Gas glut to last until 2025?

Oversupply in the global gas market could persist until 2025, and the saturation spells bad news for coal plants everywhere. 

This week’s pod discusses the current dynamics in the LNG market and why, despite low prices, producers and exporters of gas show no sign of holding back. 

Host: 

• Richard Sverrisson, Editor-in-Chief Europe, Montel. 

Guest: 

• Kjell Eikland, Managing Director, Eikland Energy. 

Transcript

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

Hello listeners and welcome to the Montel Weekly podcast, bringing you the most topical energy matters in an informal setting. I think it would be fair to say that we're in the middle of an unprecedented period of global gas oversupply at the moment. So listeners, if you have wondered how long the gluts can last or what the strategies of gas producers and shippers may be, or if there are any bullish factors out there, or even how low wholesale prices can go in Europe. Then you're in the right place. My name is Richard Sverrisson and I'm joined today by Kjell Eikland, managing director of Eikland Energy. Welcome to you, shell. Thank you very much, Richard. I think I'd like to start by talking a little bit about what we've seen so far this year. This is after. The Ukraine Russian gas deal has been signed, which was kind of maybe supporting some prices, but now we're seeing TTF spot prices under 10 euros. Henry Hub under $3 and Asian prices under four, $4. What, what's, what's going on? Kjell.

Kjell Eikland, Managing Director, Eikland Energy: 1:03

Well, for the first time it really started last year, last January. But for the first time in history, we're seeing a global supply glut and a globally inter interconnected gas market. So there's no place for oversupply to hide anymore.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:16

Okay. So what are the next moves here? I mean, what, what can we expect from February if the mild weather continues, can we expect prices could continue down supply to continue flooding into to Europe? What's your view here?

Kjell Eikland, Managing Director, Eikland Energy: 1:30

My view is in many ways similar to other observers that or the message that has come across by analysts the past couple of years, that there, there would be an expectation of a global surplus of LNG at least until 20 21, 20 22. Okay. And last summer we did some some work that suggested that the glot could even continue till 24, 25. But one of the things that. The analysts typically have not looked at was the short term market implications. It was a general observation that that the surplus could be managed.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:03

Okay, so talk us through that. What are the short term implications of managing this glut

Kjell Eikland, Managing Director, Eikland Energy: 2:07

In a typical, liberated or liberalized market you get an adjustment of supply and demand driven by prices. And what we're seeing now is that LNG is a very rigid supply source in a sense. It's almost like a must flow. A source of energy. So it doesn't, in the short term, at least, it does not seem to react to low prices at all. And that, of course, does not bode well for those who who expect higher prices in the next two months.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:37

I should also mention, Michelle, that you are the managing director. If not the owner of iis, LNG, which is a ship tracking and an information service for the global LNG market. But what are you seeing here in terms of the short term drivers or the short term factors driving this market?

Kjell Eikland, Managing Director, Eikland Energy: 2:55

Well, it's interesting. Last year we saw a few weeks ahead of the initial. Price drop in January. That there was a fairly significant volume surge and the market was taken by surprise and another blip came in March that led to a further drop. The system that we we use, I-G-L-N-G is basically supply forecasting three to four weeks ahead. Is just not ship tracking. It's a supply forecasting based on fundamentals. And what we're seeing now is that starting in November, there was a unprecedented buildup of supply quite a bit earlier than what we've seen in the past few years. And yet, winter temperatures did not seem to materialize. And there's certain doubt about the Chinese economic growth and demand. There was a startup of of pipeline from Russia. Into China, so is weakening the potential demand for LNG there? But what we saw that the delivery profile in, in December continued well into January and has not really abated until the past two or three weeks. So way too much demand or supply, rather for the market to handle.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:06

And this is Asia and Europe or global. Trying desperately to find a home. These this LNG, if you like.

Kjell Eikland, Managing Director, Eikland Energy: 4:13

That's right. I mean, most of the demand obviously is in, in, uh, in Asia, but you saw a, a really global, uh, supply surplus and, and the way market work right now, the ships can change direction at any moment based on the arbitrage, uh, opportunities. So. One day the ship can aim for Asia the next day for, for Europe. Really, it's that. Does that just, it's a matter of hours that they're just looking where they can get the higher prices, I suppose. So they make a decision, just a snap decision as if they're Mid-Atlantic or, well, I wouldn't call it snap decision, but it's certainly something that's an ongoing exercise for at least a third of the cargoes. Where to sell the the cargo with the best oil. Not necessarily best profit, but least amount of loss in the current situation.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:56

Absolutely. So a third of global cargoes, how many ships would that be?

Kjell Eikland, Managing Director, Eikland Energy: 5:00

In terms of the fleet we're tracking about 560, 70 vessels at this point. So we're talking about close to 200 vessels that could change direction at at short notice.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:12

That's substantial. You said the wave of supply carried on from January. Or from the turn of the year and into January, slowing down a little bit over the last two weeks, what's your prediction for the coming sort of three to four weeks to the end of February?

Kjell Eikland, Managing Director, Eikland Energy: 5:28

What we're seeing is buildup of storage, both floating storage. Or implicit floating storage and actual in tank storage when implicit storage. What do you mean that? Well, implicit, I mean, it could be ships not sailing as fast as they should. They're taking a good time to, to get to market. So that's a way to store LNG as well.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:49

Absolutely. Yeah. Yeah. So you're saying you're seeing. A lot of this in storage over the coming four weeks.

Kjell Eikland, Managing Director, Eikland Energy: 5:56

Well, uh, the operators, importers, buyers of LNG now has a challenge when they see that the the winter is coming to to an end. What do we do with incoming cargoes? I. And the moment that operators decide this is it for this year, there will be a significant turndown of delivery frequency into the, to the markets. So what will happen with those those cargoes that can be potentially delivered to any other market? The capacity to produce LNG does not disappear.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:24

Absolutely.

Kjell Eikland, Managing Director, Eikland Energy: 6:24

So the potential to deliver LNG is there and paradoxically, with current low prices producers. We'd like to onsell as much as possible to cover or to recover as much of their cost as possible.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:39

Yeah, we'll come back to those producers 'cause they're in a quite a tricky situation if one looks at the market, the current market situation. And which leads me onto my next question is, do you see these low prices? To continue. Is it a short term blip or is it a longer term trend that we could see lasting, as you mentioned, into maybe 24 to 20, 24, 25?

Kjell Eikland, Managing Director, Eikland Energy: 7:03

If I were to to put my money anywhere, then it would be for this to be a long term phenomenon. That we could end up with a typical seasonal markets where you could have a fairly good strengthening in the top winter months. But basically for the off winter months and certainly summer months fairly low prices and really marginal prices.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:26

And. Presumably very high storage as well.

Kjell Eikland, Managing Director, Eikland Energy: 7:29

Well, so storage, uh, not necessarily so. Mm-hmm. Because if, if the market all of a sudden relaxes and say, we can always get hold of the gas, whether it's in pipeline form or it's in the, in LNG form, they can end up turning down on their their storage levels. Okay. Simply to minimize working capital.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:48

Right. So storage doesn't become that important then in because of the availability of aid by cargoes or, or, or pipelines is what you're saying?

Kjell Eikland, Managing Director, Eikland Energy: 7:57

Yes. Interestingly, the two years ago when there was a North Korean conflict of the threat of war, all of a sudden both Japan and South Korea got nervous. So they they, after having depleted. The LNG stock their strategic storage. All of a sudden they had to rebuild that and drove up prices quite significantly as part of their their stock replenishment. Commercial and strategic decisions like this really can affect. The market quite strongly.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:25

But returning to the producers, I mean, there's been a lot of focus on the US here. And how do the, the US producers and exporters react to this period of very low prices?

Kjell Eikland, Managing Director, Eikland Energy: 8:36

The lowest cost US gas sources is 50 cents or less. So there will always be a base that makes money almost regardless. On top of this, there is associated gas, particularly from the Permian now

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:52

in the Permian base in the us That's

Kjell Eikland, Managing Director, Eikland Energy: 8:54

right. Yeah, that's right. That has negative cost implicitly, as long as oil prices are reasonably strong. Even at 55, $60 as we see currently. There, there can be a negative price of natural gas sales and they will still continue the drilling and producing. So the US as a model source of natural gas does not really help in terms of of turn down capacity. They will not turn down as it is right now.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 9:19

They'll keep pumping and shipping.

Kjell Eikland, Managing Director, Eikland Energy: 9:21

That's right. And on top of this for the foreseeable future, you mentioned that Henry Hub prices were around three. In fact, they're at now about one 90.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 9:29

Okay, so they're under two. I'm That's right. I'm already out of date. Shell thanks. Yeah. So they're under two. That's right. How about producers elsewhere? So Qataris or the Australians, or to other producers?

Kjell Eikland, Managing Director, Eikland Energy: 9:40

Well, Qatar has by many estimates, including our own cost of about 50 cents as well. Once wells are drilled, whether you have the Shell gas in the US or the large fields elsewhere in the world, once you have them up and running, the module costs are neg negligible. So that does not stop natural gas from

Richard Sverrisson, Editor-in-Chief Europe, Montel: 10:00

flowing. Exactly. But it has to have a home though. It has to go somewhere. And if, you know, storage are full, the market's over supplied, then this just, you're just basically driving prices down.

Kjell Eikland, Managing Director, Eikland Energy: 10:11

That's right. But on top of this you have the complication of of what's called lifting rules. In fields you have contracts that have a sign that have take or pay obligations in them that make it required for. Producers and sellers or buyers rather, to actually receive this LNG. So the question is, who has the burden? Who will adjust? It's not the producer necessarily. It could be the buyer who has committed to buying LNG or natural gas as a case may be on the medium or long term basis. So they are paying. Fixed charges at a substantial level. And we're talking here about anywhere from 2 25 to $3 per million. BTU for us, LNG.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 10:54

And these are contracts that obviously were signed quite some time ago. Yes. Inflation adjusted. But what does this do to the companies that are piping the gas? We seem that Gas Pro, for example, in January, sold. Close to four BCM via its electronic sales platform. How do you see them reacting?

Kjell Eikland, Managing Director, Eikland Energy: 11:14

I think all producers, if you're talking about European export or producers right now they're challenged by the current situation. That's undoubtedly the threat of the us LNG particular coming in. But in broad perspective, Australia, LNG is just as significant. And how do you react to this really surge of energy hitting liberalized markets and with the price impact that is pretty much immediate? It is unprecedented at the scale that we're currently seeing at. So what we heard just short while ago that Ecuador had held back natural gas cells because of LNG. What we're seeing though is that overall export from Norway in in 2019 hardly budget from from from 2018. So it's a minimal effect. We see, however, that that players may be shifting export from UK one day to Germany or France the other day. So they tried to optimize the markets, so really into the portfolio and trading strategy play here, but. In the big scheme, the volume effects for the time being have been minimal.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 12:22

Okay. So they're still pumping it through the pipelines as they have done previous years, which have been record high actually levels haven't they, from both Norway and Russia.

Kjell Eikland, Managing Director, Eikland Energy: 12:31

That's right. And Norway now is pretty much at. The plateau level, at the top level that we can actually handle. We may be able to do four or 5% more, but the fields cannot handle much more than what we're doing anyway. For this to have any material effect on pricing in Europe compared to the inflow of LNG, that's that's actually taking place. We're talking about much more significant adjustments that are required by some player, some supplier in the market.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 12:58

If I understood you. Correctly Shell, what you are saying is that the way they're reacting to this unique situation that hasn't been here before is optimizing their trading, optimizing the way that they ship these volumes. Either to the markets or in, in what kind of capacity, whether it's day ahead or intraday or whatever. Is that, would that be a fair assumption? It is. We

Kjell Eikland, Managing Director, Eikland Energy: 13:22

have a complication with regard to LNG though compared to both electricity and natural gas. In Europe and the us and that is that the market's extremely organized. You through the remit system in Europe, you know exactly what, where outages take place, how long they will last. You go through the nomination process through exchanges and you can see how the forward curve looks like with LNG. People don't really know. How much is coming into the market on any day, all of a sudden, several ships may target Japan or target Europe, or not target Europe. That is not scheduled into the systems. So you add uncertainty here. That. Nobody really knows how to handle it, handle that supply

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

from the LNG

Kjell Eikland, Managing Director, Eikland Energy: 14:08

or the uncertainty of what will decide prices. And that brings in a risk element in the pricing scheme that we've gotten used to in the past decade or so, that things are essentially forecastable use that term. LNG adds an element of uncertainty that producers and buyers alike have trouble. Finding

Richard Sverrisson, Editor-in-Chief Europe, Montel: 14:27

out of, and if they have trouble finding out, then the markets more generally will certainly find it difficult to analyze or forecast both supply and potential prices.

Kjell Eikland, Managing Director, Eikland Energy: 14:37

Yes. And sometimes you have a risk premium when you share that supply can be short. But currently we may actually see the opposite lower than rational price, simply because the market believes that there will be a flood of LNG coming in that may. In part, not materialize, but such is the uncertainty right now. And I'm just

Richard Sverrisson, Editor-in-Chief Europe, Montel: 14:55

wondering as well, we've talking about, talked about supply shell, but the demand side where is the demand for this wave of LNG, this gas globally? Where's it coming from? I mean, is it from the, the power generation sector in Europe? Is it from, I mean, we've seen it, certainly Asian gas demand has driven up prices in the past, especially in in, in harsh winters. But where's it gonna come from, especially in light of, you know, the move to decarbonize and move away from fossil fuels?

Kjell Eikland, Managing Director, Eikland Energy: 15:25

In Europe, we do have a certain challenge because already the the flexible power market is pretty much saturated with with natural gas. There may be a cargo two extra that can be be brought into the market, but minimal in the big scheme. What we've seen though in the past two to three months is that gradually low, the low prices have really challenged coal plants. In Asia? In Asia, okay. In Asia, we expected to to see India as a big potential module importer, but that has not happened. Instead there has been a surprising strength in Japan, Korea, that has helped absorb some of the surplus to the level that we don't think that this necessarily has reflected the the actual. Price level in the market, but it has been unsold literally to minimize losses and to satisfy the take or pay requirements. Okay. So how about Europe? Very little. I mean, obviously we see very strong demand for natural gas in in, in Britain. And oil certainly is out a long time ago. But we have a situation now where where renewables have helped LNG somewhat the past couple of months, simply lack of renewables production. As solar comes in. In the next few months. And also with traditional wind and spring, we may actually see some loss in market here as well. Some market share from market share. Yes. Yeah.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:57

So would you say LNG and renewables are good partnership?

Kjell Eikland, Managing Director, Eikland Energy: 17:01

The l and d companies, gas companies like to see that those sources as good partners, but as it is right now, they actually compete for the model supply. In the big scheme of things renewables will. Outcompete LNG, simply because it's delivered on an instant basis and LNG is not, and it's

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:21

almost it's extremely low cost as well. That's right. Jill, thank you very much for a fascinating discussion. I think it'll be very interesting to look at the supply dynamics going forward, and I'm sure. We'll welcome you back on the pod at some point later in the year to see how the things have developed if they're according to your forecast. So thank you for joining the Monte pod today. Glad to be here. Thanks, please, listeners, remember to keep up to date with all our stories on Monte News and follow us on Twitter, LinkedIn, and subscribe on Apple Podcasts and Spotify. Goodbye.