Russian flow roulette

Can we expect a total reduction in gas flows to Europe over the coming weeks? Will the Nord Stream 1 pipeline stay offline after annual maintenance in July? These are the key issues facing countries across Europe in the week to come, as a trickle in gas deliveries could deepen the continent’s energy, possibly causing prices to spike still further. Listen to discussion on the outlook for the coming winter and the options available for market participants and policy makers. 

Host: Richard Sverrisson, Editor-in-Chief, Montel
Guest: Wayne Bryan, Director European Gas Research, LSEG

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:07

Hello listeners and welcome to the Montel Weekly podcast. Bring Your Energy Matters, an informal setting. This week's episode is being recorded at the Eid World Trade Fair in Essen. So listeners, pardon the background hub of ongoing negotiations and deals being struck in a follow up to last week's pod and many in recent weeks. We returned to events in the gas model. The main driver of the energy market crisis across Europe. We will take a close look at recent developments such as the drop-in flows on the North Stream wind pipeline, which transports gas from Russia to Germany. And joining me, Richard Sverrisson is my old friend Wayne Bryan of Refinitiv. A warm welcome to you, Wayne.

Wayne Bryan, Director European Gas Research, LSEG: 0:47

Good afternoon. Nice to see you here at E-World.

Richard Sverrisson, Editor-in-Chief, Montel: 0:49

Yeah. How are you enjoying yourself?

Wayne Bryan, Director European Gas Research, LSEG: 0:50

It's my first time here actually yeah, I'm really enjoying it. A lot of good, a lot of good people around. Lot of good stands. Some new technology, some new innovations. Yeah it's a good vibe here.

Richard Sverrisson, Editor-in-Chief, Montel: 1:00

Perfect. Perfect. So Wayne, I thought, your, your expert subject here the gas market, European gas market. What's happening at the moment? We see Nord Stream one flows down, as I hinted at, in, in the intro, we see some outages in North America. Is this, these are the main price drivers?

Wayne Bryan, Director European Gas Research, LSEG: 1:21

Yeah. Yeah, definitely. You look back a few weeks ago, just before Freeport and also the Russian flow issue. You looked at prices and they'd already retreated back below pre-invasion levels that told you the market was a bit more sanguine. Regards to supply. Storages were getting filled at record rates. They're still getting filled, of course, but a bit slower now, so the market was quite relaxed. To be fair, LNG continues to arrive. Chinese demand hasn't recovered. So that led to prices, falling nicely. And then of course, and actually said it in our weekly report a couple of weeks ago, that these, this price looks a little bit cheap and judging by what's been happening in the past, I think it's a bit remiss to, to think we're out of the woods yet. And then of course a week later we had the double whammy of three port situation. And of course Nord Stream one and all the political sort of discontent that's been bubbling around ever since is. And now the market, again is once more in a precarious situation and prices are back on the rise.

Richard Sverrisson, Editor-in-Chief, Montel: 2:17

So you would say fear has taking hold again in it?

Wayne Bryan, Director European Gas Research, LSEG: 2:19

Fear has definitely taken hold again, even though nor stream Warn, sorry, has got lower flows. We're still village in storage. LNG is still arriving. Demand is very low at the moment. It's been very warm, so yeah, overall things were looking quite comfortable, but now we've got this sort of specter of. North Stream one flows, will they return to previous levels? Will the turbine arrive? Will the compressor, sorry, arrive from Canada. You've got the Italian Prime Minister calling the Russian. I think DT Pesco a liar today. There's talk of Gazprom withholding supplies to Europe, which if you look at the available capacity at other routes, you could say that deliveries have been cut to several buyers over recent week, as we've seen. Yeah it's back to uncertain times and again, relying on LNG to help us fill our storages ahead of the start of the winter. And I think that's where the real concern is this continues into the winter. We might still get the storages back to a reasonable level, but then what happens if we have a cold snap? What happens if we have an extended outage, for example, in Norway, the uk, something not even connected to Russia, just to exacerbate the situation. Cold snap in Asia could drive their price above ours. We're gonna continue fighting with them. So I think, yeah, there's a lot of uncertainty and I think that it's part, mainly driven by gas prom and this. Or flows coming into Europe.

Richard Sverrisson, Editor-in-Chief, Montel: 3:42

If we can follow up and ask about Nord Stream one. It is quite unusual to talk about Nord Stream one 'cause we're so used to talking about Nord Stream two, aren't we? Over the, unless forget exactly. But what was happening there? What? What's behind this reduce flows? Is it, you'd mentioned the turbine. Could you go into

Wayne Bryan, Director European Gas Research, LSEG: 3:58

Yeah, the compressors. So there's these compressors there. That have had faults. Now these have to be checked, and the way to do that is they go to Siemens and then they go to Canada. Now the Canadians have the part. Now what's happened now is, but due to sanctions, they can't send that part back. They're not allowed to send anything to Russia. So that's why at the moment we've reached an impasse. Now just after that there's been talk of the German and the Canadian governments getting together to see how they can get round this. But as of yet, we've seen nothing. No further news on whether this compressor's gonna be returned. Then we had another issue where Gazprom took another compressor offline and said, it's got a problem. Now we're down to, we've got two offline now, so now we've got another problem. So we've got two more of these left, but people are now saying that this is being used as an excuse to further cut European gas flows. And of course, we all know the impact it's having on the European gas market. Not only that, but also on the economies. You've seen the inflationary numbers around Europe. A rising energy prices, including my own supplier, tried to make me have a direct debit of around three pounds a month. So this is happening a lot. And I think Putin even mentioned it, alluded to it, he said, these sanctions and tit for tat sanctions, it's actually causing a lot of harm for the European economies, which of course it is. But we mustn't forget there's an invasion still going on and these sanctions are in place for a good reason. So the Nord Stream one situation. As caught people app it. Obviously by surprise, we didn't expect this to happen. One good thing is it was already going offline for maintenance anyway on the 11th of July, so Okay. Which was already, yeah, obviously priced in where we get no Nordstrom two's, its annual inspection, but what the fear is now is if that annual inspection goes ahead and then they come out and say, actually we found further issues due to this. The compressors haven't returned. There'll be zero North Street closed. When it returns and that after the maintenance period, sorry. Now that would really make the February, sorry, the March the eighth peak, the European gas hubs peak.'cause that's a major concern at the moment. And if you look even we did our own sort of analysis looking following month. Even if Nord Stream two is continue at 60% capacity, stream one nor stream one, you've got me saying it now. Nord Stream two, no longer. It's catching. Yeah. Even if if Nord Stream one runs at 60% capacity, which sort is now for the rest of the summer, it'll get storages filled to a reasonable level if of course LNG continues where we expect it. So it's not the doomsday scenario that we'll think however. Like I said, the fact if it goes off completely or we get these problems going into the winter, this is when we really see prices continue to climb throughout the winter period. And of course, we could see some of these measures that have been talked about come into effect cutting industrial supply. We've seen, I think you saw additional coal fire generation now allowed in in the Netherlands. You're seeing they're bringing some back online in Germany, a bit of reserve, ignite and coal. So these other measures, we might see some further draconian measures come into effect if we get into the winter in a similar situation.

Richard Sverrisson, Editor-in-Chief, Montel: 7:07

But this is like gas problem has got over a barrel here. It's you drop the sanctions or basically you get no gas.

Wayne Bryan, Director European Gas Research, LSEG: 7:13

This is how it appears because as I said, they've got capacity out of the route. They can send gas via lk, they've got capacity, they can send more via Suji, but they're not. Slovakia and Poland. Yeah. There was the latest auctions yesterday. Nothing, they didn't buy anything for next month. So again, it seems like they're saying they cannot, but it seems like they do not want to interpretation. There's no other way to interpret it. If you've got the capacity to send it, why are you telling the likes of ENI, uni, et cetera, are delivering less gas? It's not just due to Nord Stream one. There's other forces at play here, and I think. That is the sort of overarching fear for the market at the moment.

Richard Sverrisson, Editor-in-Chief, Montel: 7:49

Absolutely. You can speculate what the intention is here. Yeah. No one really knows except for knows people sitting inside the Kremlin.

Wayne Bryan, Director European Gas Research, LSEG: 7:54

Yeah. But we can look at the cold hard facts and we can say, okay, you can't send that through Nord Stream one. However you've got capacity, additional points. But you're not utilizing that. So what does that tell you? And I think the Ukrainian G-T-S-O-U has already said, oh, we'll transfer that capacity to Seja from Senka, which obviously is under sort of separatist control, which is why they invi give the force majeure in the first place. But no, they said they still, no, but they still, gazprom still daily submit nominations even though they get rejected every day. So it's, yeah, there's a lot of political brinkmanship at play here. And at the end of the day, it's the consumers or us that are suffering here.'cause prices are getting higher. There's no respite for the consumer, even the industrial side of it as well. You've got these smaller businesses now. Costs are rising and this is all really precious building, which is why we're seeing inflation where it is at the moment. So yeah, it's very disconcerting actually.

Richard Sverrisson, Editor-in-Chief, Montel: 8:44

Yeah, last week's pod we looked at the whole geopolitics a bit and this is at the core of what's happening globally, isn't it?

Wayne Bryan, Director European Gas Research, LSEG: 8:50

This really is, yeah, it and the energy crisis or energy sort of crisis. Driven by the invasion now is really, it's really shaken up, the economy globally as well. We're seeing the impact far reaching even with the grain exports and, Africa shortage. So it's spreading. And yeah, and I think the gas market, it's now seems to be, again, the beginning of some, a real period of uncertainty. Due to Nord Stream one, and we also, we know Nord Stream two is never gonna happen. Not very highly unlikely to ever happen. Yeah, there's a, there's quite a lot of fear at the moment, but luckily we have LNG, but then we have the Freeport. So at the moment you can't win. Really. Exactly. We can't win

Richard Sverrisson, Editor-in-Chief, Montel: 9:30

If we, we've seen gas cut off to initially to Bo Poland, Bulgaria Binland, denmark. Exactly. And now and France as well. So who's next? Is this, would, this is who else is there? It could be Italy. Yeah.

Wayne Bryan, Director European Gas Research, LSEG: 9:44

Who else is, who else can they, who else can they, or they might just further increase the percentage of the cuts to said countries that again is still something that could be on the table. And again, they might use this compressor situation, try and cut further,

Richard Sverrisson, Editor-in-Chief, Montel: 9:56

Through North Stream one, I think. So if you're a politician in Rome or Berlin, you would be getting very very scared. Of what's coming for the winter. If this is the intention behind the cuts and you'd want to take some drastic steps, which you've already mentioned and, bringing coal back on maybe curbing industrial demand. So we could maybe

Wayne Bryan, Director European Gas Research, LSEG: 10:13

see that LNG expansions like gate we're all gonna expand there. So there's, there's more LNG capacity being built. There's more LNG coming online over the next 12 months as well. So these sort of measures can help mitigate. We all know the complete halt of any Russian gas puts Europe in a very difficult position. We are lucky it's the summer, as I mentioned, once we get into the winter, and if the situation is as it is now. I do fear. Fear for prices for everyone.

Richard Sverrisson, Editor-in-Chief, Montel: 10:40

Absolutely. We've had some fairly benign winters. Yeah. These years we have, maybe would you, a very cold one, would you?

Wayne Bryan, Director European Gas Research, LSEG: 10:46

A very cold one. And if it coincides with a colder period in Asia, and if also Chinese man comes back at the moment, it's still quite suppressed then. We could be in trouble and we'll see a lot of these measures actually being enacted. Sweden obviously a small user, the latest to say, look, there could be a gas crisis ahead. We're looking at enacting a plan. The German plan's already out, think three stages we're only at stage one. They said there's no need for the next couple of stages at the moment, because gas is still coming, customers are still being supplied. But once we start getting deeper into the summer, and if the situation hasn't improved, then. You're gonna see more of these gas plans come into effect because the last thing we want to do is not be prepared going into the winter. And I think some of these might be kickstarted a bit earlier if things don't change, and I think as we get through July, see how the North Stream one maintenance period goes, see what happens on the other side. I think once we get towards the end of July and into the start of August, then if things haven't improved in terms of Russian flows, we're gonna see some serious planning. From various European countries, but as I said, the storage is at the moment in good position. We predict them, to be just shy of the five year average at the end of next month. So that is not a bad situation. You think to the last couple of years and where storages have been? Where we are now is, we are reasonably comfortable thanks to record storage injections in April, may, and I think in June as well. So far in June is not a record, but April and May were quite high.

Richard Sverrisson, Editor-in-Chief, Montel: 12:13

And this is, the storage injections have been centrally planned. Yeah, pretty much, haven't they? Yes. So this has been, the owners has been targeted to to fill the, fill these facilities

Wayne Bryan, Director European Gas Research, LSEG: 12:21

ahead of the winter, but it will need further measures to enable them to fill without this additional Russian gas, fire, Nord stream one. It needs other measures needs, which is why we're seeing all these plans spoken about.

Richard Sverrisson, Editor-in-Chief, Montel: 12:34

If we look further out, Wayne, and you mentioned the LNG capacity that's coming. Okay, we've got terminals being planned in Germany, in other parts of Europe, but where's the gas gonna come from?

Wayne Bryan, Director European Gas Research, LSEG: 12:44

Yes, good question. There's some new actually LNG facilities coming online to give us additional supply as well. But yeah, correct is there's only so much we can take at the moment. Of course, we get these additional capacity. Where is it coming from? And I think that's the question. And who wants it? Where will it go? The demand might from Asia again is the big question. Yeah, if that re reemerges, then you know, we're gonna be, again, fighting for them for that gas. But I think you've got us producers, obviously they've been maxing out. There's a couple more to come, but I think one more comes online. We've got Europe as well, with a couple of more capacity coming online. So things are gonna get a bit better, but it's just where will we be later on in the winter? Think and even early into next year, there's so much now uncertainty ahead and I think you nailed it when you mentioned the weather, how, how cold will it be? We are Jew. We are Jew, a cold ones. So yeah. It's a, there's a lot of these concerns are bubbling now, I think.

Richard Sverrisson, Editor-in-Chief, Montel: 13:38

But where is, where are most of the concerns? Are they in the next six months, the next 18 months or three to five year time period? Where is the biggest squeeze gonna happen, would you say, in the next months? Months?

Wayne Bryan, Director European Gas Research, LSEG: 13:52

The next six to 12 months for sure. Because if we have a winter scenario where it's erring on the bad side, as in I mentioned, there's a cut of flows, colder winter, ramp up in demand, supply constraints, et cetera, that then rolls into next summer as well. So kicking the can down the road. So I think the initial fear, because of the invasion, because of the. I call it Russian flow Roulette is what we've been seeing for months now. The real fear for is the next six to eight months. Surely it has to be what happens further down the line will be a byproduct of what happens over these next six to eight months, which at the moment is, it's fraught with uncertainty that, so I think the focus now is on getting first. I think the first stage is can we get to the start of winter with storages at the required fill levels? That'll give us a bit more confidence. I think that's the first, first post we need to get to. Once we're there, we then need to get through the winter and that involves a whole multitude of different things, as we know over recent years on the up and down side, that can affect how the winter ends. But the main concern now is let's get these storages filled, give us a bit of confidence and let's hope that the invasion ends, which doesn't look likely. It seems like we're in for a bit of a long haul at the moment. And while that invasion goes on, it means the sanction goes on. It means the west keeps supplying weapons to Ukraine. It means the Russians are then looking for other ways to hurt the west. This tip for tat, it, I just see no end for it at the moment and unfortunately for us, we've been so over and reliant on Russia for their molecules for all these years that we find ourselves now on, staring down the end of their sort of barrel, so to speak. So yeah, it's that this next six months is key really.

Richard Sverrisson, Editor-in-Chief, Montel: 15:36

And as you mentioned, the macroeconomic picture isn't that Roy either though, with the with the inflationary pressure, with interest rates, with, cost of living crisis across Europe, so supply chain

Wayne Bryan, Director European Gas Research, LSEG: 15:45

issues, there's a whole multitude of problems at the moment, and energy is unfortunately for us, at the center of it at the minute, and it's responsible for a lot of the sort of issues we're seeing, which again comes from the start of the invasion. Ever since then, I think nothing's really been the same in the European gas market, apart from the odd. Quiet moment like a few weeks ago. But as I said, we're always mindful that there's always something. That's what I remember saying. There's always something. And I used to be a trader and we'd say that there's always something that's gonna happen. You can never really relax. And I think we got a little bit relaxed a couple of weeks ago and then bang two incidents right away showed us how fragile this market is at the moment. And I think that's the point. Any small problem exacerbates what is already a, a sort of market on tenter hooks. And you've seen some of the wild swings. Prices and it shows you that there's a lot of lot of concern there.

Richard Sverrisson, Editor-in-Chief, Montel: 16:35

There's been talk as well in media as well as, politicians talking about potential rationing of energy. Is that a likely scenario, would you say?

Wayne Bryan, Director European Gas Research, LSEG: 16:42

I think it could be but not for, I think as domestic users, we're always gonna be safe. I think in terms of the industrials you'll be looking to cut your large industrial consumers first. So your ceramics, bricks, all these sort of heavy chemical industry. Excuse me. Heavy duty. That's part of the plan anyway. Like the uk you have the interruptible contracts. So a lot of people are on these interruptible contracts, which means the government can step in or national grids step in and say we're, we are now cutting your gas. And that, that, that can help. And of course I think I was reading the German plan, they have that as well. They'll start doing that. We're seeing, more KOL being allowed to be for power generation. So there's a lot of measures that can help. But I think, yeah, I think we. If we continue on the same vein in terms of the lower levels of Russian flows going into August, I think we'll start to see these measures come into force even before the winter starts. I think that would be the most prudent plan. Let's, if we're still fraught with risk and we don't think the storage can be filled, let's start that plan a bit earlier. Make sure these storages are filled, but again, that's gonna hurt the economy. You're telling the producers of, whatever you're producing to stop producing. Again, it's not great for what's already, an economy that's already. Lot of trouble. But I think we may see it if the supply side doesn't improve, I think we may see it. And again, the Freeport thing really didn't help as well. Yeah,

Richard Sverrisson, Editor-in-Chief, Montel: 17:59

I know. But how would that be managed though, Wayne? I mean if you, who decides where to cut and what to cut and how much, is that the TSO, is it regulator?

Wayne Bryan, Director European Gas Research, LSEG: 18:08

I think you cut by in Germany for start. It comes from the regulator and I think in the UK's instance, national Grid, and I imagine it's the, it's all the. The sort of respective owners of the grid in the respective countries like Holland, et cetera, sorry, in Netherlands, et cetera. So they're the ones that decide that. But I think it's gonna come from the politicians as well, because politicians don't wanna see, don't wanna see prices like this, don't wanna see inflation like this. And they also realize the energy is at the heart of it, which is why you're seeing a lot of these comments now coming from like the likes of Mario Drag, et cetera, where he like a city called Pesco the liar, it's quite strong word. You don't normally hear these sort of very strong words to say. And it kinda shows you the stress they're under as well, which means there will be aggressive cuts to where they see fit to ensure, security of supply for people like you and I that heat our homes. The ratcheting up of the rhetoric. Yeah. They're the, it's a bad sign for me. That's a, it's a really bad sign. Things are actually deteriorating. And the thing is. When you look at Russia, they can really do what they want to us in terms of gas. They can flip the switch today and I know you look at their own situation. What they're gonna do with the gas. Are they gonna, how are their storage is looking and the data coming outta Russia's sketchy at the least, but even more so at the moment. But we know the production has fallen. We know obviously exports are falling, but what about the storages as well? When their storages get to a level, what will they do? Will they flare, burn the gas off themselves? But that's the problem for us in Europe. And I think this. This stronger the rhetoric gets, the more you're poking the stick into the bear, so to speak. And then we could see, let's see how you like this, and off we go with no Russian gas at all for a few days and see what that does to the price is, yeah, you like it too.

Richard Sverrisson, Editor-in-Chief, Montel: 19:43

Exactly. Yeah. Yeah. Could you ever imagine a situation which we've seen in Australia where they just says, trading has stopped, markets are all closed.

Wayne Bryan, Director European Gas Research, LSEG: 19:50

Someone said that the market could stop. T-T-F-M-V-P, these markets are broken. Let's stop. I don't. It'd be unprecedented, obviously be completely unprecedented. Like with price caps, I've read about these sort of price cap, but that's the whole point of these markets. Liquid markets need new freedom. You start putting in price caps. And how does that work in terms of especially the TTF here, or you stop the trading then? Yeah, I think that would be the most extreme measure, but it's, again, as we always keep saying as well, throughout these last few, there's nothing's off the table. We are next times would surprise. Yeah. Nothing would surprise me at the moment. I've been surprised a lot the last few years in these energy markets, but not like the last 12 months. I didn't think I'd see prices like this. I didn't see, I'd think I'd see volatility at some of the close to close numbers have been, horrific. And again, that's another point. German government are gonna increase credit lines to allow, allow these buyers to purchase more gas. They're gonna so that they're gonna help do that as well because that's been a huge concern with price swings like they are, is margin calls, et cetera. That's another way of helping.

Richard Sverrisson, Editor-in-Chief, Montel: 20:52

For sure. When, final question some of the journalists at Mattel put out stories are, about potential trade war, LNG, trade war, China and Europe. We've seen a downturn in the Chinese economy. Demand in China has been weak, but once the economy starts going up full speed again. Yeah. When we're talking, maybe just after summer, autumn. Certainly in the winter. How will that play out?

Wayne Bryan, Director European Gas Research, LSEG: 21:13

Think big risk. Yeah. The European gas market as well. But what it will do is it'll keep our prices even more elevated to stay in competition with Asia. But you mustn't forget in Asia there's a lot more price sensitive wires especially in Southern Asia, the likes of India, Pakistan, and they step out at certain levels, even below 30, some of them 30 and below they're not happy. Sorry, 25 upwards, sorry. And over 30. They're not happy and they're stepping out the market. So that might reduce a bit of demand, but you're, you are right in your assumption. If we see a complete takeoff in China again, then we need to be slightly concerned. However, we mustn't forget the fact that China now has more domestic gas storage. They have more pipeline supply through the power of Siberia. They have more domestic production as well. So they're a bit more prepared than they were say, a year or two ago. And you look at some of the other Asian big buyers like your Japan and Korea. Pretty reasonable levels of storage. Things are not as tight as they were say a year or two ago when we saw, like in Asia, that actually f actually followed. So it's a concern though, Chinese, if a full return to Chinese sort of demand, then it is a concern for this market for sure.

Richard Sverrisson, Editor-in-Chief, Montel: 22:21

And if you have a very extreme winter in Northeast Asia as well,

Wayne Bryan, Director European Gas Research, LSEG: 22:24

yes, then that's also and remaining uncertainty, Russian gas flows then. It's actually a perfect storm once more. We've seen a pretty perfect storms, but this again would be another perfect storm for perhaps even a test of, what we saw in March the seventh, I think 800 pence of thumb. We could even see level we would see these levels beaten if we saw, a multitude of issues surface at the same time, as well as a resurgence Chinese demand. Yeah, again, it's just a future few months fraught with. Uncertainty risk. I think there's gonna be a lot of people tear their hairs out over the next few months, whether that's traders, analysts, journalists, we're all in a similar sort of boat at the moment with so many things going on and a lot of uncertainty.

Richard Sverrisson, Editor-in-Chief, Montel: 23:08

Wayne, always a pleasure having you on the pod, so thanks very much for joining us this week From E-World.

Wayne Bryan, Director European Gas Research, LSEG: 23:13

You're welcome. Always a pleasure.

Richard Sverrisson, Editor-in-Chief, Montel: 23:15

Listeners, you can now follow the podcast on our own Twitter account, aply named the Montel Weekly podcast. Please direct message any suggestions. Questions or, let us know if you think you have a good idea for a guest on the show, you can also send us an email to podcast@montelnews.com. Lastly, remember to keep up to date with all that's happening in energy markets on Montel News. You can subscribe on Apple Podcasts and Spotify, or wherever you get your podcasts from. Thank you and goodbye.