in terms and conditions but only until 2025.
“If we are more successful, and we have more parcels to be delivered, we need not less people, but we need more people,” he said. “So really, job cuts are not part of our plan at all.”
He said if the management, union and employees work together, “we will be successful”.
Another concern is the potential break-up of the business.
The profit for Royal Mail’s parent company last year was entirely generated by its German and Canadian logistics and parcels business, GLS. Royal Mail itself made a loss.
Mr Kretinsky has promised not to split off GLS or load the parent company with excessive debt, although borrowings will rise if the deal goes through.
But he has a way to go to convince the CWU.
“I can’t think of any other country in the world that would just just hand over its entire postal service to an overseas equity investor,” Mr Ward of the CWU said.
However, Mr Kretinsky said that the postal unions “do understand that we are on the same ship, and that we need this ship to be successful, and that if we are there, we don’t have any real problems to deal with, because the sky is blue, and it’s blue for everybody.”
The union cannot stop this deal but the government can block it under the National Security and Investment Act.
Business Secretary Jonathan Reynolds has said he will scrutinise the assurances and guarantees given and called on Mr Kretinsky to work constructively with the unions.
Mr Kretinsky may say that he and the unions are ultimately on the same ship but, as things stand, they are not on the same page.
Who is Daniel Kretinsky?
Daniel Kretinsky started his career as a lawyer in his hometown of Brno, before moving to Prague.
He then made serious money in Central and Eastern European energy interests.
This includes Eustream, which transports Russian gas via pipelines that run through Ukraine, the Czech Republic and Slovakia.
He then diversified into other investments, including an almost 10% stake in UK supermarket chain Sainsbury’s and a 27% share in Premier League club West Ham United.
The Czech businessman is worth about £6bn, according to reports.
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