The Russia question

European wholesale gas prices have softened in recent days on forecasts of mild weather and the prospects of LNG imports but they are set to remain at historic highs for many weeks to come.

This week’s pod discusses the crucial question of Russian gas supply, LNG shipments in the first quarter and Asian demand. When will the energy crisis ease?

Guest: 

• Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:04

Hello listeners and welcome to the Montel Weekly podcast, bring Energy Matters in an informal setting. This week we discuss gas and Europe's energy crisis. Everywhere you look, energy is in the headlines as prices surge. Households and industry face soaring costs perhaps for many years to come. If we are to believe some bosses of UK energy firms, and this is largely on the back of soaring gas markets, now, what's the reason for the crisis? Is Putin to blame as the IEA director Fatty Bureau suggested this week? Or are there other factors at play as we record? Prices have softened, but will they stay that way for the weeks and months to come? Joining me, Richard Sverrisson, to discuss these issues is our old friend Trevor Sikorski of energy aspects. A warm welcome to you, Trevor.

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 0:54

Thank you very much, Richard, and as always a pleasure to join Montel.

Richard Sverrisson, Editor-in-Chief, Montel: 0:58

Let's go straight in and discuss current prices. They have softened. This is the wholesale gas prices both in the continent and in the uk. What's the reason for this?

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 1:06

I think the softening that you're seeing at the start of this year is a couple of things. I'd say there's two, two main drivers there, and the first one's of course is always weather and certainly it was a very mild, a mild end to 2021. And whenever you have those, that peak winter not being that, that cold it really helps soften demand and with softening of demand. People's views of scarcity, how much scarcity is in, there is in the market starts to come off. And so we really saw that. And certainly even for the first half of January, even if it's not been that mild, it hasn't been really, it's been around normal or slightly better than normal in terms of temperatures. So again. Not the big draw on storage that demand could have brought had it been a lot colder. So I think you're seeing some of the winter risk Ebo away as we go through the peak winter. And and really cold weather hasn't really shown up. I think the second big one is of course, as well, l and g and LNG send. It's been really high and we've had a lot of LNG you could say this is also weather, but it's not European weather driving that. It is of course Northeast Asian weather, largely driving that because the Northeast Asians went into, I think this winter, really highly bought with a lot of gas and storage and they've had a very mild winter. Lots of concerns about LA Nina going into the winter. We did some analysis there was quite interesting, really said only with year, you only tend to get one month of. Of, of very cold temperatures, and that tends to be January, maybe in the second half of January might, we might see a little bit of that. But December really mild, far milder than normal and milder than expected for a laina year. And that really just meant that, the Asians weren't burning through their stocks. And a lot of that is terminal stocks. So you know, if you've got a lot in your terminals. You just aren't, if anything, you're gonna be turning away a few cargoes because you just don't have room for it. And we saw a bit of that, and of course that just weakened, that sent a lot more cargoes into the European space. The other thing as well as we've seen a lot of over performance, probably from a lot of LNG supply and of course with LNG prices where they are. You are looking at, around, they've been around 30,$30, maybe a little bit less with some of the recent changes in the TTF, but very high gas prices. Huge amount of incentive to get gas onto the water if you're a producer. And of course we've seen, a lot of production probably over over what you'd say nameplate capacity is of facilities. We've seen that. From the us we've seen that from Australia. All of the big producers really being strong in terms of their production. And that has pushed probably more LNG than expected as well into that European market. So those two drivers being really strong for LNG Sendout that has. Helped limit the draw on stocks and has eased those concerns about end of, end of March storage, which were so important. Even, six weeks ago, or even probably four weeks ago before these, before the weather happened and before LNG happened.

Richard Sverrisson, Editor-in-Chief, Montel: 4:08

We saw, in December, prices peaked at all time. Highs of 188 euros per megawatt hour. They come down to around 70, 80. What's your view going forward here in the weeks and months to come, Trevor, and what is it all about the weather now?

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 4:24

It's always about a couple of things.

Richard Sverrisson, Editor-in-Chief, Montel: 4:26

Sure.

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 4:27

The two drivers that have helped soften it are gonna be really important, right? So if you see a flip in, in either of those two drivers, either the weather or the LNG imports then you say the, there's a bit more upside probably into pricing to come. You would, again, start to see a bigger draw on storage and that would worry, the market a bit and there would be a little bit more risk priced into that market. Probably not, possibly not as high as what we saw, in December because there's less of winter left. So probably the risk profile looks a little bit better than it did back then, but you could still see prices. Going reasonably high if either of those two switch. And then there's the Russian question. And that Russian question, of course is, is incredibly important and has been something which means yes, we're talking about prices coming down, but historically even, even the 70 euro price is incredibly high for the European market, historically at levels that, we've never seen before. Very high, very expensive gas expected for the rest of the winter. And for the summer because, even with some softening expected probably, on that curve, it's still not really going to be a place where we're going to be able to burn a lot of gas into power. So those pricing dynamics are gonna keep the curve reasonably high.

Richard Sverrisson, Editor-in-Chief, Montel: 5:39

So you think around 70 euros, megawatt hour, then that that's where we'll stay. Until the summer?

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 5:44

I, I, like I said, I think, if any of those two, if any, if weather changes l and g changes, then of course there's upside. Has the market finished repricing, it's wait and see, as we get further and further through the winter, if we continue to. Have an end of March which looks satisfactory and, comfortable for the market. Maybe you see a little bit of reasoning, but for certainly for that strip from now to the end of summer, prices are gonna have to stay historically reasonably high. IE at the top of the fuel switch range, if not higher. And they've certainly been a lot higher than. The fuel switch range over the last couple of months. So that kind of support is still gonna hang out in the market.

Richard Sverrisson, Editor-in-Chief, Montel: 6:22

I want to return to the fuel switching levels and the dynamics there, Trevor, but let's return to the the Russian question. So the pipeline gas and the scarcity, is it all about Putin as fatty Bural? Was hinting this week or suggesting Quite, not really suggesting, it was clearly stating and blaming gasper for the crisis. Is that too simplistic?

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 6:43

I mean it's, certainly if you looked earlier in the year, it was a combination of, Asia bidding away a lot of the LNG from the market, it being pretty supportive in terms of weather. Renewables was like, you had a whole bunch of things adding into this and it was very cold in Russian. I think last time we talked we were, sympathetic, at least. Over the first half of the year in terms of, the Russians, needed to fill supply and, or needed to fill domestic storages, which were, incredibly low and, had increased production a lot in order to do that. So we were reasonably sympathetic to the idea that Russians didn't actually have very much incremental gases supply into the market. Kinda six months around that sympathy is has eased. I would stay home has waned a bit. A couple of things happened. First of all, if you'd looked over the previous couple of years, gas Pro was always refilling domestic storage to, between 72 and 73 bcm. And when they hit that, it would've maybe been a signal that they could have sold some additional gas into the market. And of course they didn't. Do that. And they seem to be relying very heavily just on nominations. They've effectively stopped selling on the ESP and then they filled up the storage, to 75 domestically. And that means that now they do have a lot of gas and storage, and certainly to the end of December, you would've said, they have been preserving domestic stocks at the expense of selling any incremental gas into the European market, and given how high the European market is pricing. That does feel like there, there is a degree of withholding supply from that market for whatever reason. And, and we do certainly, internally, we have lots of debates about, what are the Russians, actually doing here? Is it just about getting Nord stream to online? Everyone's agreed and, or, and, and at least publicly recognized that this is just a, a regulatory set of hoops that the Russians have to jump through it. Its. At the moment, there isn't a big, external threat to it anymore. That could change depending on if the US votes for heavier sanctions. But, the Biden administration has gone very soft so far on, on that. So it did seem like this was just a bennet kind of hurdle that the market that the Russians had to get over. So why signal, why continue to withhold gas from the market if there's such a big profit to be made now? You could say they're making a huge amount of profit anyways because obviously the lack of Russian gas into the market has kept it very high and you're seeing, record, profitability, let's say for gas prom this year, even though it didn't sell that much gas into the European market. And that's because so much of it's now hub indexed and gas prom is if you'd say, using its market power in a way to, to maximize its revenue at the moment. And it, that's really where we feel like we've gotta, now how long does Gas Pro do this and let l and g wash into the European market? And take that maybe for potentially for a very long time. They have come out recently and said, you guys need to sign up to some long-term contracts. If you sign up to long-term contracts, then we will provide some more cash. Now this is a little bit of a change of tack, but it makes sense 'cause if you g promp you have to be worried about, the direction of travel for European, for their European gas market. And the decarbonization that's expected to happen over the next. Over the next decade in the power sector with lots of, the member states, really looking for significant increases, in, in the decarbonization of power, which means really hollowing out what you have for thermal generation. And yes, coal's gonna take a hit on that. But you'd expect gas is gonna take a hit on that as well. Of course. They could be like let's, let's get the utilities to lock in longer contracts. And, and we've seen maybe some of the more southern, less market focused or those markets with less developed gas markets, signing up, we saw Greece, we saw Turkey, in the last, in the last month or two. Signing up to some longer term contracts from the Russians and that, maybe that's what they're trying to push. It's basically like saying, forget about the, we're not gonna do sales. You want more gas from us. You commit to a period. Hard to see maybe the utilities, going from maybe another five year strip of gas or something like that, given, if you look at investor reports and stuff like that, it's all about. Amongst the utilities, it's all about renewables, it's about batteries, it's about ev charging points. It's about the energy transition. It's not about renewables and that's not the story you wanna sell investors if you're a European utility.

Richard Sverrisson, Editor-in-Chief, Montel: 11:07

Yeah. It's not about gas, you mean?

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 11:08

A Yeah yeah. It's probably not a, it's not really about gas anymore. And, gas, we, we certainly believe gas, will have to. Play a transition role, and it's just a question of how do you manage that transition role? And certainly it's not probably increasing demand, but do you need to keep gas around because you are going to expand power demand through the electrification of transport and other sectors, you're probably going to increase. Electricity demand from the increase in green hydrogen. So you've got, all of these things aren't gonna draw on renewables, so you are still gonna need some of the existing capacity just to, to meet underlying demand. So there's this really big question, unless you have a really. Big increase in energy efficiency. Demand's gonna go up. If demand's gonna go up, renewables will struggle to do everything that's gonna be asked of it, which is meet higher demand, replace coal, replace nuclear, and potentially replace gas. That becomes very difficult. So we think, gas definitely has a role to play through the coming decade. Maybe a little bit longer, but then it is getting a little bit thin. And are you going to get utilities saying, yes I'm gonna happily commit. A very, to a very long period of gas demand. And the answer is probably no. Maybe there's this little winder now where they say, yes, gas has this transition, or I can sign up for 10 years, but, maybe five years is a more realistic for anybody wanting, that those Russian gas flows. And is that enough for, gas promise gas? I'm guessing Gas Pro might offer that, but it's a big question.

Richard Sverrisson, Editor-in-Chief, Montel: 12:40

Yeah. So there's a combination of geopolitics as we're seeing now with tensions on the Ukraine border, as well as trying to secure these long-term deals for, the long-term demand for it, for its its product. But when it comes to North Stream two Trevor what kind of analysis have you done and when do you expect. The pipeline to start commercially start operations.

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 13:02

Yeah. I think last time we talked to you we talked almost exclusively about Russian question.

Richard Sverrisson, Editor-in-Chief, Montel: 13:07

Yeah.

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 13:07

And two. And at that point we. I think we were quite pessimistic. We, we basically said nor Stream two is not gonna start probably till the end of q3. And certainly nothing that's happened, in, in the last four or five weeks has really changed our view on that. We still think it is, an end of Q3 type of timeframe for them to get authorization. Now, like you, you said in your previous comment, I, there, there is a couple of threats to Nord Stream ever coming on. One is US sanctions. The other is, all of the conflict, on the Ukrainian border. And certainly if you have if you have any kind of, Russian incursion into Ukrainian, onto Ukrainian soil again, it just seems very hard, politically then for the Europeans to switch on, Nord Stream two. That becomes, it becomes, a pipeline that looks, looks almost dead in the water, and these are two big threats to Nord stream too. The tension on Ukraine and and US sanctions and certainly the Europeans would be much more relaxed with a very heavy US sanctions on that pipeline. If you do have an invasion of, Ukraine by the Russians.

Richard Sverrisson, Editor-in-Chief, Montel: 14:16

Moving away from the Russia. Question a little bit there, Trevor. The other aspect that you haven't touched on, which could, be throw a spanner in the works here is is the impact of French nuclear outages or a lack of availability here, have you what are your expectations for the coming months? There's always, it's always a bit of a wild card, the, extended outages, sudden unplanned stops, et cetera. What? What kind of impact do you see this having in the coming months?

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 14:43

Yeah, this is certainly one of the things, when you looked at, you, when you look at 2022 either gasper in power or the need for thermal, let's say, and emissions as well. You look at both of those and you'd say power is gonna be another year over year and year increases. Because not you, you've got a whole bunch of kind of nuclear questions. Certainly you've got the loss of four gigawatts at the beginning of this year of German nuclear. You've got ED, F, again, pointing to, after two years of kind of recovery of nuclear. A very, a weak year for nuclear generation from the French. So you've got, low nukes is gonna be a question. I think the one thing that might save that in terms of year in year increments, of course, is last year, 2021 was such an outlier in terms of, wind speeds and that sort of thing. It was not a great year for wind availability. And of course a lot of wind. New wind capacity, new solar capacity came on in the EU last year. And again, we expect that probably to happen again this year. You're looking over, well over 20 gigawatts of additional renewables being added. There's a lot more capacity. It was just you had, extreme and extremely calm year in terms of weather patterns. You would expect some degree of normalization on that, and that's the one thing that's maybe gonna offset that, or potentially partially offset. That big loss of nuclear that we're seeing this year. Of course, you also have a, a number of of coal fired power generation being shut down in the block as well, and all of that just adds to adds to some of the pressure on the European gas market just because you are getting less, fuel switching. You're getting, what we saw this year, with as gas move through the fuel switch, steps. And priced itself increasingly out. You weren't getting, you were getting less demand side response partially because coal was tight as well, but you were getting less demand side response from the coal sector than, what we expected to see from previous years. And that is one of the thing that's. The transition's gonna bring is as you get rid of coal, gas will become a le less flexible market. It will become a more volatile beast because you don't have that safety net of, oh, we can just take it out of power and let coal generation take up the slack. That's just not gonna be there anymore. So it doesn't make it a much more volatile. Set of markets back to the gas market and of course the power market,

Richard Sverrisson, Editor-in-Chief, Montel: 17:05

but that's more in the media term. I'm thinking this year we've seen record high comp prices up to nearly 90 euros, a ton. Yet you've seen this switch from gas. To coal fire generation. What would it take to, to flip that back to, coal to gas, which is what the carbon market's there to do in a sense.

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 17:26

Yeah. And we've said it for a couple of years and we're probably have been a little bit of outlier, but we've, we've had for a while. The basic premise that the carbon market will be ineffective in the coal to gas switch because you price on. All of the gas you need at such a low price that, that it's not the carbon market that can then, stimulate more gas fired generation because you're already maximizing out supply at very low gas prices. It, it doesn't provide that short-term abatement. What Try, what provides that short-term abatement is development in the gas market. When gas gets cheap against coal, then. And be because it's, that's happening because there's less demand than supply. And so that market is flexible and is trying to get more demand and is pushing coal out and that's what needs to happen. We, if you wanna get back to, the coal to gas switch rather than the gas to coal switch, you need the gas market to soften. And really, the carbon market, the fact it's higher just means. That, the fuel switch range happens at a higher place than it would otherwise do. It's inflationary for gas, but it doesn't, a high carbon price doesn't actually drive that switch in any material way. It is just the dynamics in the gas market, which is important for that switch.

Richard Sverrisson, Editor-in-Chief, Montel: 18:41

Yeah, and as you said earlier, you don't really expect to soften until the latter half of this year. The gas prices. A fi final question, Trevor. You mentioned at the start, us LNG coming in. What's your view here in the coming weeks and months and to what extent will this help Europe and the supply situation within Europe?

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 18:59

Yeah, like I said, a number of things happened and it has been, one of the key reasons behind the softening in gas prices that we have seen, coming off these really big highs. You, you mentioned about, we generally, we're still reasonably constructive now in terms of how much LNG we did have in our previous balances, we only saw January as being reasonably low in terms of incremental supply. And then we had quite a lot of incremental supply coming in February, March, and that was because. We'd, assumed a reasonable degree of normalization of Asian weather and because Asian weather was so cold in December and January, from December, 2020 into January 21, you just had a lot of restocking in February and March, and that restocking is gonna be pushed later and later into the year because you don't. The Asians at the moment don't need to do that. There's a lot of, there's enough backwardation in the curve to say, use up stocks and just sell your cargoes back into the market. So I'd say for the rest of Q1, it looks pretty good for LNG back, coming back into the European market, we expect. A reasonable size, incremental chunks of that to continue to happen for the next for the next two months and really maybe softening a little bit when you get into the summer. But generally I would say generally through this year, we're reasonably constructive of increments Coming in last year was reasonably low in terms of the amount of LNG supply through year on year. We do expect more LG supply to come into the market. That doesn't really funda, it allows a softening of prices. It probably allows prices, and the risk profile to come down quite a lot. Does that mean, we're gonna move from historically high gas prices? It. It probably doesn't mean that's gonna happen this year,

Richard Sverrisson, Editor-in-Chief, Montel: 20:36

but we won't see those extreme spikes that we saw, say, in December, potentially.

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 20:40

Certainly that's not our base case. You can certainly some of the things we expect to happen is, Russian flows at the moment are incredibly low. We do expect that those are gonna have to step up just to meet you contracted quantities that. We're even below contract numbers at the moment. I think there's a reason for that, which is the way the indexation, a lot of those contracts work is on an m plus one indexation. So that indexation number for January was set, above a hundred Euros, perton. So you know, if you are a contract holder for the Russians. Basically the economics is saying, don't nominate in January. And that's what we're seeing. If it got cold, those economics would probably change, and probably the, the day ahead price would then start going above the contract price. And when that happens, you get a return to nominations, but with the rations, not, not using the the p to sell any incremental gas into the market anymore. A lack of nominations just means a lack of Russian supply. We do think that has to pick up and that has to change. And probably, the month ahead index will for February should be it should be less than a hundred anyway. It'll fall. Whether or not those dynamics hold for another month remains to be seen, but, until we get out there. At some point you would say those nominations have to pick up, and then Russian loads have to pick up just to meet contracted numbers. So that's a risk, whether or not people, you know don't do that just because or you they don't do that for a couple of months. Maybe a little bit of an upside risk. But yeah, as with all of these things, fundamentals can change pretty quickly. If we do have a month of cold weather in February or something, then all of a sudden the summer looks, it will look tighter again. And, all of that will happen.

Richard Sverrisson, Editor-in-Chief, Montel: 22:19

So the ESB being the electronic sales platform that Gas Pro uses to sell. So gas into Europe. Yes. Yeah, exactly. Trevor, thank you very much. That was a fantastic overview of what we can expect in the coming months. Thank you for joining the Montel Weekly podcast.

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 22:31

Thank you very much for the invitation, Richard. Always a pleasure.

Richard Sverrisson, Editor-in-Chief, Montel: 22:34

All the best. So listeners, you can now follow the podcast on our own Twitter account at ly 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.