Turbine tug of war

Concerns over energy supply for the coming months are mounting as gas flows from Russia to Germany through the vital Nord Stream 1 pipeline have dwindled to 20% of capacity. Market participants fear that deliveries could be cut completely, due to an ongoing spat between the two countries over the turbine necessary to pump the gas. Listen to a discussion with a Ukraine-based expert on the likelihood of a full cut to flows and the potential implications for European industry and households.

Host: Richard Sverrisson, Editor-in-Chief, Montel
Guests: Yuriy Onyshkiv, Senior Gas Analyst, London Stock Exchange Group (LSEG)

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:05

Hello listeners and welcome to the Montel Weekly Podcast. Bring New Energy Matters in an informal setting. We return after the summer break with a look at the biggest issue in European, if not global energy markets, the return or not of Nord Stream one, and the ever-growing likelihood that Russia will fully turn off the taps to Europe. In later episodes, we'll discuss the ramifications of such an eventuality, but this week we will delve into current supply and demand developments, helping me Richard Sverrisson, to make sense of the toing and fraying. Over the Nord Stream one turbine and much, much more is Yuriy Onyshkiv of London Stock Exchange Group. A warm welcome to you, Yuriy.

Yuriy Onyshkiv, Senior Gas Analyst, London Stock Exchange Group (LSEG): 0:46

Thank you for having me, Richard.

Richard Sverrisson, Editor-in-Chief, Montel: 0:48

So Yuriy you are based in Kiev at the moment, is that right? That's correct, yeah. And could you maybe give the listeners a bit of an insight? What daily life there is what's it like at the moment? In in, in the capital city of Ukraine?

Yuriy Onyshkiv, Senior Gas Analyst, London Stock Exchange Group (LSEG): 1:01

Yeah. It's pretty normal considering the circumstances, as I used to say right now to because every of my colleagues in the West is wondering how lives here. But I would say, restaurants are open. There's a heavy traffic on the street. Banks are properly open, but so yeah, despite what's happening in the east of the country yeah, it's has returned to some normalcy, I would say, considering the circumstances, although we get. Regular air raid sirens, and then there's a curfew in the city. But other than that, it has returned to some level of normality, which is, we could see in other capitals on, in, in Europe.

Richard Sverrisson, Editor-in-Chief, Montel: 1:37

Okay, man. That, that that's great to hear. But are there any that, are you, what's it like living under this threat of potentially of bombardment or of air raids?

Yuriy Onyshkiv, Senior Gas Analyst, London Stock Exchange Group (LSEG): 1:46

I should say I won't lie. It's a little stressful. I guess not a little more than stressful. People. But with in a different ways people some leave the city to go to some rural areas where presumably could be made safer, some go abroad or to the west of the country where again, could be presumably safer. It's can't be, a hundred percent safe in Ukraine in general. But yeah, my, my focus, I would say my saver is I try to focus my work as much as I can and that keeps me off the news keeps me off the the political news in Ukraine or the geopolitical news in Ukraine. So that, that's my island of silence, I would say.

Richard Sverrisson, Editor-in-Chief, Montel: 2:23

Let's discuss your work in more detail. Your specialist subject, which is the European gas market Yuriy. So we're very honored and very pleased to have you on the pod this week. But we saw yesterday, we had the German Chants Lu of Schultz. Standing for a photographic opportunity in front of the North Stream one turbine, then Gas Pro later talking about, we will, we can't, we can't start the turbine given the sanction situation. What do you make of this sort of tug of war here, Yuriy?

Yuriy Onyshkiv, Senior Gas Analyst, London Stock Exchange Group (LSEG): 2:51

This is a very symbolic gesture by the German chancellor, which highlights. The importance of all these Russian flows in general, particularly for Germany. We haven't seen this before that, a German chancellor would come and visit some spare part being repaired and on its way from point A to point B. But, this is, again, as you right said, is a tug of war between the Germany and Russia. And on a broader scale between Europe and Russia regarding this Russian flows. And this is just highlights. How important the Russian imports are for the broader Europe.

Richard Sverrisson, Editor-in-Chief, Montel: 3:28

Absolutely. What's your view here? Do you think Gas Brown wants the turbine refitted? Do you think it's playing a game here where it's gradually gonna ease, or squeeze the supply, so then it, it dwindles to nothing.

Yuriy Onyshkiv, Senior Gas Analyst, London Stock Exchange Group (LSEG): 3:41

I think what Cas Brown wants is that, and they've said it a few times already, that they want to leave to have their sanctions to have Western sanctions lifted from Russia and to have Nord stream to launched to have, business as usual. And that's essentially what they want. And the turbine is refitted. As we can see. It has been returned from Canada to Germany and is on the way to go to Russia as soon as Russians supply did, ask for actually that to be brought to Russia. Because you, it's not like a courier delivery that you can just put it outside of your mailbox and for the house to pick it up. It's a little more complicated than that, and this is what they want. And I think that this target war regarding the. Turbine is is just a small part of it. And the entire decrease in Russian flows is a bigger highlight of what perhaps gas pro is trying to achieve, is trying to achieve like a more maybe strategic advantage.

Richard Sverrisson, Editor-in-Chief, Montel: 4:37

This may be, this brings me onto my next question, which maybe is slightly loaded, Yuriy. Why doesn't Gas Pro then use spare capacity on alternative routes to, to offset these cuts on Nord Stream One if the turbine is the issue?

Yuriy Onyshkiv, Senior Gas Analyst, London Stock Exchange Group (LSEG): 4:50

Exactly. We shouldn't be talking about the turbine or the Nord stream one at all. We should be talking about the supply of gas. And so you have gas prom as the only supplier from Russia and have multiple recipients of that gas in Europe. And, we should be talking about the ability of Russia to supply that gas to these recipients in Europe. And so with with all, capacities that are available and there are multiple capacities available. You have a pipeline through Poland, through BEUs, Poland and to Germany. You have the pipeline to, to to Slovakia from through Ukraine and which are, which could fully offset the decrease of North Gene one. And now that's another bigger question. Why is Russia not using this supp supply? Why are they focusing on the turbine? And nor stream one? And there's no reason clearly why they're not using this. Which is which brings me on to, which could be switching, discussing politics but that essentially is not a fundamental supply and demand question. It's more of a geopolitical issue.

Richard Sverrisson, Editor-in-Chief, Montel: 5:52

A question of, what the strategy that gas prom has here. And that's been very obvious maybe since last autumn in a sense of slowly squeezing the supply. It's it was a loaded question, but I think you know it's part of potentially the long-term strategy and only gas prom headquarters and the Kremlin. We will know the answer to why they don't use that, although we can speculate. But if we come down to supply and demand fundamentals, Yuriy if Nord Stream one stays at 20% capacity, how likely is the EU to meet winter storage targets?

Yuriy Onyshkiv, Senior Gas Analyst, London Stock Exchange Group (LSEG): 6:22

It would be very difficult to meet these storage targets, although not impossible. And Europe is already discussing 15% reduction in demand. Yeah which to be fair would, will not impact, the heating or the household demand. It'll probably affect mostly industrial, some gas or power demand. But yeah, that alone, we'll have storages perhaps just shorter of the 80% fullness that a European Union is targeting by the 1st of November. So they, they would need to voluntarily or not voluntarily try to decrease the demand in some way. But the bigger question I think here is that even if they even if they reach that full capacity, fullness of, and storages, or they could be just short of it, which is already fine in a normal. Let's say setting, but any prolonged supply deficit would make it would just roll over the crisis until the next summer, because by the end of the winter we would end up seeing a very depleted storages and with a lot of pressure onto the next summer. For injections and, hence why we are seeing this. For instance, TDF summer 23 prices trading at a premium to winter 23 prices, which just shows how the market is perceiving the situation already. Because normally some by trading at a discount to winter. But it's not the case right now, which just shows how difficult situation could be not only in this winter, but in the next summer, in the winter to come afterwards.

Richard Sverrisson, Editor-in-Chief, Montel: 7:54

So no respite until 20, 24, 25 even maybe. But I, people, experts are saying that the winter is the crunch period. You get through that and you start to see a light at the end of the tunnel, even though summer prices are extremely high. Is that the key getting through the winter or, is there more to it than that? Yuriy?

Yuriy Onyshkiv, Senior Gas Analyst, London Stock Exchange Group (LSEG): 8:12

Of course, winter winters, could be very unpredictable. It's the weather. It's alternative supply of of energy the wind generation. And the entire temperature. That is impacting, if you get very cold winter, that would, fasten the depletion of the storage as certainly and and then, for instance, last winter was mild compared to to what it could be. And it allowed to, save a little gas going into the summer. There could be many uncertainties throughout the year. Like any outages, for instance, in, in the us there was a fire at Freeport, LNG. And similar things could happen elsewhere. On the flip side we seeing a decrease in demand in China due to the COVID restrictions and economic slow down. Which leaves more LNG cargoes on the market and for Europe to snap up. So there are there are many uncertainties and many fluctuations throughout this. Throughout the year, and particularly in, in winter, this is very acutely felt. Any smaller or bigger outage, for instance in Norway, particularly unplanned outage, could, bring up the spot prices very fast and very high.

Richard Sverrisson, Editor-in-Chief, Montel: 9:20

And of course when Norway is pumping gas, at full capacity to Europe and to to continental Europe and to the uk, then, any small, the systems that at full stretch if you like. So any small glitch and that could, send this infrastructure into, some sort of outage situation. But what you know for, nor for the EU to meet its winter storage targets. How much does it depend on? Countries meeting the 50% gas demand? Cut aim here. You mentioned it earlier, Yuriy, but is that is, to meet the storage, do we need to cut demand by that amount?

Yuriy Onyshkiv, Senior Gas Analyst, London Stock Exchange Group (LSEG): 10:00

I think that two variables to the storage fullness equation, so to say. So one is the Russian flows. If they do not pick. In the next weeks or so, then then the, you would need to slow down on con consumption in order to fill up the storages because the rest of the supply routes so to say are operating at full capacity or even about this PL capacity. And I'm talking about Norwegian supplies, talking about LNG flows. They have been, flowing at very maximum capacity. And for very economic reasons. Because prices in Europe's are so high that Europe has been a preferred market for, uncommitted, er cargos for several months now. So the only kind of, flexibility here is in the demand and in the Russian flows. So it's either all and ideally both a little bit of savings on the demand and and some pick up in Russian flows.

Richard Sverrisson, Editor-in-Chief, Montel: 10:55

Do you think that, some countries should impose even more stricter gas demand cut targets? You know what I see lacking a bit, there's some talk of lowering the heating by one degree or, wearing more warmer clothes. But I don't see any sort of radical kind of. An urge to be more efficient and cut energy use across the board, not just in industry, but you know elsewhere. So do you think some countries should impose stricter target CF to cut demand?

Yuriy Onyshkiv, Senior Gas Analyst, London Stock Exchange Group (LSEG): 11:25

Richard, it's hard to really to say because every country is very different and you use, some countries are more dependent on natural gas. Others are more dependent on, on, on nuclear energy and more like a coal fired generation. Some are more dependent on Russian gas, some are less. So that really depends on a country. Some countries could very well go be below well beyond the 15% target and that could help, the rest of of Europe on on, on storage, injections and essentially on, on consumption targets. And I think that, it's hard. It's hard really to judge and give prescriptions. To each each and every country here. I think that, essentially every we, and in, in Brussels, they know that this is critical for everyone. So everyone will have to, try to do whatever everyone can. However, recording, the turning down the heating demand for households, I'm not very sure that, first of all, this is the path to go. And second of all, it's feasible to achieve mainly because of the setup of like the heating throughout Europe in different countries. For instance, in Western Europe, you can't just centrally turn down the heating for the entire block of like apartments or houses. This is something you can do in Eastern Europe and in the former, in Ukraine and Russia, where the heating is centrally supplied. And, it has been done in Ukraine, for instance during some of the, supply deficit. It has been turned down centrally and that helped really save the, a lot of gas for, a couple of weeks. But I'm not sure this is something that, governments in Europe will be happy to go into as first steps. Because, again, this is, could be, very political for the, the ruling governments.

Richard Sverrisson, Editor-in-Chief, Montel: 13:06

Yeah. It's absolutely I, as far as I can tell the, my understanding is that the gas. Demand cut targets are voluntary. Would you see a move towards more mandatory cuts here going forward?

Yuriy Onyshkiv, Senior Gas Analyst, London Stock Exchange Group (LSEG): 13:21

That's if, again, I think that is the reason I think Europe is doing this voluntary is because it would be hard to agree upon a mandatory since this target period, we've already seen several countries saying that, they don't happy about the plan to decrease 15 the consumption by 15%. And I think this is, in many cases, this is justified because some of them are very reliant on NA natural Gas, and they'll really have to, hun down a lot of consumers, and that'll really, hit their economies. So I think that, an effort, a joint effort. For voluntary effort is probably the way to go. And essentially maybe that could be the only way to go because European Union is has many members and you would need to have a joint agreement and it'll be really hard to achieve politically.

Richard Sverrisson, Editor-in-Chief, Montel: 14:07

Absolutely. And at this kind of. At this stage, you don't want to sow disunity or discord. You want to ma maintain a united stand. So we've talking about a drop in demand. Have you already seen that happen in some areas in Europe and where and in what kind of sectors? Uri.

Yuriy Onyshkiv, Senior Gas Analyst, London Stock Exchange Group (LSEG): 14:24

We've seen this happening over the last 12 months already. Compare compared to the previous years. And this is mainly I think, to the elevated gas prices. We've seen I think in September, october last year several fertilizer businesses have shut down some of, most of our production we have seen, some ships in the UK for instance among energy suppliers, some of the, that they couldn't handle the swings in prices already. Back in last autumn when the prices started to continue to pick up, actually not started to pick up. We are forgetting that, it hasn't started this year. It has a long time, a little longer than not, than this year. So yeah, that's a, it's a major thing to be done.

Richard Sverrisson, Editor-in-Chief, Montel: 15:05

And it probably will likely to continue and maybe even accelerate. But I'm gonna ask you a little bit of difficult question now, Yuriy, but do you. Think that Nordstrom one will ever return to full capacity.

Yuriy Onyshkiv, Senior Gas Analyst, London Stock Exchange Group (LSEG): 15:15

It's a very good question. And I had this kinda keeps me up at night. I would say on the, on one hand clearly Russians have said that they they would like to have sanctions lifted and no stream to launched. So you don't need to be an analyst to see, what they want because they already say that out loud. And many times particularly recently, former German chancellor Schroder said about it and this is coming out of Kremlin directly already. Apart from other people. But I think that this is now essentially as I see this as a waiting game. Russia would is trying to achieve their goals. By, squeezing the supply clearly because there's no justification why they're not using, for instance, the Ukrainian route. There's book capacity. It's, they're not fully utilized by Russia. And they can leave sanctions for the, for these pipeline through Poland. Gaspar could live their, Russia could live their sanctions for the pipeline through Poland, which is why they're not supplying through Poland. And they can very well do that. And but and Europe is clearly squeezed. And we can see it by looking the prices. But on the flip side, in Russia itself, Russia would had to decrease the production by by by, a double double figure percentages. This year, because of these decreased supplies to Europe. Now they are already have recently decided 80 they had in storage is 81% of of the gas that they're targeting to have by the winter. So in the next couple of in the next, two, three months, Russia would have probably their storages filled up to the Bri. Which means that by that time, they would need either to lift the supplies to Europe or further decrease their production. And that could have a detrimental effect to their future production.'cause some of the fields are not flexible. They need to be, shut down for good. And so that's a very. Difficult situation not only for Europe, but also for Russia. And unfortunately we don't have much visibility on the Russian balance because most of these figures are not published as periodically, as far as frequently as in Europe. Which is, we can't really say. And calculate when Russia will achieve the complete fullness in storages. And there's no other route they can put this production. They can't ship this to China because that pipeline into China is detached from the rest of the system. They can't pump more gas into the domestic market. And so essentially they will be forced again, either to pump it in Europe or decrease production by a lot more.

Richard Sverrisson, Editor-in-Chief, Montel: 17:54

And then that obviously has a big economic effect on, on them. So that's very interesting. So the domestic situation may force Russia to pump more and they have to, maybe that will supersede more global geopolitical elements here. But Yuriy, if we can, you mentioned LNG earlier. To what extent do you think LNG will help Europe in achieving sufficient supply this winter? And which, from which areas in particular?

Yuriy Onyshkiv, Senior Gas Analyst, London Stock Exchange Group (LSEG): 18:20

The LNG has been, a major saver of of Europe in the last half a year, in the last 12 months already. It has, the allergy g arrivals and send outs have I would say almost tripled. And they have replaced most of what Russia has removed from the market. And and it'll play, I would say a crucial role this winter and I think in years to come and particularly regarding this increase in capacity in input capacities because that's, I think that's the major bottleneck right now for Europe. That it the most of the energy terminals are operating. Above their, an NPL capacity. So it's not likely that they will have, will be able to, pick up more cargos than they already doing. And so the increasing in capacities in this floating storage and reg reification units across Europe, which, we've seen, numerous plans across the board in Italy Germany, Greece, and elsewhere that they would need to pick up these capacities. And, but that clearly is not going to come perhaps not until next year. But again that just means that the market share of LNG. There is very important l will increase its importance and just look at the historical numbers. This year, most of the increase has come from LNG cargos from the United States because that's where most of the uncommitted cargos were coming from. And that kind of coincided with some of the capacity, export capacity increases in the United States.

Richard Sverrisson, Editor-in-Chief, Montel: 19:52

Absolutely. I think just to round off the discussion Yuriy I, across Europe there are mainly, we are in a perfect storm of very bare bullish factors. We have, problems that French nuclear plants. We have high temperatures and low water levels in both Germany and France. We have very low reservoirs in the Nordic region. It's all pointing to high prices. You know that's without the north stream or the supply, gas supply from Russia problems here. So are there any factors which could point to, could you pressurize prices downwards and what would they be?

Yuriy Onyshkiv, Senior Gas Analyst, London Stock Exchange Group (LSEG): 20:30

I think that the market is currently, and it has been for a few months already very sensitive to any news mainly on the bullish side, but also on the bear side as well. So any pickup in in production, for instance, in the Dutch production in the UK production any indications of of any beverage in drivers or any indications of the beverage drivers like this? Implementation of this plan for consumption cuts. Could send very very signals to the market and could suppress prices for some time. And that, that will play a very strong signal to the market.

Richard Sverrisson, Editor-in-Chief, Montel: 21:05

Okay, Yuriy, thank you very much for joining the Montel Weekly podcast this week. All the best to you and to, to you and your family in Kiev. So 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.