Speaker 1: Hi, I'm Dana Perkins and you're listening to Switched on
Speaker 1: the bienn F podcast. Today is all about natural gas
Speaker 1: and what we can expect as we look ahead to
Speaker 1: this winter. In the Northern Hemisphere, gas prices remain very
Speaker 1: elevated and security of supply is uncertain. Europe has been
Speaker 1: hit particularly hard by the reduced supply coming from Russia,
Speaker 1: and in all honesty, some demand reduction is going to
Speaker 1: be needed. While there may be enough gas to get
Speaker 1: through this upcoming winter, there's a lot to consider when
Speaker 1: we think about what might happen to the supply and
Speaker 1: demand balance in the months and years ahead. So today
Speaker 1: I sit down with Stefan Ulrich and Arun Tora, who
Speaker 1: are both European gas specialists at bienn e F, and
Speaker 1: they're going to talk about our winter gas outlook. We
Speaker 1: do these twice a year, once for the summer and
Speaker 1: once for the winter. As a reminder, bienni F does
Speaker 1: not provide investment or strategy advice, and our complete disclaimer
Speaker 1: can be found at the very end of the show.
Speaker 1: And now let's jump into the conversation with Stefan and
Speaker 1: Aaron and think about what might happen as we look
Speaker 1: forward to this winter and natural gas. Stefan, thank you
Speaker 1: for joining us, and Aaron Yea, thank you. Dana happy
Speaker 1: to be here. So we are here to talk about
Speaker 1: while the outlook for natural gas as we head into
Speaker 1: this winter in the Northern Hemisphere, and we do both
Speaker 1: a winter and a summer gas outlook every single year,
Speaker 1: and the both of you we do these globally, but
Speaker 1: you guys focus specifically on the European part of this outlook,
Speaker 1: and this is really where I think the I guess
Speaker 1: the crux of the attention is globally right now is
Speaker 1: on Europe specifically. So we will come to that and
Speaker 1: we will talk about those dynamics. But before we dive
Speaker 1: in there, could you please provide some perspective on why
Speaker 1: before the whole world was looking at gas prices, we
Speaker 1: were writing and researching winter and summer gas outlooks. Fundamentally,
Speaker 1: your gas year is split into two parts, your winter
Speaker 1: where you withdraw gas from storage, and your summer where
Speaker 1: you put gas into storage. Most gas consumption is in
Speaker 1: the Northern Hemisphere, so that works as a kind of
Speaker 1: like a global picture. So as a BNF Global Gas
Speaker 1: research team, what we do is at the start of
Speaker 1: each of those seasons in the winter, so that starts
Speaker 1: from October, so in September and the summer. So that's
Speaker 1: a forecast we produced in March for April looking for
Speaker 1: the year ahead for those two seasons. In many ways,
Speaker 1: these are like our regular monthly publications we put out,
Speaker 1: so we have our global Energy Outlook, we have the
Speaker 1: US Gas Monthly and the European Gas Monthly. But these
Speaker 1: are just where we really crunch some of the numbers
Speaker 1: and a bit more details, sit together as a team
Speaker 1: and decide what the story is for the global gas
Speaker 1: markets over the coming twelve months. So the disruption specifically
Speaker 1: in Europe really took off this summer, even though the
Speaker 1: crunch time is really approaching right now in the winter.
Speaker 1: So as we think about that, so Western Europe, what
Speaker 1: really happened was it lost almost all of its pipe
Speaker 1: supply from Russia. Can you really talk about why this
Speaker 1: is so important to the supply for Europe generally and
Speaker 1: what this does to the gas balance. So that pipe
Speaker 1: supply or Russian pipe supply and makes up around the
Speaker 1: third of your total European gas supply. So it's a
Speaker 1: market which have lost the very large chunk around thirty
Speaker 1: percent at the moment of its total supply, and for
Speaker 1: a lot of commodities markets, that would be quite a
Speaker 1: hard shock to balance. Fundamentally, this is a story which
Speaker 1: has been building over time. Russian gas supplies didn't really
Speaker 1: flow to the levels expected and have gradually decreased coming
Speaker 1: to the summer, where you've only got a dribble, so
Speaker 1: around ten of their historical levels remaining. So Russian gas
Speaker 1: was the third of the supply to Europe. But how
Speaker 1: about the rest of Russia's gas? Where else are they
Speaker 1: selling to and no longer supplying to Europe? Has that
Speaker 1: been problematic for them? Yeah, it's it's been problematic for them.
Speaker 1: So the thing is about pipeline gas. Those pipelines run
Speaker 1: to fixed locations and so you can't really send that
Speaker 1: gas to other locations unless you have a pipeline heading
Speaker 1: from the same source to a different location, which when
Speaker 1: it comes to a lot of Russian gas production that
Speaker 1: isn't currently So a lot of that gas which would
Speaker 1: be or historically has been sent to Europe is now
Speaker 1: is now lost to the global market, which is why
Speaker 1: this then also this has a very big impact on
Speaker 1: your global gas balance. When it comes to regards to
Speaker 1: Russian sales, high prices had largely offset their lowest sales
Speaker 1: volumes untill around the summer of this year, when you've
Speaker 1: actually increasingly seen Russian gas revenues for on a year
Speaker 1: on year basis, of course pipeline gas to Europe and
Speaker 1: the only gas Russia cells. It still has pipeline sales
Speaker 1: to China which are ramping up, but it also of
Speaker 1: course sells all energy Aaron, can you quantify those cells
Speaker 1: and really highlight where they've been flowing. Yeah, thank you, Stephan.
Speaker 1: In particular Russian llergy exports into Western Europe, so markets
Speaker 1: such as Spain, Netherlands, France, they have they have increasingly
Speaker 1: been importing higher volumes of llergy from Russia, even countries
Speaker 1: that typically didn't import Russian energies. So you're looking at
Speaker 1: countries such as Belgium, they are now increasing their appetite
Speaker 1: for Russian energy and this is primarily coming from the
Speaker 1: Yamal facility. So it's quite interesting, you know, when we
Speaker 1: talk about the complete, well not complete, almost complete collapse
Speaker 1: of Russian supply into Western Europe, we're still importing quite
Speaker 1: a significant amount of energy and just quickly explained why
Speaker 1: this supply was shut off. This was not due to
Speaker 1: sanctions imposed by Europe on Russia. This was a decision
Speaker 1: made by Russia proactively correct That depends on who you're
Speaker 1: talking to write. But we read a piece back in
Speaker 1: September one called unpacking putin statements right, which was really
Speaker 1: looking at some of the what we have to say,
Speaker 1: rather weak arguments Russia was using to justify why flows
Speaker 1: to Europe had not returned to previous highs and actually
Speaker 1: kept on falling. There is of course a debate about
Speaker 1: the nord Stream two pipeline and whether this reduction in
Speaker 1: flows could be viewed in retaliation to some of the
Speaker 1: political movements around that. And then, of course, though since
Speaker 1: the war in Ukraine, Russian flows have fallen further and
Speaker 1: further as the excuses have mounted. Only one turbine was
Speaker 1: left operational on the nord Stream pipeline, with I think
Speaker 1: a total of seven turbines at that facility or the
Speaker 1: upstream facility being found with technical issues. That's really surprising
Speaker 1: for a company with the performance record and the operational
Speaker 1: record of gas Prom. Gas Prom of course, then use
Speaker 1: sanctions as a shield, claiming that they could not repair
Speaker 1: these turbines given sanctions, So of course it depends on
Speaker 1: who you ask. But in a lot of our pieces,
Speaker 1: we've highlighted how weak some of the arguments have been
Speaker 1: the gas Prom and Russia have put forward. And the
Speaker 1: best example of that is how gas Prom still has
Speaker 1: available pipeline capacity through the Ukraine which it is not
Speaker 1: using currently and has not been using for quite a
Speaker 1: few months now, despite now sending less than its contractual
Speaker 1: obligations to a lot of its European customers. Let's then
Speaker 1: think about what this reductions apply to Europe has really
Speaker 1: done to gas prices, because we all acknowledge that, you know,
Speaker 1: gas is an important part of the energy system. It's
Speaker 1: an important part for heating for homes, it's an important
Speaker 1: part for manufacturing. It really touches so so many parts
Speaker 1: of the economy. And one of the primary reasons why
Speaker 1: people have said that it is linked to in many
Speaker 1: respects this high inflationary period that we're in right now.
Speaker 1: So what has been happening with Russian gas prices? Because
Speaker 1: I know that it is definitely more than gas traders
Speaker 1: that are keeping a close eye on gas prices at
Speaker 1: the moment. So the European gas market is largely liberalized, right,
Speaker 1: your price is set by that marginal supply source. And
Speaker 1: with the decline and Russian gas, Europe has to import
Speaker 1: a lot more energy, but specifically spot llergy, so liquid
Speaker 1: natural gas coming to us from ships instead of through
Speaker 1: these pipelines historically in Europe exactly. But also you know
Speaker 1: a lot of your buyers globally who import energy like that,
Speaker 1: they're signed up to these long term fixed price contracts
Speaker 1: which are set generally as a proportion of the oil price,
Speaker 1: and so a lot more stable. What Europe has to
Speaker 1: do is capture an exorbitantly large share of the global
Speaker 1: spot market, right. So that's in competition with Asian buyers.
Speaker 1: I think, Aaron, do you want to add in there
Speaker 1: about just what pushes and just how that competition is
Speaker 1: unfolding and pushing both European and global energy prices to
Speaker 1: these record high levels. So the situation you find itself
Speaker 1: is the fact that it now needs to replace, as
Speaker 1: Stefan mentioned, a large proportion of its baseline or baseload
Speaker 1: gas supply. In order to offset this, they have to
Speaker 1: attract energy and that is via the global spot market.
Speaker 1: As Stefan mentioned, a large proportion of energy volumes is
Speaker 1: tied under long term agreements. That's around seventy of the
Speaker 1: total llenergy supply. And how long is a long term
Speaker 1: agreement anywhere between fifteen and twenty five years, and they're
Speaker 1: having negotiations to bring in some shorter to medium term
Speaker 1: contracts ten to twelve years, but they haven't really gained
Speaker 1: much traction. And how much of the market is actually
Speaker 1: already tied up in these long term agreements. So you
Speaker 1: got four hundred in two million metric tons of available
Speaker 1: leergy supply se that is locked up in long term agreements.
Speaker 1: So Europe is now battling for that remaining thirty in
Speaker 1: which of its own supply is all on the spot market.
Speaker 1: So it's incredible competition, and it only takes a brief
Speaker 1: cold spell in markets such as China Japan, and then
Speaker 1: we could see a substantial amount of llergy being displaced
Speaker 1: to other markets and that will have a big impact
Speaker 1: on how Europe restocks through the winter. In terms of prices,
Speaker 1: what Europe has have to do is have to maintain
Speaker 1: a premium over Asian lergy prices that is the Japan
Speaker 1: Korean market, and then this constant competition to try and
Speaker 1: import spot ellen g has meant that the TTF has
Speaker 1: had to be priced that significant premium, and this kind
Speaker 1: of disrupts the forward curve as well, because all though
Speaker 1: prices have fallen from its significant highs due to mild
Speaker 1: weather and the fact that Europe has restopped sufficiently through
Speaker 1: the first month of the gas winter, there's always that
Speaker 1: need to import energy and that is going to keep
Speaker 1: prices high. We're in the first month of the gas winter.
Speaker 1: How closely are you guys watching the weather every morning? Yeah?
Speaker 1: Very It's a it's a daily ritual for us. So
Speaker 1: it's been incredibly mild in Europe and I think that's
Speaker 1: one factor which is why are October demand to date,
Speaker 1: So we're recording this on the October. So through October
Speaker 1: demand has come in around below your five year average,
Speaker 1: but only half of that is due to the weather,
Speaker 1: or approximately half. I think it could even be a
Speaker 1: bit less. Your weather is incredibly important when it comes
Speaker 1: to your winter gas demand. I think your rangeing outcomes
Speaker 1: over the last ten years is around ten billion cubic
Speaker 1: meters either side, which is, you know, around of your
Speaker 1: storage capacity. And this has to do with the fact
Speaker 1: that so much gas is used for residential heat or
Speaker 1: I guess buildings generally exactly, So thirty of your winter
Speaker 1: gas demand is residential household heating, at another ten for
Speaker 1: commercial buildings. Right of your winter load is gas is
Speaker 1: just for heating. And this is what makes it your
Speaker 1: gas demand so seasonal. Your gas demand in peak winter
Speaker 1: is about four times higher than your gas demand in
Speaker 1: your low points of your summer, because when you get
Speaker 1: into December January, right, you have that really big proportion
Speaker 1: of heating demand. So yeah, whether it really impacts how
Speaker 1: the balance evolves and how demanded supply shape up. So
Speaker 1: in two scenarios, either a mild winter or a particularly
Speaker 1: cold winter, is there enough in the gas stores in
Speaker 1: Europe to make it through this winter? Yeah, I think
Speaker 1: we argue that that's definitely the case. Our latest forecast
Speaker 1: for European storage inventory evolution over the course of this
Speaker 1: winter suggests that European storage is in the smaller smaller
Speaker 1: region of Europe we cover will be around full. So
Speaker 1: that's around thirty billion cubic meters, and that is enough
Speaker 1: to absorb even the coldest of the last thirty winters
Speaker 1: or the remainder of the winter because we're not forecasting
Speaker 1: from November on pretty comfortably. So whether variation is important,
Speaker 1: but I think for us what's increasingly important is also
Speaker 1: your demand destruction variation, which the market is still incredibly
Speaker 1: uncertain about. So let's talk about demand destruction. The European
Speaker 1: Union is set a target for reducing gas demand. What
Speaker 1: is that and where did that come from? So, as
Speaker 1: Aaron highlighted, there is not enough l energy to entirely
Speaker 1: replace Russian gas. You know, even if we attract really
Speaker 1: high proportion of this global spot share, you know, we
Speaker 1: can only replace around six really of the Russian gas
Speaker 1: volumes we usually got. Means that the market still has
Speaker 1: a lot of work to do to balance upside from
Speaker 1: other supply sources, especially now when you're increasingly thinking on
Speaker 1: a year on your basis is really limited, right, So
Speaker 1: the demand side of the balance has to shift in
Speaker 1: order for us to have enough gas in storage. So yeah,
Speaker 1: that's why this policy was put in place. It was
Speaker 1: from that realization of the fact that without changing our
Speaker 1: gas consumption, we still forecast that we would run out
Speaker 1: of gas and storage and an average winter by the
Speaker 1: end of March. So can you elaborate a little bit
Speaker 1: on what demand destruction looks like and is this come
Speaker 1: in the form of rationing, does it come in the
Speaker 1: form of you know, conservation. I'm even thinking a little
Speaker 1: bit about actually this summer and how there are many
Speaker 1: parts of the world that actually suffered from severe droughts
Speaker 1: and there was a lot of discussion around water rationing.
Speaker 1: Maybe this is the same conversation around electricity use and
Speaker 1: home heat. Yeah, it's exactly that, right. So the worst
Speaker 1: case scenario, which is a scenario which our forecast really
Speaker 1: think will avoid, is rang where government steps in and
Speaker 1: forcibly allocates a resource. Right, But exactly as you point out,
Speaker 1: before you get to that stage, in many cases you
Speaker 1: have campaigns to reduce consumption. You know, your classic UK
Speaker 1: summer host pipe band being the best example of that.
Speaker 1: So talking about this target of fifteen percent, which the
Speaker 1: EU set, that's cross sectoral right, So it's fift of
Speaker 1: our total gas consumption. When we think about the fact,
Speaker 1: as highlighted that in the winter, almost of your gas
Speaker 1: demand is used in buildings or so called local distribution
Speaker 1: zone that's smaller gas pipe networks which we commercial residential buildings,
Speaker 1: it becomes pretty apparent that we have to cut demand
Speaker 1: in that sector in order to meet these targets, right,
Speaker 1: we can't just let industry and power demand do all
Speaker 1: of the work there. So, you know, governments are balancing
Speaker 1: this really hard political question of protecting consumers from high
Speaker 1: prices and not wanting to part us on higher energy
Speaker 1: prices to consumers, while still needing to encourage demand reduction
Speaker 1: and us all to be a bit more sensible with
Speaker 1: how we heat our homes and the energy we consume.
Speaker 1: I think that's a very important point. That's definite makes
Speaker 1: that governments must strike this fine balance because as soon
Speaker 1: as you start to intervene with stuff such as a
Speaker 1: price cap, you start to disrupt market dynamics in terms
Speaker 1: of letting the price do the work. So up to
Speaker 1: this point, high prices have allowed sufficient demand structure to
Speaker 1: take place. But as soon as a gas price cap,
Speaker 1: as soon as that's implemented, you can start to see
Speaker 1: some of these things. Let's say, this demand structure not
Speaker 1: playing out as we have seen. So, for example, if
Speaker 1: we start to cap the price of gas and you know,
Speaker 1: demand picks up elsewhere, do we lose that energy supplied
Speaker 1: that we were able to import because of the price
Speaker 1: of wholesale gas. Another point being the fact that if
Speaker 1: you cap the price of gas, such as what happened
Speaker 1: in Spain, you could actually increase demand in the power
Speaker 1: sector because you could start to see incremental cult to
Speaker 1: gas switching once again. And when you start to play
Speaker 1: around with price mechanics, then you're not really letting the
Speaker 1: market do the work, and the market should balance based
Speaker 1: off price. So I think it is a very fine
Speaker 1: balance on how much the government does intervene. Now for
Speaker 1: a very short break, stay with us. Well, there's the
Speaker 1: industry end of things, and then there is the individuals
Speaker 1: who in some respects you're seeing you know, residential individual
Speaker 1: homes paying multiples of what they are paying last year,
Speaker 1: and not everyone can afford. That is their discussion around
Speaker 1: keeping industry and individuals separate. In terms of how this
Speaker 1: is implemented, I think it's worth coming back to, like
Speaker 1: how pricing works for residential consumers and also for large
Speaker 1: parts of your industrial consumer base, to understand that link
Speaker 1: with the wholesale market, because I think that's also critical
Speaker 1: to understand why we went so high, but also why
Speaker 1: we're coming off now in terms of your prices gas
Speaker 1: demand for wholesale consumers is often set through a variety
Speaker 1: of tariff structures which are not directly related to your
Speaker 1: wholesale price of gas right there, based on like an
Speaker 1: average price your wholesale importer has had to pay over
Speaker 1: twelve months, say, you know, there's often extra fees or subsidies,
Speaker 1: which means that the price a wholesale consumer pays is
Speaker 1: generally quite lag compared to your wholesale price movements. When
Speaker 1: we come to that really explains why it's really hard
Speaker 1: for the market to calibrate at the moment. Because we've
Speaker 1: said that the market needs demand destruction, but a lot
Speaker 1: of the sectors where you had to reduce that demand
Speaker 1: only saw an increase in prices well after your wholesale
Speaker 1: prices had already gone up by multiples of ten in
Speaker 1: a year, right from the summer of the summer of one.
Speaker 1: Now we're in a situation where your average wholesale price
Speaker 1: over the last year is probably like twenty times roughly,
Speaker 1: let's say over the summer. And of course, then, as
Speaker 1: you rightly point out, no residential consumer or customer or
Speaker 1: small business can really deal with that. So coming back
Speaker 1: to what governments now face, right you're facing between balancing
Speaker 1: this book of where some of your importers and the
Speaker 1: people who supply downstream gas have to pay wholesale prices
Speaker 1: which are up by multiples, you know, in the tens, twenties,
Speaker 1: thirties even higher, and residential gas consumers of course cannot
Speaker 1: pay that multiple. So yeah, there was a bound to
Speaker 1: be struck here, and many governments have put in price caps.
Speaker 1: You know, across the perimeter of countries we cover in
Speaker 1: northwest Europe, including the UK, your average residential price is
Speaker 1: going to increase somewhere from sevent to two pad to
Speaker 1: levels over the course of this winter, so still a
Speaker 1: very substantial price increase. But for some consumers that's that's
Speaker 1: not the case, right. You know, we have a lot
Speaker 1: of chat in the London office that for some of
Speaker 1: us here, because we might live in a well insulated
Speaker 1: new building block, our energy prices are actually going to
Speaker 1: be going down this winter, which is really comes back
Speaker 1: to how difficult some of these policy decisions are and
Speaker 1: how they need to really keep a very close eye
Speaker 1: and on that link between what's happening on your residential
Speaker 1: consumer side and how that affects your wholesale price evolution.
Speaker 1: So there's getting through this winter, which is definitely front
Speaker 1: of mind, but fundamentally, unless something changes, we're going to
Speaker 1: be in the same situation next winter as well. So
Speaker 1: then this brings me to this question around as we
Speaker 1: look forward, and as we look at a lot of
Speaker 1: net zero targets that many companies and countries have out to.
Speaker 1: There was a lot of discussion about actually phasing out
Speaker 1: natural gas at some point and building enough of various
Speaker 1: other forms of capacity in order to at least dramatically
Speaker 1: reduce the dependence upon this flexible capacity which in many
Speaker 1: respects has been supporting wind and soul. Where do you
Speaker 1: see the conversation right now moving towards installing more renewables
Speaker 1: in order to create domestic supply or the other thing
Speaker 1: that we're also seeing, which is in your already referenced this,
Speaker 1: you know, switching between coal and gas and this almost
Speaker 1: coal renaissance, and also this discussion now that's re emerging
Speaker 1: around nuclear and things that provide baseload energy. I think
Speaker 1: it helps me to think about this by splitting those
Speaker 1: things into three different baskets. I think, given how quickly
Speaker 1: Russian flows have declined in the short term, we really
Speaker 1: need some of this emergency demand destruction for the medium terms.
Speaker 1: So for me, that kind of means out to now,
Speaker 1: I think to see how Europe's approaching and thinking about this,
Speaker 1: or at least hoping to do this. The document that
Speaker 1: and the policy that needs to be looked at is
Speaker 1: the European Commissions Repower You Plan. So this was a
Speaker 1: plan released in March two in response to the Russian invasion,
Speaker 1: and it was supposed to change European energy consumption so
Speaker 1: that we would be rid of our alliance on Russian
Speaker 1: natural gas. When I like talk about this plan, I
Speaker 1: used the phrase really like turbo charging. The energy transition.
Speaker 1: The bulk of demand reduction and the bulk of what
Speaker 1: offsets this lost Russian supply is electrification, insulation, switching to hydrogen.
Speaker 1: It's it's around seventy of the targeted demand reduction, right,
Speaker 1: so a thirty percent reduction in our European gas consumption.
Speaker 1: By However, it's important to highlight that that plan also
Speaker 1: included two things which I grouped into a bucket which
Speaker 1: I called of kind of have referred to previously as compromises,
Speaker 1: which includes measures such as potentially extending the life of
Speaker 1: some cold plants reevaluating some of the decisions we've made
Speaker 1: on nuclear as you point out, data which will be
Speaker 1: needed realistically by and the fundamental reason for that is
Speaker 1: that some of these decorganization measures such as hydrogen development
Speaker 1: you know, won't take place before and substantial quantities. And
Speaker 1: then the third bucket, which becomes even more critical and
Speaker 1: absolutely necessary given how quickly Russian flows have fallen, is
Speaker 1: outright demand destruction and reduction of consumption. Right. So the
Speaker 1: European Commission admitted that high prices and outlook for sustained
Speaker 1: high prices would have caused some demand reduction, but it
Speaker 1: was only really in the region of around billion cubic
Speaker 1: meters if I remember correctly. You know, I think this
Speaker 1: year we're looking at our forecast of being around sixty
Speaker 1: billion cubic meters. Yeah, for for repower you and the
Speaker 1: European Commission Medium time Plan, it's it's very heavy on
Speaker 1: that decorganization piece, which tied into the long term strategy, right,
Speaker 1: it's tied into the long term strategy of decobonization, And
Speaker 1: a lot of these policies are actually only acceleration of
Speaker 1: things which were all ready discussed. And fifty five, which
Speaker 1: was the European unions checkpoint to net zero. So we've
Speaker 1: seen prices quite high recently, and then they have since
Speaker 1: we first made our outlook for this winter period. What
Speaker 1: is the medium term outlook for prices in Europe and
Speaker 1: what do we think is going to happen among all
Speaker 1: of this volatility. So if we look at the wholesale
Speaker 1: natural gas benchmark in Europe, this is the TTF. If
Speaker 1: we look at the forward curve out until about we
Speaker 1: can see elevated prices persisting. And this is predominantly due
Speaker 1: to the fact that, as we mentioned earlier on that
Speaker 1: it needs to replace a lot of this Russian gas
Speaker 1: with expensive lergy. Expensive llergy due to the fact that
Speaker 1: it's procured on the spot market and it needs to
Speaker 1: outcompete other buyers on a global basis. Structurally, we don't
Speaker 1: really see a large increase in lique faction capacity until
Speaker 1: Qatar's mega expansion comes online. This is around This will
Speaker 1: add another seventy two point five million tons per annum,
Speaker 1: So this is a huge boost in energy supply, but
Speaker 1: there's a long way to get there. So in the meantime,
Speaker 1: Europe has to import a lot of llenergy from North America,
Speaker 1: US supply into Western Europe typically accounts for around thirty
Speaker 1: five of Europe's overall llergy share, and outside of this
Speaker 1: they're procuring llenergy from Qatar and Algeria. The only difficult
Speaker 1: thing is the fact that, as Stephan mentioned in regards
Speaker 1: to Europe's decarbonization strategy, despite Europe, you know, building out
Speaker 1: llergy import capacity, they are still reluctant to sign long
Speaker 1: term agreements. This is because for them, signing long term
Speaker 1: agreements kind of signals to the rest of the world
Speaker 1: that you know, we're still pinned to gas and we're
Speaker 1: not really decarbonizing as we intended to. Let's say this year,
Speaker 1: for example, Western European markets that we cover in our perimeter,
Speaker 1: we're gonna lose around eight point five million tons of
Speaker 1: llergy from long some contracts expiring. This then further exposes
Speaker 1: us to the spot market once again, and then the
Speaker 1: US again will look to deliver volumes into into Europe.
Speaker 1: So the US is a major beneficiary of high global
Speaker 1: gas prices because they also source markets in Asia. But
Speaker 1: when Asian demand lowers, as we've seen this year, they
Speaker 1: kind of just shift their supply into Europe. But then
Speaker 1: once again, it all depends on you know, it's just
Speaker 1: constant battle that will have to take place over the
Speaker 1: next two seasons. Well, and we're talking a lot about
Speaker 1: battles for and consumers in terms of pricing and then
Speaker 1: policies that are being passed along. But really the willingness
Speaker 1: to pay these higher prices at a country level comes
Speaker 1: down to some wealthier and potentially less wealthy nations. How
Speaker 1: is that emerging and are there countries that are essentially
Speaker 1: being forced out of the market. Yes, certainly. I mean
Speaker 1: some of the emerging markets in Asia, such as Pakistan
Speaker 1: and Bangladesh, they are unable to procure lergy at prices
Speaker 1: north of thirty five dollars MMB. To you, what this
Speaker 1: does is the fact that this strains their power supply
Speaker 1: margins and they've had to implement rolling blackouts. Even countries
Speaker 1: such as India, which you know has seem to be
Speaker 1: climbing the global scales in terms of economic powerhouses, they
Speaker 1: are even struggling to procure llenergy at sufficient rates at
Speaker 1: these high prices. So you know, when Europe's importing such
Speaker 1: high volumes of llergy, they're actually taking away supply from
Speaker 1: these other markets as well. So it's not just a
Speaker 1: European energy crisis, it really is a global supply crisis. Yeah.
Speaker 1: I think, as Aaron pointed out earlier, right, this is
Speaker 1: not just the theme for the short term, it also
Speaker 1: continues into the medium term. I think that's a great
Speaker 1: chart from our medium term llergy outlook, which compares our
Speaker 1: forecast for year on year, so from the previous year
Speaker 1: to this year, and you can see that South Asian
Speaker 1: llen G flows I think it declined by twenty two
Speaker 1: million tons in our scenario, right, So that's quite a
Speaker 1: lot of gas which we now expect not to be
Speaker 1: flowing to South Asia in fundamentally because Europe needs that
Speaker 1: gas and will probably outbid for it. So not even
Speaker 1: in the not just in the short term, but in
Speaker 1: the medium term. You're seeing this really have ripple effects
Speaker 1: on energy policy globally. So you would already referenced that
Speaker 1: there are new leng production facilities there are potentially going
Speaker 1: to be coming online parts of the Middle East. But
Speaker 1: between now and then there are existing exporters like the
Speaker 1: United States. Do you see any movement in terms of
Speaker 1: increased supply in order to meet all of this global demand?
Speaker 1: I think this is the fundamental reason for why we
Speaker 1: expect llergy prices to remain elevated and why we expect
Speaker 1: this competition for llergy on the global scale to to
Speaker 1: remain hot is the fundamental fact that supply editions between
Speaker 1: now and then are rather limited. So between now and then,
Speaker 1: the global LLENG market isn't really going to get a
Speaker 1: lot looser unless buyers manage or other buyers, So you're
Speaker 1: looking at places like Japan and Career and potentially some
Speaker 1: more price sensitive markets start consuming and demanding a lot
Speaker 1: less l en G. Additional point to flag here is
Speaker 1: that in our medium term outlook we highlight a low
Speaker 1: case scenario for which takes a lot of the Russian projects,
Speaker 1: which was your second biggest source of energy capacity additions,
Speaker 1: out of our balances. So again this is an issue
Speaker 1: with sanctions and project partners not wanting to get involved
Speaker 1: in Russian up scene gas projects. Returning a bit more
Speaker 1: short term, this is a real fundamental problem for Europe
Speaker 1: is that apart from l en G, there is very
Speaker 1: limited short term supply upside, and we've used a lot
Speaker 1: of that already when it comes to thinking about Norwegian
Speaker 1: flows increasing slightly because they're reducing some of the oil
Speaker 1: production to push out more gas. I guess the one
Speaker 1: source of supply close to home, which is starting to
Speaker 1: produce more gas. Again as North Africa, you've seen some contracts,
Speaker 1: especially with Italian developers developing new production and of Africa,
Speaker 1: and you've really seen a big tic up and flows
Speaker 1: from North Africa to Europe. But again there's a there's
Speaker 1: a pretty marginal volumes when it comes to the overall
Speaker 1: picture of things. So this is another reason why I
Speaker 1: think a lot of people are focusing on the demand
Speaker 1: rather than the supply side of the equation. So we've
Speaker 1: talked about the willingness or maybe put better, the ability
Speaker 1: to pay of wealthier nations versus developing nations in terms
Speaker 1: of this really high gas price that we're experiencing in
Speaker 1: the moment, as well as individual retail consumers. But what industries,
Speaker 1: and I'm thinking of you know, different manufacturing industries that
Speaker 1: are very dependent upon natural gas for their production. What
Speaker 1: industries are under the most strain. You're completely right, Dana,
Speaker 1: and as you kind of pointed to, it's the most
Speaker 1: energy intensive industries particularly, I think you'll fertilize the production
Speaker 1: which relies on gas not just for its energy consumption,
Speaker 1: but also as a feedstock. You've really seen substantial cuts
Speaker 1: to European production in that space, but also chemicals production.
Speaker 1: More generally, other industries steal. Given the link with power prices,
Speaker 1: aluminium producers are really under threat in Europe, and realization
Speaker 1: of this is really causing governments to take energy prices
Speaker 1: for industrials more seriously because they realized that this could
Speaker 1: really have long term complications for the industrial future and
Speaker 1: the industrial development of Europe if they don't step in
Speaker 1: and helps support industries through this difficult period. So let's
Speaker 1: fast forward not that far into the future. You'd reference
Speaker 1: that the gas here is split into you've got winter
Speaker 1: and summer. We arrive at summer. What things are you watching?
Speaker 1: Summer in large ways is just a repeat of the winter. Right.
Speaker 1: It's about replacing Russian gas. But what makes this more
Speaker 1: difficult is that a lot of your upsides year on
Speaker 1: year have already been utilized a right, so you're losing
Speaker 1: Russian gas, but you've already pressed a lot of the
Speaker 1: levers that you have to replace that gas. So this
Speaker 1: really drives an opinion in the market that you know,
Speaker 1: the twenty four could be the real test and this
Speaker 1: winter where we actually had significant volumes of Russian gas
Speaker 1: to help refill European storages is a bit less challenging,
Speaker 1: I think for us when we look at it fundamentally,
Speaker 1: because demand is lower in the summer. It comes down
Speaker 1: to the variation we potentially see in the global energy market.
Speaker 1: And you're completely right there, Stephen, and just looking at
Speaker 1: Asian demand and how that recovers, that could significantly displace
Speaker 1: a lot of spot energy volumes that you know we
Speaker 1: really need during the summer for the injection period. So
Speaker 1: just keeping an eye globally and how the demand picture
Speaker 1: from the allergy side develops. It's about that composition again,
Speaker 1: isn't aren't like you know, our base case forecasters for
Speaker 1: Europe to roughly pull sevent of your global spot supply,
Speaker 1: but you know that relies on the outbidding Asia for
Speaker 1: these volumes if it chooses not to. If it chooses
Speaker 1: is a weird word to use from market, but you know,
Speaker 1: should TTF prices or European energy prices fall below those
Speaker 1: j k M levels, then you know you could see
Speaker 1: greater proportion of that supply heading to Asia, really taking
Speaker 1: away the gas we need to inject into storage this summer.
Speaker 1: So I've been living in the UK for a long
Speaker 1: time now and I think one of the cliches about
Speaker 1: the UK is that people are really obsessed with the weather.
Speaker 1: It's a lot of conversation about whether or not the
Speaker 1: sun is shining or it's raining, and what the temperature is.
Speaker 1: And I think that this plays well on the British
Speaker 1: obsession with the weather. We will be probably all checking
Speaker 1: now every morning after listening to this podcast, seeing what's
Speaker 1: in store this next winter. Stefan Aaron, thank you very
Speaker 1: much for joining us today and talking to us about
Speaker 1: the winter gas outlook and what we need to be
Speaker 1: considering as we think about prices and policy and you know,
Speaker 1: really what's happening in global gas markets. Thanks a lot, Dana,
Speaker 1: thank you. Today's episode of Switched On was edited by
Speaker 1: Rex Warner of gray Stoke Media. Bloomberg any F is
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