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Speaker 1: Hi, I'm Dana Perkins and you're listening to Switched on

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Speaker 1: the bienn F podcast. Today is all about natural gas

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Speaker 1: and what we can expect as we look ahead to

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Speaker 1: this winter. In the Northern Hemisphere, gas prices remain very

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Speaker 1: elevated and security of supply is uncertain. Europe has been

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Speaker 1: hit particularly hard by the reduced supply coming from Russia,

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Speaker 1: and in all honesty, some demand reduction is going to

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Speaker 1: be needed. While there may be enough gas to get

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Speaker 1: through this upcoming winter, there's a lot to consider when

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Speaker 1: we think about what might happen to the supply and

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Speaker 1: demand balance in the months and years ahead. So today

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Speaker 1: I sit down with Stefan Ulrich and Arun Tora, who

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Speaker 1: are both European gas specialists at bienn e F, and

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Speaker 1: they're going to talk about our winter gas outlook. We

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Speaker 1: do these twice a year, once for the summer and

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Speaker 1: once for the winter. As a reminder, bienni F does

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Speaker 1: not provide investment or strategy advice, and our complete disclaimer

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Speaker 1: can be found at the very end of the show.

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Speaker 1: And now let's jump into the conversation with Stefan and

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Speaker 1: Aaron and think about what might happen as we look

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Speaker 1: forward to this winter and natural gas. Stefan, thank you

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Speaker 1: for joining us, and Aaron Yea, thank you. Dana happy

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Speaker 1: to be here. So we are here to talk about

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Speaker 1: while the outlook for natural gas as we head into

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Speaker 1: this winter in the Northern Hemisphere, and we do both

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Speaker 1: a winter and a summer gas outlook every single year,

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Speaker 1: and the both of you we do these globally, but

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Speaker 1: you guys focus specifically on the European part of this outlook,

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Speaker 1: and this is really where I think the I guess

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Speaker 1: the crux of the attention is globally right now is

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Speaker 1: on Europe specifically. So we will come to that and

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Speaker 1: we will talk about those dynamics. But before we dive

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Speaker 1: in there, could you please provide some perspective on why

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Speaker 1: before the whole world was looking at gas prices, we

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Speaker 1: were writing and researching winter and summer gas outlooks. Fundamentally,

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Speaker 1: your gas year is split into two parts, your winter

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Speaker 1: where you withdraw gas from storage, and your summer where

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Speaker 1: you put gas into storage. Most gas consumption is in

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Speaker 1: the Northern Hemisphere, so that works as a kind of

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Speaker 1: like a global picture. So as a BNF Global Gas

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Speaker 1: research team, what we do is at the start of

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Speaker 1: each of those seasons in the winter, so that starts

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Speaker 1: from October, so in September and the summer. So that's

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Speaker 1: a forecast we produced in March for April looking for

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Speaker 1: the year ahead for those two seasons. In many ways,

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Speaker 1: these are like our regular monthly publications we put out,

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Speaker 1: so we have our global Energy Outlook, we have the

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Speaker 1: US Gas Monthly and the European Gas Monthly. But these

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Speaker 1: are just where we really crunch some of the numbers

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Speaker 1: and a bit more details, sit together as a team

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Speaker 1: and decide what the story is for the global gas

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Speaker 1: markets over the coming twelve months. So the disruption specifically

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Speaker 1: in Europe really took off this summer, even though the

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Speaker 1: crunch time is really approaching right now in the winter.

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Speaker 1: So as we think about that, so Western Europe, what

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Speaker 1: really happened was it lost almost all of its pipe

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Speaker 1: supply from Russia. Can you really talk about why this

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Speaker 1: is so important to the supply for Europe generally and

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Speaker 1: what this does to the gas balance. So that pipe

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Speaker 1: supply or Russian pipe supply and makes up around the

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Speaker 1: third of your total European gas supply. So it's a

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Speaker 1: market which have lost the very large chunk around thirty

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Speaker 1: percent at the moment of its total supply, and for

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Speaker 1: a lot of commodities markets, that would be quite a

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Speaker 1: hard shock to balance. Fundamentally, this is a story which

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Speaker 1: has been building over time. Russian gas supplies didn't really

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Speaker 1: flow to the levels expected and have gradually decreased coming

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Speaker 1: to the summer, where you've only got a dribble, so

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Speaker 1: around ten of their historical levels remaining. So Russian gas

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Speaker 1: was the third of the supply to Europe. But how

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Speaker 1: about the rest of Russia's gas? Where else are they

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Speaker 1: selling to and no longer supplying to Europe? Has that

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Speaker 1: been problematic for them? Yeah, it's it's been problematic for them.

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Speaker 1: So the thing is about pipeline gas. Those pipelines run

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Speaker 1: to fixed locations and so you can't really send that

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Speaker 1: gas to other locations unless you have a pipeline heading

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Speaker 1: from the same source to a different location, which when

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Speaker 1: it comes to a lot of Russian gas production that

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Speaker 1: isn't currently So a lot of that gas which would

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Speaker 1: be or historically has been sent to Europe is now

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Speaker 1: is now lost to the global market, which is why

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Speaker 1: this then also this has a very big impact on

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Speaker 1: your global gas balance. When it comes to regards to

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Speaker 1: Russian sales, high prices had largely offset their lowest sales

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Speaker 1: volumes untill around the summer of this year, when you've

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Speaker 1: actually increasingly seen Russian gas revenues for on a year

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Speaker 1: on year basis, of course pipeline gas to Europe and

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Speaker 1: the only gas Russia cells. It still has pipeline sales

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Speaker 1: to China which are ramping up, but it also of

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Speaker 1: course sells all energy Aaron, can you quantify those cells

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Speaker 1: and really highlight where they've been flowing. Yeah, thank you, Stephan.

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Speaker 1: In particular Russian llergy exports into Western Europe, so markets

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Speaker 1: such as Spain, Netherlands, France, they have they have increasingly

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Speaker 1: been importing higher volumes of llergy from Russia, even countries

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Speaker 1: that typically didn't import Russian energies. So you're looking at

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Speaker 1: countries such as Belgium, they are now increasing their appetite

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Speaker 1: for Russian energy and this is primarily coming from the

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Speaker 1: Yamal facility. So it's quite interesting, you know, when we

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Speaker 1: talk about the complete, well not complete, almost complete collapse

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Speaker 1: of Russian supply into Western Europe, we're still importing quite

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Speaker 1: a significant amount of energy and just quickly explained why

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Speaker 1: this supply was shut off. This was not due to

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Speaker 1: sanctions imposed by Europe on Russia. This was a decision

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Speaker 1: made by Russia proactively correct That depends on who you're

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Speaker 1: talking to write. But we read a piece back in

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Speaker 1: September one called unpacking putin statements right, which was really

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Speaker 1: looking at some of the what we have to say,

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Speaker 1: rather weak arguments Russia was using to justify why flows

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Speaker 1: to Europe had not returned to previous highs and actually

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Speaker 1: kept on falling. There is of course a debate about

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Speaker 1: the nord Stream two pipeline and whether this reduction in

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Speaker 1: flows could be viewed in retaliation to some of the

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Speaker 1: political movements around that. And then, of course, though since

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Speaker 1: the war in Ukraine, Russian flows have fallen further and

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Speaker 1: further as the excuses have mounted. Only one turbine was

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Speaker 1: left operational on the nord Stream pipeline, with I think

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Speaker 1: a total of seven turbines at that facility or the

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Speaker 1: upstream facility being found with technical issues. That's really surprising

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Speaker 1: for a company with the performance record and the operational

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Speaker 1: record of gas Prom. Gas Prom of course, then use

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Speaker 1: sanctions as a shield, claiming that they could not repair

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Speaker 1: these turbines given sanctions, So of course it depends on

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Speaker 1: who you ask. But in a lot of our pieces,

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Speaker 1: we've highlighted how weak some of the arguments have been

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Speaker 1: the gas Prom and Russia have put forward. And the

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Speaker 1: best example of that is how gas Prom still has

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Speaker 1: available pipeline capacity through the Ukraine which it is not

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Speaker 1: using currently and has not been using for quite a

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Speaker 1: few months now, despite now sending less than its contractual

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Speaker 1: obligations to a lot of its European customers. Let's then

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Speaker 1: think about what this reductions apply to Europe has really

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Speaker 1: done to gas prices, because we all acknowledge that, you know,

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Speaker 1: gas is an important part of the energy system. It's

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Speaker 1: an important part for heating for homes, it's an important

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Speaker 1: part for manufacturing. It really touches so so many parts

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Speaker 1: of the economy. And one of the primary reasons why

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Speaker 1: people have said that it is linked to in many

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Speaker 1: respects this high inflationary period that we're in right now.

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Speaker 1: So what has been happening with Russian gas prices? Because

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Speaker 1: I know that it is definitely more than gas traders

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Speaker 1: that are keeping a close eye on gas prices at

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Speaker 1: the moment. So the European gas market is largely liberalized, right,

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Speaker 1: your price is set by that marginal supply source. And

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Speaker 1: with the decline and Russian gas, Europe has to import

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Speaker 1: a lot more energy, but specifically spot llergy, so liquid

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Speaker 1: natural gas coming to us from ships instead of through

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Speaker 1: these pipelines historically in Europe exactly. But also you know

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Speaker 1: a lot of your buyers globally who import energy like that,

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Speaker 1: they're signed up to these long term fixed price contracts

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Speaker 1: which are set generally as a proportion of the oil price,

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Speaker 1: and so a lot more stable. What Europe has to

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Speaker 1: do is capture an exorbitantly large share of the global

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Speaker 1: spot market, right. So that's in competition with Asian buyers.

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Speaker 1: I think, Aaron, do you want to add in there

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Speaker 1: about just what pushes and just how that competition is

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Speaker 1: unfolding and pushing both European and global energy prices to

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Speaker 1: these record high levels. So the situation you find itself

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Speaker 1: is the fact that it now needs to replace, as

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Speaker 1: Stefan mentioned, a large proportion of its baseline or baseload

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Speaker 1: gas supply. In order to offset this, they have to

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Speaker 1: attract energy and that is via the global spot market.

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Speaker 1: As Stefan mentioned, a large proportion of energy volumes is

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Speaker 1: tied under long term agreements. That's around seventy of the

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Speaker 1: total llenergy supply. And how long is a long term

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Speaker 1: agreement anywhere between fifteen and twenty five years, and they're

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Speaker 1: having negotiations to bring in some shorter to medium term

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Speaker 1: contracts ten to twelve years, but they haven't really gained

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Speaker 1: much traction. And how much of the market is actually

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Speaker 1: already tied up in these long term agreements. So you

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Speaker 1: got four hundred in two million metric tons of available

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Speaker 1: leergy supply se that is locked up in long term agreements.

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Speaker 1: So Europe is now battling for that remaining thirty in

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Speaker 1: which of its own supply is all on the spot market.

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Speaker 1: So it's incredible competition, and it only takes a brief

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Speaker 1: cold spell in markets such as China Japan, and then

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Speaker 1: we could see a substantial amount of llergy being displaced

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Speaker 1: to other markets and that will have a big impact

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Speaker 1: on how Europe restocks through the winter. In terms of prices,

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Speaker 1: what Europe has have to do is have to maintain

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Speaker 1: a premium over Asian lergy prices that is the Japan

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Speaker 1: Korean market, and then this constant competition to try and

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Speaker 1: import spot ellen g has meant that the TTF has

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Speaker 1: had to be priced that significant premium, and this kind

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Speaker 1: of disrupts the forward curve as well, because all though

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Speaker 1: prices have fallen from its significant highs due to mild

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Speaker 1: weather and the fact that Europe has restopped sufficiently through

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Speaker 1: the first month of the gas winter, there's always that

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Speaker 1: need to import energy and that is going to keep

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Speaker 1: prices high. We're in the first month of the gas winter.

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Speaker 1: How closely are you guys watching the weather every morning? Yeah?

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Speaker 1: Very It's a it's a daily ritual for us. So

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Speaker 1: it's been incredibly mild in Europe and I think that's

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Speaker 1: one factor which is why are October demand to date,

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Speaker 1: So we're recording this on the October. So through October

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Speaker 1: demand has come in around below your five year average,

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Speaker 1: but only half of that is due to the weather,

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Speaker 1: or approximately half. I think it could even be a

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Speaker 1: bit less. Your weather is incredibly important when it comes

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Speaker 1: to your winter gas demand. I think your rangeing outcomes

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Speaker 1: over the last ten years is around ten billion cubic

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Speaker 1: meters either side, which is, you know, around of your

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Speaker 1: storage capacity. And this has to do with the fact

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Speaker 1: that so much gas is used for residential heat or

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Speaker 1: I guess buildings generally exactly, So thirty of your winter

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Speaker 1: gas demand is residential household heating, at another ten for

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Speaker 1: commercial buildings. Right of your winter load is gas is

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Speaker 1: just for heating. And this is what makes it your

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Speaker 1: gas demand so seasonal. Your gas demand in peak winter

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Speaker 1: is about four times higher than your gas demand in

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Speaker 1: your low points of your summer, because when you get

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Speaker 1: into December January, right, you have that really big proportion

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Speaker 1: of heating demand. So yeah, whether it really impacts how

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Speaker 1: the balance evolves and how demanded supply shape up. So

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Speaker 1: in two scenarios, either a mild winter or a particularly

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Speaker 1: cold winter, is there enough in the gas stores in

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Speaker 1: Europe to make it through this winter? Yeah, I think

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Speaker 1: we argue that that's definitely the case. Our latest forecast

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Speaker 1: for European storage inventory evolution over the course of this

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Speaker 1: winter suggests that European storage is in the smaller smaller

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Speaker 1: region of Europe we cover will be around full. So

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Speaker 1: that's around thirty billion cubic meters, and that is enough

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Speaker 1: to absorb even the coldest of the last thirty winters

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Speaker 1: or the remainder of the winter because we're not forecasting

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Speaker 1: from November on pretty comfortably. So whether variation is important,

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Speaker 1: but I think for us what's increasingly important is also

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Speaker 1: your demand destruction variation, which the market is still incredibly

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Speaker 1: uncertain about. So let's talk about demand destruction. The European

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Speaker 1: Union is set a target for reducing gas demand. What

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Speaker 1: is that and where did that come from? So, as

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Speaker 1: Aaron highlighted, there is not enough l energy to entirely

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Speaker 1: replace Russian gas. You know, even if we attract really

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Speaker 1: high proportion of this global spot share, you know, we

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Speaker 1: can only replace around six really of the Russian gas

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Speaker 1: volumes we usually got. Means that the market still has

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Speaker 1: a lot of work to do to balance upside from

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Speaker 1: other supply sources, especially now when you're increasingly thinking on

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Speaker 1: a year on your basis is really limited, right, So

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Speaker 1: the demand side of the balance has to shift in

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Speaker 1: order for us to have enough gas in storage. So yeah,

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Speaker 1: that's why this policy was put in place. It was

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Speaker 1: from that realization of the fact that without changing our

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Speaker 1: gas consumption, we still forecast that we would run out

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Speaker 1: of gas and storage and an average winter by the

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Speaker 1: end of March. So can you elaborate a little bit

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Speaker 1: on what demand destruction looks like and is this come

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Speaker 1: in the form of rationing, does it come in the

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Speaker 1: form of you know, conservation. I'm even thinking a little

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Speaker 1: bit about actually this summer and how there are many

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Speaker 1: parts of the world that actually suffered from severe droughts

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Speaker 1: and there was a lot of discussion around water rationing.

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Speaker 1: Maybe this is the same conversation around electricity use and

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Speaker 1: home heat. Yeah, it's exactly that, right. So the worst

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Speaker 1: case scenario, which is a scenario which our forecast really

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Speaker 1: think will avoid, is rang where government steps in and

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Speaker 1: forcibly allocates a resource. Right, But exactly as you point out,

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Speaker 1: before you get to that stage, in many cases you

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Speaker 1: have campaigns to reduce consumption. You know, your classic UK

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Speaker 1: summer host pipe band being the best example of that.

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Speaker 1: So talking about this target of fifteen percent, which the

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Speaker 1: EU set, that's cross sectoral right, So it's fift of

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Speaker 1: our total gas consumption. When we think about the fact,

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Speaker 1: as highlighted that in the winter, almost of your gas

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Speaker 1: demand is used in buildings or so called local distribution

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Speaker 1: zone that's smaller gas pipe networks which we commercial residential buildings,

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Speaker 1: it becomes pretty apparent that we have to cut demand

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Speaker 1: in that sector in order to meet these targets, right,

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Speaker 1: we can't just let industry and power demand do all

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Speaker 1: of the work there. So, you know, governments are balancing

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Speaker 1: this really hard political question of protecting consumers from high

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Speaker 1: prices and not wanting to part us on higher energy

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Speaker 1: prices to consumers, while still needing to encourage demand reduction

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Speaker 1: and us all to be a bit more sensible with

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Speaker 1: how we heat our homes and the energy we consume.

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Speaker 1: I think that's a very important point. That's definite makes

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Speaker 1: that governments must strike this fine balance because as soon

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Speaker 1: as you start to intervene with stuff such as a

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Speaker 1: price cap, you start to disrupt market dynamics in terms

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Speaker 1: of letting the price do the work. So up to

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Speaker 1: this point, high prices have allowed sufficient demand structure to

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Speaker 1: take place. But as soon as a gas price cap,

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Speaker 1: as soon as that's implemented, you can start to see

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Speaker 1: some of these things. Let's say, this demand structure not

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Speaker 1: playing out as we have seen. So, for example, if

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Speaker 1: we start to cap the price of gas and you know,

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Speaker 1: demand picks up elsewhere, do we lose that energy supplied

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Speaker 1: that we were able to import because of the price

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Speaker 1: of wholesale gas. Another point being the fact that if

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Speaker 1: you cap the price of gas, such as what happened

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Speaker 1: in Spain, you could actually increase demand in the power

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Speaker 1: sector because you could start to see incremental cult to

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Speaker 1: gas switching once again. And when you start to play

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Speaker 1: around with price mechanics, then you're not really letting the

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Speaker 1: market do the work, and the market should balance based

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Speaker 1: off price. So I think it is a very fine

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Speaker 1: balance on how much the government does intervene. Now for

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Speaker 1: a very short break, stay with us. Well, there's the

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Speaker 1: industry end of things, and then there is the individuals

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Speaker 1: who in some respects you're seeing you know, residential individual

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Speaker 1: homes paying multiples of what they are paying last year,

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Speaker 1: and not everyone can afford. That is their discussion around

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Speaker 1: keeping industry and individuals separate. In terms of how this

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Speaker 1: is implemented, I think it's worth coming back to, like

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Speaker 1: how pricing works for residential consumers and also for large

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Speaker 1: parts of your industrial consumer base, to understand that link

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Speaker 1: with the wholesale market, because I think that's also critical

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Speaker 1: to understand why we went so high, but also why

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Speaker 1: we're coming off now in terms of your prices gas

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Speaker 1: demand for wholesale consumers is often set through a variety

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Speaker 1: of tariff structures which are not directly related to your

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Speaker 1: wholesale price of gas right there, based on like an

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Speaker 1: average price your wholesale importer has had to pay over

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Speaker 1: twelve months, say, you know, there's often extra fees or subsidies,

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Speaker 1: which means that the price a wholesale consumer pays is

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Speaker 1: generally quite lag compared to your wholesale price movements. When

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Speaker 1: we come to that really explains why it's really hard

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Speaker 1: for the market to calibrate at the moment. Because we've

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Speaker 1: said that the market needs demand destruction, but a lot

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Speaker 1: of the sectors where you had to reduce that demand

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Speaker 1: only saw an increase in prices well after your wholesale

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Speaker 1: prices had already gone up by multiples of ten in

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Speaker 1: a year, right from the summer of the summer of one.

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Speaker 1: Now we're in a situation where your average wholesale price

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Speaker 1: over the last year is probably like twenty times roughly,

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Speaker 1: let's say over the summer. And of course, then, as

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Speaker 1: you rightly point out, no residential consumer or customer or

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Speaker 1: small business can really deal with that. So coming back

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Speaker 1: to what governments now face, right you're facing between balancing

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Speaker 1: this book of where some of your importers and the

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Speaker 1: people who supply downstream gas have to pay wholesale prices

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Speaker 1: which are up by multiples, you know, in the tens, twenties,

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Speaker 1: thirties even higher, and residential gas consumers of course cannot

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Speaker 1: pay that multiple. So yeah, there was a bound to

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Speaker 1: be struck here, and many governments have put in price caps.

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Speaker 1: You know, across the perimeter of countries we cover in

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Speaker 1: northwest Europe, including the UK, your average residential price is

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Speaker 1: going to increase somewhere from sevent to two pad to

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Speaker 1: levels over the course of this winter, so still a

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Speaker 1: very substantial price increase. But for some consumers that's that's

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Speaker 1: not the case, right. You know, we have a lot

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Speaker 1: of chat in the London office that for some of

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Speaker 1: us here, because we might live in a well insulated

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Speaker 1: new building block, our energy prices are actually going to

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Speaker 1: be going down this winter, which is really comes back

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Speaker 1: to how difficult some of these policy decisions are and

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Speaker 1: how they need to really keep a very close eye

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Speaker 1: and on that link between what's happening on your residential

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Speaker 1: consumer side and how that affects your wholesale price evolution.

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Speaker 1: So there's getting through this winter, which is definitely front

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Speaker 1: of mind, but fundamentally, unless something changes, we're going to

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Speaker 1: be in the same situation next winter as well. So

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Speaker 1: then this brings me to this question around as we

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Speaker 1: look forward, and as we look at a lot of

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Speaker 1: net zero targets that many companies and countries have out to.

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Speaker 1: There was a lot of discussion about actually phasing out

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Speaker 1: natural gas at some point and building enough of various

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Speaker 1: other forms of capacity in order to at least dramatically

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Speaker 1: reduce the dependence upon this flexible capacity which in many

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Speaker 1: respects has been supporting wind and soul. Where do you

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00:20:01,520 --> 00:20:07,040
Speaker 1: see the conversation right now moving towards installing more renewables

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Speaker 1: in order to create domestic supply or the other thing

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Speaker 1: that we're also seeing, which is in your already referenced this,

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Speaker 1: you know, switching between coal and gas and this almost

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Speaker 1: coal renaissance, and also this discussion now that's re emerging

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Speaker 1: around nuclear and things that provide baseload energy. I think

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Speaker 1: it helps me to think about this by splitting those

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Speaker 1: things into three different baskets. I think, given how quickly

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Speaker 1: Russian flows have declined in the short term, we really

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Speaker 1: need some of this emergency demand destruction for the medium terms.

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Speaker 1: So for me, that kind of means out to now,

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Speaker 1: I think to see how Europe's approaching and thinking about this,

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Speaker 1: or at least hoping to do this. The document that

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Speaker 1: and the policy that needs to be looked at is

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Speaker 1: the European Commissions Repower You Plan. So this was a

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Speaker 1: plan released in March two in response to the Russian invasion,

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Speaker 1: and it was supposed to change European energy consumption so

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Speaker 1: that we would be rid of our alliance on Russian

377
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Speaker 1: natural gas. When I like talk about this plan, I

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Speaker 1: used the phrase really like turbo charging. The energy transition.

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Speaker 1: The bulk of demand reduction and the bulk of what

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Speaker 1: offsets this lost Russian supply is electrification, insulation, switching to hydrogen.

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Speaker 1: It's it's around seventy of the targeted demand reduction, right,

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Speaker 1: so a thirty percent reduction in our European gas consumption.

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Speaker 1: By However, it's important to highlight that that plan also

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Speaker 1: included two things which I grouped into a bucket which

385
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Speaker 1: I called of kind of have referred to previously as compromises,

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Speaker 1: which includes measures such as potentially extending the life of

387
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Speaker 1: some cold plants reevaluating some of the decisions we've made

388
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Speaker 1: on nuclear as you point out, data which will be

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Speaker 1: needed realistically by and the fundamental reason for that is

390
00:22:04,400 --> 00:22:08,120
Speaker 1: that some of these decorganization measures such as hydrogen development

391
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Speaker 1: you know, won't take place before and substantial quantities. And

392
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Speaker 1: then the third bucket, which becomes even more critical and

393
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Speaker 1: absolutely necessary given how quickly Russian flows have fallen, is

394
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Speaker 1: outright demand destruction and reduction of consumption. Right. So the

395
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Speaker 1: European Commission admitted that high prices and outlook for sustained

396
00:22:28,760 --> 00:22:31,840
Speaker 1: high prices would have caused some demand reduction, but it

397
00:22:31,880 --> 00:22:35,200
Speaker 1: was only really in the region of around billion cubic

398
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Speaker 1: meters if I remember correctly. You know, I think this

399
00:22:38,400 --> 00:22:41,800
Speaker 1: year we're looking at our forecast of being around sixty

400
00:22:41,840 --> 00:22:45,919
Speaker 1: billion cubic meters. Yeah, for for repower you and the

401
00:22:45,920 --> 00:22:48,439
Speaker 1: European Commission Medium time Plan, it's it's very heavy on

402
00:22:48,480 --> 00:22:52,800
Speaker 1: that decorganization piece, which tied into the long term strategy, right,

403
00:22:52,800 --> 00:22:56,080
Speaker 1: it's tied into the long term strategy of decobonization, And

404
00:22:56,160 --> 00:22:58,959
Speaker 1: a lot of these policies are actually only acceleration of

405
00:22:59,000 --> 00:23:02,600
Speaker 1: things which were all ready discussed. And fifty five, which

406
00:23:02,640 --> 00:23:07,880
Speaker 1: was the European unions checkpoint to net zero. So we've

407
00:23:07,920 --> 00:23:14,160
Speaker 1: seen prices quite high recently, and then they have since

408
00:23:14,160 --> 00:23:17,919
Speaker 1: we first made our outlook for this winter period. What

409
00:23:18,119 --> 00:23:21,600
Speaker 1: is the medium term outlook for prices in Europe and

410
00:23:21,640 --> 00:23:23,280
Speaker 1: what do we think is going to happen among all

411
00:23:23,280 --> 00:23:26,040
Speaker 1: of this volatility. So if we look at the wholesale

412
00:23:26,119 --> 00:23:28,760
Speaker 1: natural gas benchmark in Europe, this is the TTF. If

413
00:23:28,760 --> 00:23:32,600
Speaker 1: we look at the forward curve out until about we

414
00:23:32,680 --> 00:23:37,440
Speaker 1: can see elevated prices persisting. And this is predominantly due

415
00:23:37,440 --> 00:23:39,840
Speaker 1: to the fact that, as we mentioned earlier on that

416
00:23:39,880 --> 00:23:41,960
Speaker 1: it needs to replace a lot of this Russian gas

417
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Speaker 1: with expensive lergy. Expensive llergy due to the fact that

418
00:23:45,520 --> 00:23:47,800
Speaker 1: it's procured on the spot market and it needs to

419
00:23:47,840 --> 00:23:52,400
Speaker 1: outcompete other buyers on a global basis. Structurally, we don't

420
00:23:52,400 --> 00:23:56,359
Speaker 1: really see a large increase in lique faction capacity until

421
00:23:56,560 --> 00:24:00,600
Speaker 1: Qatar's mega expansion comes online. This is around This will

422
00:24:00,640 --> 00:24:04,600
Speaker 1: add another seventy two point five million tons per annum,

423
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Speaker 1: So this is a huge boost in energy supply, but

424
00:24:07,320 --> 00:24:09,840
Speaker 1: there's a long way to get there. So in the meantime,

425
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Speaker 1: Europe has to import a lot of llenergy from North America,

426
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Speaker 1: US supply into Western Europe typically accounts for around thirty

427
00:24:17,720 --> 00:24:22,280
Speaker 1: five of Europe's overall llergy share, and outside of this

428
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Speaker 1: they're procuring llenergy from Qatar and Algeria. The only difficult

429
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Speaker 1: thing is the fact that, as Stephan mentioned in regards

430
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Speaker 1: to Europe's decarbonization strategy, despite Europe, you know, building out

431
00:24:35,560 --> 00:24:38,560
Speaker 1: llergy import capacity, they are still reluctant to sign long

432
00:24:38,640 --> 00:24:41,480
Speaker 1: term agreements. This is because for them, signing long term

433
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Speaker 1: agreements kind of signals to the rest of the world

434
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Speaker 1: that you know, we're still pinned to gas and we're

435
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Speaker 1: not really decarbonizing as we intended to. Let's say this year,

436
00:24:51,480 --> 00:24:55,760
Speaker 1: for example, Western European markets that we cover in our perimeter,

437
00:24:55,840 --> 00:24:58,520
Speaker 1: we're gonna lose around eight point five million tons of

438
00:24:58,640 --> 00:25:03,400
Speaker 1: llergy from long some contracts expiring. This then further exposes

439
00:25:03,480 --> 00:25:05,919
Speaker 1: us to the spot market once again, and then the

440
00:25:06,000 --> 00:25:10,760
Speaker 1: US again will look to deliver volumes into into Europe.

441
00:25:10,760 --> 00:25:13,959
Speaker 1: So the US is a major beneficiary of high global

442
00:25:14,000 --> 00:25:17,800
Speaker 1: gas prices because they also source markets in Asia. But

443
00:25:17,880 --> 00:25:21,159
Speaker 1: when Asian demand lowers, as we've seen this year, they

444
00:25:21,240 --> 00:25:24,200
Speaker 1: kind of just shift their supply into Europe. But then

445
00:25:24,240 --> 00:25:26,720
Speaker 1: once again, it all depends on you know, it's just

446
00:25:26,840 --> 00:25:28,639
Speaker 1: constant battle that will have to take place over the

447
00:25:28,640 --> 00:25:31,040
Speaker 1: next two seasons. Well, and we're talking a lot about

448
00:25:31,320 --> 00:25:33,960
Speaker 1: battles for and consumers in terms of pricing and then

449
00:25:34,520 --> 00:25:39,280
Speaker 1: policies that are being passed along. But really the willingness

450
00:25:39,320 --> 00:25:41,480
Speaker 1: to pay these higher prices at a country level comes

451
00:25:41,480 --> 00:25:45,800
Speaker 1: down to some wealthier and potentially less wealthy nations. How

452
00:25:45,880 --> 00:25:50,480
Speaker 1: is that emerging and are there countries that are essentially

453
00:25:50,520 --> 00:25:53,280
Speaker 1: being forced out of the market. Yes, certainly. I mean

454
00:25:53,359 --> 00:25:55,919
Speaker 1: some of the emerging markets in Asia, such as Pakistan

455
00:25:55,920 --> 00:25:59,480
Speaker 1: and Bangladesh, they are unable to procure lergy at prices

456
00:25:59,560 --> 00:26:02,719
Speaker 1: north of thirty five dollars MMB. To you, what this

457
00:26:02,800 --> 00:26:05,720
Speaker 1: does is the fact that this strains their power supply

458
00:26:05,800 --> 00:26:09,640
Speaker 1: margins and they've had to implement rolling blackouts. Even countries

459
00:26:09,680 --> 00:26:11,880
Speaker 1: such as India, which you know has seem to be

460
00:26:12,359 --> 00:26:16,120
Speaker 1: climbing the global scales in terms of economic powerhouses, they

461
00:26:16,160 --> 00:26:19,520
Speaker 1: are even struggling to procure llenergy at sufficient rates at

462
00:26:19,560 --> 00:26:24,680
Speaker 1: these high prices. So you know, when Europe's importing such

463
00:26:24,760 --> 00:26:28,280
Speaker 1: high volumes of llergy, they're actually taking away supply from

464
00:26:28,400 --> 00:26:30,840
Speaker 1: these other markets as well. So it's not just a

465
00:26:30,920 --> 00:26:34,560
Speaker 1: European energy crisis, it really is a global supply crisis. Yeah.

466
00:26:34,560 --> 00:26:37,040
Speaker 1: I think, as Aaron pointed out earlier, right, this is

467
00:26:37,040 --> 00:26:39,040
Speaker 1: not just the theme for the short term, it also

468
00:26:39,080 --> 00:26:41,520
Speaker 1: continues into the medium term. I think that's a great

469
00:26:41,600 --> 00:26:45,400
Speaker 1: chart from our medium term llergy outlook, which compares our

470
00:26:45,560 --> 00:26:49,439
Speaker 1: forecast for year on year, so from the previous year

471
00:26:49,520 --> 00:26:52,280
Speaker 1: to this year, and you can see that South Asian

472
00:26:52,480 --> 00:26:55,000
Speaker 1: llen G flows I think it declined by twenty two

473
00:26:55,119 --> 00:26:58,840
Speaker 1: million tons in our scenario, right, So that's quite a

474
00:26:58,840 --> 00:27:00,760
Speaker 1: lot of gas which we now expect not to be

475
00:27:00,800 --> 00:27:05,320
Speaker 1: flowing to South Asia in fundamentally because Europe needs that

476
00:27:05,440 --> 00:27:08,880
Speaker 1: gas and will probably outbid for it. So not even

477
00:27:08,880 --> 00:27:10,560
Speaker 1: in the not just in the short term, but in

478
00:27:10,600 --> 00:27:13,680
Speaker 1: the medium term. You're seeing this really have ripple effects

479
00:27:13,680 --> 00:27:17,119
Speaker 1: on energy policy globally. So you would already referenced that

480
00:27:17,160 --> 00:27:21,040
Speaker 1: there are new leng production facilities there are potentially going

481
00:27:21,080 --> 00:27:24,520
Speaker 1: to be coming online parts of the Middle East. But

482
00:27:24,600 --> 00:27:27,760
Speaker 1: between now and then there are existing exporters like the

483
00:27:27,840 --> 00:27:30,600
Speaker 1: United States. Do you see any movement in terms of

484
00:27:31,080 --> 00:27:34,639
Speaker 1: increased supply in order to meet all of this global demand?

485
00:27:34,880 --> 00:27:37,199
Speaker 1: I think this is the fundamental reason for why we

486
00:27:37,240 --> 00:27:40,959
Speaker 1: expect llergy prices to remain elevated and why we expect

487
00:27:40,960 --> 00:27:44,000
Speaker 1: this competition for llergy on the global scale to to

488
00:27:44,160 --> 00:27:47,439
Speaker 1: remain hot is the fundamental fact that supply editions between

489
00:27:47,480 --> 00:27:51,040
Speaker 1: now and then are rather limited. So between now and then,

490
00:27:51,080 --> 00:27:53,560
Speaker 1: the global LLENG market isn't really going to get a

491
00:27:53,560 --> 00:27:57,680
Speaker 1: lot looser unless buyers manage or other buyers, So you're

492
00:27:57,680 --> 00:28:00,760
Speaker 1: looking at places like Japan and Career and potentially some

493
00:28:00,840 --> 00:28:04,640
Speaker 1: more price sensitive markets start consuming and demanding a lot

494
00:28:04,720 --> 00:28:07,840
Speaker 1: less l en G. Additional point to flag here is

495
00:28:07,880 --> 00:28:10,680
Speaker 1: that in our medium term outlook we highlight a low

496
00:28:10,720 --> 00:28:15,560
Speaker 1: case scenario for which takes a lot of the Russian projects,

497
00:28:15,640 --> 00:28:18,879
Speaker 1: which was your second biggest source of energy capacity additions,

498
00:28:18,920 --> 00:28:21,440
Speaker 1: out of our balances. So again this is an issue

499
00:28:21,440 --> 00:28:24,440
Speaker 1: with sanctions and project partners not wanting to get involved

500
00:28:24,440 --> 00:28:28,200
Speaker 1: in Russian up scene gas projects. Returning a bit more

501
00:28:28,240 --> 00:28:32,520
Speaker 1: short term, this is a real fundamental problem for Europe

502
00:28:32,600 --> 00:28:35,240
Speaker 1: is that apart from l en G, there is very

503
00:28:35,320 --> 00:28:39,360
Speaker 1: limited short term supply upside, and we've used a lot

504
00:28:39,440 --> 00:28:42,760
Speaker 1: of that already when it comes to thinking about Norwegian

505
00:28:42,760 --> 00:28:46,200
Speaker 1: flows increasing slightly because they're reducing some of the oil

506
00:28:46,200 --> 00:28:49,320
Speaker 1: production to push out more gas. I guess the one

507
00:28:49,360 --> 00:28:52,840
Speaker 1: source of supply close to home, which is starting to

508
00:28:52,920 --> 00:28:56,640
Speaker 1: produce more gas. Again as North Africa, you've seen some contracts,

509
00:28:57,040 --> 00:29:01,040
Speaker 1: especially with Italian developers developing new production and of Africa,

510
00:29:01,240 --> 00:29:03,280
Speaker 1: and you've really seen a big tic up and flows

511
00:29:03,800 --> 00:29:07,240
Speaker 1: from North Africa to Europe. But again there's a there's

512
00:29:07,240 --> 00:29:09,680
Speaker 1: a pretty marginal volumes when it comes to the overall

513
00:29:10,080 --> 00:29:13,720
Speaker 1: picture of things. So this is another reason why I

514
00:29:13,720 --> 00:29:15,600
Speaker 1: think a lot of people are focusing on the demand

515
00:29:15,720 --> 00:29:18,920
Speaker 1: rather than the supply side of the equation. So we've

516
00:29:18,960 --> 00:29:22,480
Speaker 1: talked about the willingness or maybe put better, the ability

517
00:29:22,520 --> 00:29:26,000
Speaker 1: to pay of wealthier nations versus developing nations in terms

518
00:29:26,000 --> 00:29:28,000
Speaker 1: of this really high gas price that we're experiencing in

519
00:29:28,040 --> 00:29:33,360
Speaker 1: the moment, as well as individual retail consumers. But what industries,

520
00:29:33,400 --> 00:29:36,040
Speaker 1: and I'm thinking of you know, different manufacturing industries that

521
00:29:36,080 --> 00:29:40,360
Speaker 1: are very dependent upon natural gas for their production. What

522
00:29:40,480 --> 00:29:43,600
Speaker 1: industries are under the most strain. You're completely right, Dana,

523
00:29:43,720 --> 00:29:45,640
Speaker 1: and as you kind of pointed to, it's the most

524
00:29:45,720 --> 00:29:49,720
Speaker 1: energy intensive industries particularly, I think you'll fertilize the production

525
00:29:49,760 --> 00:29:52,280
Speaker 1: which relies on gas not just for its energy consumption,

526
00:29:52,400 --> 00:29:56,080
Speaker 1: but also as a feedstock. You've really seen substantial cuts

527
00:29:56,280 --> 00:30:00,440
Speaker 1: to European production in that space, but also chemicals production.

528
00:30:00,480 --> 00:30:04,520
Speaker 1: More generally, other industries steal. Given the link with power prices,

529
00:30:04,560 --> 00:30:08,480
Speaker 1: aluminium producers are really under threat in Europe, and realization

530
00:30:08,520 --> 00:30:12,840
Speaker 1: of this is really causing governments to take energy prices

531
00:30:12,840 --> 00:30:16,640
Speaker 1: for industrials more seriously because they realized that this could

532
00:30:16,720 --> 00:30:21,000
Speaker 1: really have long term complications for the industrial future and

533
00:30:21,040 --> 00:30:23,720
Speaker 1: the industrial development of Europe if they don't step in

534
00:30:24,240 --> 00:30:27,520
Speaker 1: and helps support industries through this difficult period. So let's

535
00:30:27,560 --> 00:30:30,240
Speaker 1: fast forward not that far into the future. You'd reference

536
00:30:30,320 --> 00:30:32,160
Speaker 1: that the gas here is split into you've got winter

537
00:30:32,280 --> 00:30:36,320
Speaker 1: and summer. We arrive at summer. What things are you watching?

538
00:30:36,680 --> 00:30:39,520
Speaker 1: Summer in large ways is just a repeat of the winter. Right.

539
00:30:39,520 --> 00:30:42,680
Speaker 1: It's about replacing Russian gas. But what makes this more

540
00:30:42,760 --> 00:30:45,920
Speaker 1: difficult is that a lot of your upsides year on

541
00:30:46,040 --> 00:30:49,920
Speaker 1: year have already been utilized a right, so you're losing

542
00:30:50,000 --> 00:30:52,320
Speaker 1: Russian gas, but you've already pressed a lot of the

543
00:30:52,440 --> 00:30:55,479
Speaker 1: levers that you have to replace that gas. So this

544
00:30:55,560 --> 00:30:58,600
Speaker 1: really drives an opinion in the market that you know,

545
00:31:00,000 --> 00:31:01,720
Speaker 1: the twenty four could be the real test and this

546
00:31:01,840 --> 00:31:05,360
Speaker 1: winter where we actually had significant volumes of Russian gas

547
00:31:05,360 --> 00:31:09,760
Speaker 1: to help refill European storages is a bit less challenging,

548
00:31:10,000 --> 00:31:12,400
Speaker 1: I think for us when we look at it fundamentally,

549
00:31:12,400 --> 00:31:15,120
Speaker 1: because demand is lower in the summer. It comes down

550
00:31:15,160 --> 00:31:18,719
Speaker 1: to the variation we potentially see in the global energy market.

551
00:31:18,880 --> 00:31:22,080
Speaker 1: And you're completely right there, Stephen, and just looking at

552
00:31:22,120 --> 00:31:25,960
Speaker 1: Asian demand and how that recovers, that could significantly displace

553
00:31:26,040 --> 00:31:28,400
Speaker 1: a lot of spot energy volumes that you know we

554
00:31:28,480 --> 00:31:31,480
Speaker 1: really need during the summer for the injection period. So

555
00:31:32,000 --> 00:31:34,800
Speaker 1: just keeping an eye globally and how the demand picture

556
00:31:34,880 --> 00:31:37,800
Speaker 1: from the allergy side develops. It's about that composition again,

557
00:31:37,920 --> 00:31:41,000
Speaker 1: isn't aren't like you know, our base case forecasters for

558
00:31:41,040 --> 00:31:43,840
Speaker 1: Europe to roughly pull sevent of your global spot supply,

559
00:31:44,000 --> 00:31:46,280
Speaker 1: but you know that relies on the outbidding Asia for

560
00:31:46,320 --> 00:31:49,480
Speaker 1: these volumes if it chooses not to. If it chooses

561
00:31:49,960 --> 00:31:52,440
Speaker 1: is a weird word to use from market, but you know,

562
00:31:52,920 --> 00:31:56,520
Speaker 1: should TTF prices or European energy prices fall below those

563
00:31:56,600 --> 00:31:58,840
Speaker 1: j k M levels, then you know you could see

564
00:31:59,280 --> 00:32:03,320
Speaker 1: greater proportion of that supply heading to Asia, really taking

565
00:32:03,360 --> 00:32:06,040
Speaker 1: away the gas we need to inject into storage this summer.

566
00:32:06,440 --> 00:32:08,040
Speaker 1: So I've been living in the UK for a long

567
00:32:08,080 --> 00:32:10,520
Speaker 1: time now and I think one of the cliches about

568
00:32:10,720 --> 00:32:13,960
Speaker 1: the UK is that people are really obsessed with the weather.

569
00:32:14,120 --> 00:32:16,320
Speaker 1: It's a lot of conversation about whether or not the

570
00:32:16,320 --> 00:32:18,360
Speaker 1: sun is shining or it's raining, and what the temperature is.

571
00:32:18,400 --> 00:32:23,000
Speaker 1: And I think that this plays well on the British

572
00:32:23,000 --> 00:32:25,880
Speaker 1: obsession with the weather. We will be probably all checking

573
00:32:26,240 --> 00:32:29,200
Speaker 1: now every morning after listening to this podcast, seeing what's

574
00:32:29,200 --> 00:32:31,960
Speaker 1: in store this next winter. Stefan Aaron, thank you very

575
00:32:32,000 --> 00:32:34,040
Speaker 1: much for joining us today and talking to us about

576
00:32:34,080 --> 00:32:36,720
Speaker 1: the winter gas outlook and what we need to be

577
00:32:36,760 --> 00:32:41,440
Speaker 1: considering as we think about prices and policy and you know,

578
00:32:41,440 --> 00:32:45,160
Speaker 1: really what's happening in global gas markets. Thanks a lot, Dana,

579
00:32:45,240 --> 00:32:52,719
Speaker 1: thank you. Today's episode of Switched On was edited by

580
00:32:52,760 --> 00:32:55,400
Speaker 1: Rex Warner of gray Stoke Media. Bloomberg any F is

581
00:32:55,400 --> 00:32:58,320
Speaker 1: a service provided by Bloomberg Finance LP and its affiliates.

582
00:32:58,600 --> 00:33:01,160
Speaker 1: This recording does not constitut, nor should it be construed

583
00:33:01,160 --> 00:33:04,760
Speaker 1: as investment advice, investment recommendations, or recommendation as to an

584
00:33:04,800 --> 00:33:07,360
Speaker 1: investment or other strategy. Bloomberg an F should not be

585
00:33:07,400 --> 00:33:10,760
Speaker 1: considered as information sufficient upon which to base an investment decision.

586
00:33:10,880 --> 00:33:13,720
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587
00:33:13,720 --> 00:33:16,880
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