Winter gas supply risk

This week’s pod discusses the outlook for Europe’s gas market for the coming months, as the risk of higher prices is a concern amid doubts over supply, both from pipelines and LNG, robust demand and very low storage levels ahead of the winter.

An additional factor could be Nord Stream 2, with prices plunging this week after operator Gazprom announced plans to start supplying Germany through the contested pipeline this year.

Guest:

• James Waddell, Head of European Gas, Energy Aspects

Transcript

0:01

Did you know Montel uses artificial intelligence and machine learning to forecast spot prices, inflow to reservoirs, wind, and runoff river production. We can improve forecast for your individual power plants anywhere in Europe. Contact us at ai@motelnews.com for more info.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:35

Hello listeners and welcome to the Montel Weekly podcast. Bring New Energy Matters in an informal setting. This week's topic is gas. The past few days have been very turbulent, to say the least prices on all hubs, but on the Dutch TTF in particular crashed, then rebounded before plunging again. Joining me, Richard Sverrisson, to talk us through current market dynamics and to help us gain some understanding of why participants are so jumpy at the moment, is James Waddell Gas Analyst at Energy Aspects. Listeners, we recorded the initial podcast actually as prices were crashing. But I was very lucky to get a hold of James and ask him what his views were on the reasons for the fall in prices. So James, please tell us what happened this morning as we were recording the initial podcast.

James Waddell, Head of European Gas, Energy Aspects: 1:27

Thank you, Richard. Thanks for having me back on. Yes, it's very difficult to take your eyes off this market at the moment, even to record a podcast. What seems to happen is a statement was issued by Gas Prom on its telegram messaging platform where it talks mostly about what it's been doing on the operational performance of NS one over the course of this year. And at the very bottom of that post, it talks about a 5.6 BCM. That it says can be delivered to the European market this year. Now, this is a volume that is. Probably quite a lot higher than the general market consensus. It's certainly higher than what we had expected in our balances for this year. And it indicates really just an earlier startup of those Russian flows that people were expecting. And as we discussed a little bit earlier, the Russian flows are really the key to when we might start to see the TTF relaxing back to a bunch of. Different coal to gas fuel switch triggers. Now we look at this statement and the interesting way in which it was delivered with a little bit of skepticism in terms of what it means for actual flows. This year, what we see is the main delay on those flows is the regulatory approval by the German energy regulator bonnet in giving and issuing gas pro an operator license. We think that process could really drag on until late December, which would only allow for a very small margin of time over this year for then to actually deliver that gas into the European market, and that's how we arrive at that RSM at 1.5. BCM being delivered, getting to this 5.6. Technically we think gas. Does have the option capacity to do we think it also has the pipeline capacity to flow that. We know for sure that the first leg of the pipeline was completed on the 11th of June. And even giving two to three months for safety and integrity testing that should be ready to start flowing. Ahead of Q4, and if that is flowing at capacity over Q4, that's seven BCM that can be delivered into the European market. So it's a big risk off event with people thinking that could be the volume of gas coming into Europe. But as I said, it will require that regulatory approval from bonnet for them to start flowing. And there is some talk in the market about weathers are Mike grants and kind of provisional license to allow first flows. But again, we're a bit skeptical that will be the case. And even if there is this drive within Europe to try and unlock, from some in Europe, to try and unlock higher flows from NS two to bring down some of these gas prices to bring down some of these power prices, we still think the process will likely last into December.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:05

Thank you very much, James, for explaining why the market is so nervous at the moment. Who knows what the coming days will bring. And listeners, here's the conversation. We recorded with James on Thursday morning. We're recording this on a Thursday, on Wednesday. Prices took quite a tumble, though they rebounded later in the session. What was all that about James?

James Waddell, Head of European Gas, Energy Aspects: 4:28

The events of Wednesday were quite particular very interesting crash in the market. A huge recovery. We lost about five Euros on the initial crash. Then we were covered most of that by the market close. It was a lot of data being published by gas Gate indicating a potential startup for Nord Stream two which would've been well ahead of what most people were expecting in terms of first flows through that pipeline. And it really indicates the extent to which gas prom. Really holds the keys to the price drivers at the moment on the tt f a lot of people are watching what's happening with Russian flows. We've also had a bunch of outages recently on Polish transit. A lot of questions about when will Nord Stream two come online and questions about Russia, British deliver gas into the European market. So all of this is mixed together. The market saw that actually these data about first flows were not actually correct. The market quickly rebounded again, and now we're back into a situation where we're back at TTF prices being near their historic highs, so they're not as high as earlier on in the month. And that is just a symbol of how tight we are in the European market, how much we're having to price gas outta the power sector in order to shore up. Storage inventory is ahead of this winter.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:42

We'll come back to some of these issues. Just to say for maybe those listeners who aren't familiar with Gasca, that's the German gas TSO, right? That's right, yeah. If we compare last year to this, we've mentioned it before on the pod in terms of the gas market, chalk and cheese we saw last summer prices fall to about two euros, and now they almost hit 50. Could you talk us through the journey and the main reasons for these very high prices?

James Waddell, Head of European Gas, Energy Aspects: 6:08

Of course. So last year we had obviously the demand destruction associated with COVID and the pandemic. And really it was a situation where we had too much base load supply being fed into the European market and the pricing signals were really trying to deter as much of that supply coming in. So you're looking at your highest price delivery sources being things like the oil index. Gas from Algeria or from Russia and trying to turn that away first and then moving on to the stage where you were shutting off imports via from Norway and also LNG being shipped across the Atlantic from the US as one of the price signals. So we got down to this pricing point where we really just couldn't take as much gas and we were having to price that off. Because demand was just so low. Fast forward to this year and we've had a period where the LNG coming out of the US was heavily restricted over last winter. We had quite cold weather because, of course, Northeast Asia, also in Europe which led to a lot of LNG being sucked out of Europe over the winter. So that. Drove down our storage inventories in Europe and then we got into the start of summer where we had fairly low inventories, and then we had a couple of very cold shoulder months in April and May, which stopped us from being able to build up those stocks. So when you compare stock levels to what was previous TA year of 2018? Just after the beast in the east phenomenon when we had very cold weather over February, March. We actually are riding on lower storage inventories right now than we were back then. We're about five BCM down compared to that 2018 minimum, and because of that low storage, we are having to scramble to try. Price on as much supply as possible in complete contrast to last year. So we've unlocked a lot of flexible output from Norway, from the Osberg and the troll field. We've unlocked a lot of extra gas coming in from Algeria. We're trying to price on gas coming from Russia, but Russia seems to be constrained in that's not willing to use the interrupter capacity that's being offered. Through Ukraine to boost flows into Europe. So we still have quite a low level of Russian flows into that market. And the only mechanism that Europe is really finding to get some gas into storage is by pricing gas out of the power sector. So we're seeing now quite a substantial switch away from gas and towards coal in the market. And particularly that's visible in the last two or three months where we've seen a big switch within the thermal stack towards coal generation. Away from gas

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:39

And in which country particularly is that the case? Is that maybe in Germany, Netherlands.

James Waddell, Head of European Gas, Energy Aspects: 8:43

Exactly. We see that in southern parts of southern eastern Europe, in that northwest European space to some extent. There's that's in in Italy as well. But Germany and Netherlands are the two big markets where you expect to see the most. Switching potential.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:55

No, we've seen the noises coming outta Germany that, emissions this year are likely to be very high, which is also very interesting given that the carbon prices has hit record highs again or hit highs earlier this summer at about 58 euros. So where is the demand for gas coming from then amongst these very high carbon prices? James and what's the outlook going forward? When would you expect the switch back to gas? Or what would trigger that?

James Waddell, Head of European Gas, Energy Aspects: 9:18

So the demand is coming from just the recovery in both Europe and in Asia. I think we have to remember that going back to the start of this year, a lot of analysts looking at this market would've said that lots of LNG will come in. And replace essentially what was gonna be quite low Russian blows into the European market, and we haven't seen that we're gonna, we're gonna end up this summer with effectively LNG imports into Europe being down on year, despite the fact that last year had a very low base on the amount of hurricane disruption we saw in the us. So we're actually getting very minimal LNG coming into European space because it's all going. Over to Asian markets, submit a recovery in demand over in that part of the world. And then in Europe you've got this recovery in demand just on the industrial side in terms of, and also on the commercial side, more things are opening up after a lot of the demand destruction we saw most particularly in Q2, 2020. So a big increase on that low baseline. And you're also seeing, we saw at the start of this summer, quite a lot of. Extra demand just because it was a very cold shoulder season. So that really boosted demand in Q2, year in year

Richard Sverrisson, Editor-in-Chief Europe, Montel: 10:23

and you mentioned Asia. What are your expectations here? Will the Asian LNG demand, will it subside over the autumn or what do you think here, there's obviously a key factor in terms of, potential energy vessels coming to Europe.

James Waddell, Head of European Gas, Energy Aspects: 10:36

Exactly. So the, one of the interesting things, and a lot of people are now looking into the extent to which. These high prices will start to push gas out of the Asian market and maybe force elements like gas to liquid switching in the Asian power sector. But at the base of it, you've just got strong industrial demand recovery. You've had a hot summer in Asia, which has been driving things up, and then fast forward into the winter months where you've got a lot of extra Chinese. Import capacity that's been brought online this year to really debottleneck that LNG flow into the Chinese market. And you've got these baseline increases in structural demand. You're looking at the Indian market, for example with more fertilizer plants being hooked onto the grid and more city gas demand growth, more connections effectively onto the grid. So there's these underlying growth tendencies. Now what we've been seeing is a headwind against that growth. Is the recovery in nuclear availability in both Korea and particularly in Japan. And this is one of the things that we expect to help loosen up that Asian market over the winter months and allow Europe to have more LNG coming into. European market on a year, on year basis over the winter months. So we do expect to see some sequential easing from the current situation where really most of the LNG is ending up in Asia.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:54

And how about Latin America? I've heard talk about that demand is quite strong there as well.

James Waddell, Head of European Gas, Energy Aspects: 11:58

So one of the big drivers with Latin America has just been the state of Brazil's hydro reserves. It's been in extended drought and that has been really picking up its demand for. LG cargoes going into that country. We've also seen strong growth outside of Brazil in in the rest of Latin America. But really it's that Brazilian market, which has been the standout taker for LNG cargoes.

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

It's quite fascinating when we're talking about European gas markets, we need to look at Brazilian hydro levels and Japanese nuclear. That shows how, really, how global this market is, James.

James Waddell, Head of European Gas, Energy Aspects: 12:32

Exactly. I think having. Good LNG numbers feeding into Europe is very important for how we think about where the TTF is gonna end up and what type of storage we're gonna get in Europe. And not even just in terms of the. Demand of outside of Europe, but you've also looking at these comparative markets, looking at what's happening in coal and looking at what's happening in emissions. Because I think one of the things that can be forgotten is that we've had a big increase in terms of relative price in terms of how tight the European balance has been and therefore how much we've had to price gas outta power. But to price gas out of power this year, we've actually had to move to very high levels because those coal to gas fuel switching prices. Have risen a huge amount year on year. In fact, if you look at the TTF and what, it's, how much it's increased year on year, about 65% of that gain has been just the gain in relative prices because coal has gone up, because emissions have gone up. And you can look also at the tightness in the global coal market at the moment as one of the key drivers for where TTF prices are going. And it's the extent to which China has. Refused to take Australian coal and really locked that Australian coal in and is instead taking a lot of coal out of the Atlantic basin, which is leaving Europe short. So you've got these twin markets working in tandem to drive up the TTF

Richard Sverrisson, Editor-in-Chief Europe, Montel: 13:48

and also, very strong carbon prices as well, although they seem to be coming off a bit this week as well. Let's talk a little bit about supply, James. Now, to what extent is Europe more dependent on Russia for supply due to LNG being redirected to Asia? You touched on it earlier.

James Waddell, Head of European Gas, Energy Aspects: 14:05

At the moment, we've got Russia as the only flexible source of an increase in gas supply into Europe. So in terms of being able to bring the TTF back down, all eyes are on Russia, and that's why we saw that. Crash that took place on Wednesday. A lot of analysts are trying to figure out when we will actually start to see those first flows through NS two and on the physical side that is being completed likely by the end of this month. But in terms of unlocking those flows, we do expect that we need to get an operator license being given to NS two to operate by Bennet. And without that in place, we don't think we're gonna get first flows. So that's probably putting the startup timing into December. We actually learned a couple of weeks ago that the initial window for Bennet to consider NS two, like as an operator company only has really started when they've considered all the documents to be received, and they hadn't considered that. At the start of August, that really puts out the first flows as potentially taking place in mid-December and potentially into q1. And if we don't have those flows in place, then we are gonna be going into Q4 with still very restricted Russian flows coming into the European market. And a very tight. Situation. If we were to get Russia increasing flows quickly in Q4 and for some reason we get an early operator license being given to NS two, that would help to soften the market further and particularly going out into next year. And that's why we can see such a steep backwardation going from this winter into summer 22, just because most of the market largely feels that Russian flows will be unlocked. They will no longer be constrained and we will have really Russia being able to deliver as much as it wants into. European market next year.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:50

So James, would you concur with the market here that prices will fall to Euro 2025 Euros once Nord Stream two comes online?

James Waddell, Head of European Gas, Energy Aspects: 16:00

We do think that when Gas Pro no longer feels that it's constrained in exporting gas to Europe, it should be able to deliver enough gas into the European market. We'll be able to almost fully maximize this reverse on the coal to gas switch and really get gas back into power in a substantial way, which allow gas to fall back to those coal to gas switching ranges and down into the low twenties for 2022. So we do agree with the market that is the single key that will unlock lower prices than we're seeing at the moment. Now in terms of the timing, as we said, we think we're gonna see the first NS two flows basically had taken place in December. That will still leave very tight picture going into Q1 because over Q4 year in year, you're having less capacity that's available via Ukraine because there's been a decrease year in terms of that transit capacity. So we could end up, particularly if it's very cold over q4, burning through some of those already very low storage inventories and it will take time for that. Increase in Russian flows to really translate into softening the TTF market over the course of next year. But by the time we get into Q2 and Q3 next year, there should be enough spare capacity for gas promise to deliver into the European market that we can see a big relaxation in prices.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:13

Big relaxation, meaning what? James? Not down to two surely, but two Euros.

James Waddell, Head of European Gas, Energy Aspects: 17:18

No. I think last year we did get down to that, so single digit number now because of this increase in. In coal prices and in emissions prices. On a year in year basis, we don't think that's really possible because when you're maximizing that cold to gas switch, you are looking at a price which is around the low twenties rather than last year when that was low tens or into the single digits. And because of what's going on in terms of. The Europeans emissions targets and everything connected with the green deal with fit for 55, there is just this long-term bullish picture on emissions prices, so there's no likely event that's gonna bring that market come coming crashing down. And I, as I said, with coal prices, we're seeing. A fairly slow response to these very high prices for coal, both in Asia and in Europe. And if there isn't enough supply unlocked in the coal market, those prices are gonna stay very high for, several months and certainly through next winter and potentially into next summer. So that just sets a very high baseline, and we don't think that gas prom would want to deliver so much gas into the European market that it would. More than crash the TTF beyond this cold to gas fuel switch and bring it down to ranges where you're shutting off supply from competing producers. Because if gas pump wanted to deliver so much gas into the European space that it did, that the European market could crash as low as the price where you need to shut off us LNG coming in. And that's around 10 euros. So in terms of what Gas Pro receives under a lot of its contracts, which are. Predominantly TTF or Hub Index these days, that would be a major cut to the amount it gets per unit of gas if it managed to crash the market that much.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:03

So it seems that gas prom holds all the cards here. If I can just go back to Nord Stream two, James and ask you, 'cause we are hearing 23rd of August, or certainly by the end of August, the actual physical pipe will be in place and will be finished. But as you highlighted the. Permitting process could take several months, but there's also the small matter of the German election coming up, or rather a large matter, which is there a danger that it could be delayed even more, or that even it won't deliver gas at all if you get a green Chancellor?

James Waddell, Head of European Gas, Energy Aspects: 19:34

There are definitely these risks. We think it's an outside risk if the green party enters the governing coalition, that we get any form of cancellation on the project at the moment. It's in the hands of the German energy regulator, Bennet sa. This is meant to be an independent body certifying the operational license. Now, if there is a political decision taken outside of that to try and stop NS two flows, that would be another situation, but we think that's a fairly unlikely situation to actually manifest. We think as long as you have constellation in the German election where it's the green party and. Potentially CDU and a few other parties. There was no big risk to this project being canceled, and there shouldn't be that much of a risk in terms of delaying the process because as I said, it should be Vanessa taking this decision according to its own timelines. There is also a call within this decisionmaking process on the European Commission. What we're seeing at the moment with these very high gas prices, which translates into very high power prices, is that increasingly states are coming to the commission and saying, we need to have some controls on how high these prices are going. We had this from the Spanish not that long ago, and if the commission is seen to be delaying the process of unlocking NS two. And thereby forcing prices to continue to rise, that would probably not go down well with member states and not look good for the commission. So I think there may be some urgency in actually signing off on allowing some of these flows to, to come through. So actually almost the flip side. Argument for delaying the project?

Richard Sverrisson, Editor-in-Chief Europe, Montel: 21:06

No, that's interesting. Just to allow prices to ease under certain political pressure. Pressure, as you mentioned from Spain, but also certainly from other member states. But, it's interesting 'cause how a potentially green chancellor will sell this to the electorate because they, she's been a vocal. Opponent of Nord Stream too. So it'd be interesting to see how this pans out. And obviously we won't get more clarity until maybe September, October when we can invite you back, James. But what's happening in Eastern Europe? There's been, about gas prom, not booking capacity. As you mentioned, the flows through yal came down quite substantially a few weeks ago. Will gas from, in your opinion, take monthly or short term capacity through Poland?

James Waddell, Head of European Gas, Energy Aspects: 21:47

So this is all very interconnected in terms of questions about Russia's ability to supply to the European market at present, and whether it will have that ability restored. Going into Q4, the Polish route for Russian gas does look like the route most likely to be. Diminished in flows as you get Nord Stream two starting up. The main reason is because with Ukrainian capacity that's now sunk cost for gas, prom's been locked until the end of 2024, under the transit agreement that negotiated with the help of Germany and Europe. Poland will become a variable cost for Gas Pro and it will be as it launches NS two. It will be thinking about how much you want to send through Poland, and therefore that might have been one of the reasons and one of the factors why we didn't get a quarterly booking for Q4 and for the rest of the coming gas year on that Polish route.'cause gas pro effects wants to modulate on a monthly basis how much is flowing through. But with these prices and TTF up in the mid forties, the actual booking costs for delaying booking until monthly or even shorter term capacity, are not that significant relative to how much gas problem is actually making in terms of sales into the European market. So we do think it does want preserve a bit of that flexibility in terms of whether it's able to deliver is the other big question because obviously we've. Through Poland since the 31st of July, and I think it's important to stress that there was an initial flow drop before we got news of this fire on a facility linked to the condensate processing and stabilization facility. There was a drop around 30 MCM per day on the 31st of July through to the 4th of August. Now. This lines up a little bit with what we saw in terms of some news reports from Russia that there was a fire on a major transmission line near the city of PERM in Russia, which may have caused a bit of a reconfiguration in flows and may have been part of the reason why we saw a bit of this flow drop through UMA Europe. Now this is something that we think could be fixed. Of a, and actually allow a bit of a flow recovery in the second half of August. So that's one potential event, which is separate to what has been going on in the condensate process facilities near now regarding those facilities. There is a major processing stabilization plant in Nago. The fire actually took place, we believe, at a facility which is about 12 kilometers away, which is a ization facility handling some of the gas coming outta the yengo field. But by no means most of it, and specifically that fire seems to have affected only. 50% of that catheterization plants processing capacity. And even beyond that, we think it may not have been on the actual condensate splitting element itself, but more on the generators that are connected to that. So we think that you can return that 50% of that facility's capacity, which would restore about 13 MCM per day pretty quickly, at least by the end of this month. And then the remaining bit of that facility could be replaced over the course of September and potentially into. October. So we don't think the impact of that is as grave as a lot of the market was perceiving it when we first started seeing these flow drops and this news of the fire.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 25:00

So you expect in the short term then prices to ease substantially.

James Waddell, Head of European Gas, Energy Aspects: 25:04

We still have a problem in that we. Just have very low storage in Europe, and we have some other disruptions at the moment in terms of Algerian supply coming into Southern Europe. And because we've already seen this flow drop into the European market, we've just cut more into the amount of gas that we're putting into storage. And because of that, we're just aiming for a very low storage carry. By the end of October, and this is the sort of situation where in a particularly cold year, we would not be able to get through winter on some of these storage assets. So the market is still fundamentally extremely tight and we've been moving very close to the point where you are really trying to maximize that gas to displacement from the power sector. And we feel that the market should really be around that level. So there's not a great extent to which we would expect the market to be loosening on this just because it's already tight. It's already a scramble to try and get gas into storage by the end of October, and we don't have very much time left. And if we don't get, we don't build up those inventories to a decent level, then this winter we have lots of upside risk on the TTF because if we get a particularly cold winter and we get into February, march and we get another. Scenario we will be scrambling and really competing against Asia as to who can price the other outta the market.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 26:19

So by November, what kind of levels do you expect the stocks to be at, and is there any kind of regional difference or a variety in the storage capacity?

James Waddell, Head of European Gas, Energy Aspects: 26:29

One of the key questions really is how low we expect storage at the end of October to be, because we've had this baseline about 20 from. 2016 through to 2020, the lowest storage inventories were, was really 90 BCM. And that was at the end of October, 2018 when you'd had this scramble to get gas into storage after the B from east the previous winter. And that was really a low baseline. And we're looking like we're gonna be around about five BCM below that level. Going into October this year just doesn't look like we have the means to unlock more supply into the European market or to reduce power gas demand much further to get to a much higher level of storage carry out. So that sets up a winter where there's lots of upside risk on prices because you just have potentially gas and storage. Going into the last winter we had around a hundred BCM. Of gas and storage and when we had Asia drawing a lot on Europe's LNG supply and diverting those cargoes from the Atlantic Basin into the Asian market, the TTF did rise a little bit, but it was able to be fairly moderate just because it could ride down on those storage assets. If we had a similar phenomenon going on this winter, we have an exceptionally cold winter in Asia, we would not have that buffer to keep the TTF under control. So that is the big risk of this winter. We're about five BCM down on last year's levels. At the moment we're gonna be probably closing in about 85 BCM by the end of October.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 27:53

The coming weeks are going to be crucial to give us an indication of what to expect in the winter, both in terms of Nord Stream two, and also storage and supply from elsewhere. James, thanks very much for joining the Montel Weekly podcast.

James Waddell, Head of European Gas, Energy Aspects: 28:05

Happy to be on that. Thank you.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 28:06

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@montenews.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.