[NGW Magazine] Editorial: Winter tests Europe
The intensity of the sudden late winter freeze caught the market by surprise and prices rose to highs not seen in Europe for years. Perhaps the surprising thing is that they did not go much higher, given the loss of Rough storage in the UK and the output cuts from Groningen in the Netherlands. When considering the fate of the aging Rough facility last year, the UK government believed that the market would deliver the gas if its only long-term storage site were closed down, which is true; but look at what has happened to the price of the gas since.
Even though an anticipated temporary supply shortfall was balanced out by getting more supply in (including from Netherlands) and finally stepping down demand, day-ahead gas prices for UK-NBP gas closed March 1 at £2.25/th ($31.14/mn Btu) and for Dutch TTF at €85/MWh ($30.40/mn Btu) - four times higher than such prompt gas had been two weeks earlier, and three to four times higher than current east Asian LNG prices.
And, of course, these spikes – which will recede with the cold -- show the absurdity of the idea that opportunistic purchases on the spot LNG market is the answer to a few weeks’ tightness. You can’t deliver for cash now what you expect to have in a fortnight or more. French network operators began the spring by pleading for more send-out from the country’s LNG import terminals, as well as more import cargoes, after a modest fall in Norwegian deliveries due to a technical issue at the Kollsnes gas export facility.
So the end of February was good news for offshore producers, anyone holding a spare cargo of LNG and storage operators, forced by some counter-intuitive piece of regulation to unbundle from pipelines. Now reliant solely on the risk appetite of traders who have mostly decided winter gas and summer gas are roughly equal, they have to make money in short-term volatility.
The high prices also show that while there is more gas around than people expected when taking final investment decisions on upstream projects a few years ago, that does not equate to more peak gas. On a year-round basis the European market is fine but there will be shortages of capacity as well as commodity.
It was to address that problem that some countries such as the UK introduced the idea of an interruptible transportation contract for very large clients. As long as their plants had bunkers of alternative fuel to switch over to, they could forgo gas supply on so many days each year, freeing up supplies for other, less flexible customers. Those cheap contracts have been regulated away in the UK and not been adequately replaced. The buyers rejected requests to turn down demand as there was no incentive. Despite the huge amounts of gas they buy, those same industrial buyers will not be feeling much pain unless they are forcibly disconnected from the grid, as most of their gas is likely to be priced against a range of contracts from day-ahead to year-ahead delivery, and so far the forward curve has not been so affected by the prompt volatility.
And in the short term, panic sets in, driving prices up – even in a market in which pipeline gas from Norway, Russia and North Africa is flowing largely without interruptions. Imagine the carnage had there been a significant technical problem affecting one or more of these core suppliers.
At time of press however, that situation was not so clear-cut. This winter has provided a golden opportunity for Gazprom ally Wintershall to bang the drum expanding pipeline capacity into Germany, through Nord Stream 2. "Germany is exporting significant amounts of coal[-fired power] to neighbouring countries - even at negative prices. This is grotesque in terms of climate policy," wrote CEO Mario Mehren in the Frankfurter Allgemeine Zeitung in mid-February. What is needed is greater co-operation with Russia, not less, he argued – describing 25-year old Gazprom as “always a reliable energy partner to us Europeans” – forgetting a three-week period in January 2009 when Gazprom’s spat with Ukraine held Europe to ransom.
Non-EU Ukraine Naftogaz has managed without Russian imports for two years and, thanks to flowbacks from Poland and Germany, should survive this winter too. Polish state-owned PGNiG pointed out March 1 that Gazprom supplied only 70% of Poland’s gas supply, from 90% in 2015, and that it means to reduce that further – with the help of “regular” LNG imports from Qatar and the US.
But Gazprom’s decision to cancel the two contracts with Naftogaz after amendments by impartial arbiters and to not supply gas for Ukraine’s use does leave the market potentially in disarray. And while large western European energy utilities will do their best not to offend Russia – with five of them including Wintershall providing financial support to Gazprom’s NS2 – they too seem to view LNG as the strategic long-term bet, as they keep a mix of future supply flowing to Europe.
EDF clearly showed that on February 20 when it undertook to lift 1.2mn mt/yr for 15 years from the Anadarko-led Mozambique LNG – currently the most remote source in its diverse supply portfolio. It means to take the bulk of that offtake, starting 2023-24 subject to project FID, home to France. It should also widen the Anadarko-led project’s mix of markets, and yes, also its mix of price indices.