Simon Wood is Manager of the European Gas Analysis team at commodities specialists S&P Global Platts, and formerly the Senior Economist for ConocoPhillips. In our conversation with him, we covered the development of market pricing at key North West European gas hubs, the barriers to entry for LNG imports into Europe, and the UK’s narrow escape during the Beast from the East in March 2018.
“I think the view is that overall we can survive these short term blips, and that they will be so few and far between that is it worth investing billions of pounds in storage?”
Dare I ask how long you’ve been involved with Flame, how many years?
So I first came to Flame about seven or eight years ago actually. 2012 was my first conference, and I’ve been coming back here ever since – firstly as a market participant when I was Senior Economist at ConocoPhillips, and more recently in my new role as Manager of the European Gas Analysis team at S&P Global Platts.
So how do you see the market? Has it changed beyond recognition?
It’s probably the most exciting period for the European gas market, certainly in the last ten years. We’ve seen a seismic shift – if you’ll excuse the pun – with the announcement of the closure of the Groningen gas field by 2030. That’s a loss of an asset that was producing as much as 50bcm, and as much as 20% of North West European gas supply five years ago. It’s now only producing 20bcm, and is 7% of North West European gas supply today. That gap has been filled by Russian gas, but how long can Europe survive without having to compete for LNG with Asia? That’s a key question I think that the market needs to ask itself.
Has the market reshaped itself in the short term (looking to the next couple of years) in the way that you would expect?
Well it has actually, and what we’ve seen is that with more Russian gas coming into North West Europe, the NCG and Gaspool (the German hubs) have shifted with a discount to TTF. Whilst on the other side of Europe, MBP, the UK hub, has seen a loss of flexibility with the close of the Rough facility, and is having to pull a lot more gas during the winter from a tighter North West European balance. The result is that MBP is now trading at a significant premium for the Winter compared to TTF, and that’s something that I can certainly see continuing in the future. So we’ve definitely seen a shift of flows from the East to the West, as opposed to previously when we saw flows from West to East.
Yeah. That’s the situation now, but do you see it continuing for the short or the long term?
Yes I do see that continuing in the short term. The global LNG market doesn’t show any signs of loosening. If you look at JKM swap prices, it’s still pricing in strong Asian volumes this winter, so I don’t think there’s much upside to LNG in the next eighteen months, which means that yes, Europe’s going to have to continue to get its gas to fill the hole that Groningen has left from Russia. So yes, I can see Gaspool and NCG staying at a discount particularly in the Winter months for the next couple of years.
You don’t see LNG coming into this?
Well, LNG is on the margins, and we may see an increase in volumes in certain months – maybe the shoulder months. Certainly with Chinese demand looking so seasonal (although the growth is such that we can’t tell how seasonal) I just don’t see Europe being able to compete with Asia for LNG unless it wants to pay a really high premium, JKM netback pricing being obviously about 50% higher than current prices.
So looking ahead then – challenges for the market, and maybe different customers or consumers within the market – what are the main ones then that you pull out of it?
So in terms of the challenges for the market, it is about how do we price in flexibility? Seasonal spreads are at the lowest level they’ve been probably on record. I think Q3 Q1 TTF is at below a Euro. That’s below the short run marginal cost of storage. So how we can build more storage with the loss of flexibility from Groningen and Rough’s facility in the UK, and the decline of domestic production across Europe that the market is not pricing in. And whether that comes from direct Government intervention, i.e. like they have in France or Italy with strategic storage obligations and requirements to inject into storage, or whether we offer some sort of incentive to build storage. But at the moment that incentive isn’t there, and Europe is looking very short on indigenous flexibility. We’re relying on external supplies.
Are there any particular countries that you would look to as really being lacking in that storage?
Oh, obviously the UK. It’s Europe’s second biggest gas market, yet it only has 1bcm of storage. By contrast, the Netherlands has one storage facility in Bergermeer that’s four times that size, as well as additional storage. Germany is also similar – very high levels of storage. So out of a total North West European storage capacity of about 40 bcm, the UK only has 1 bcm of it.
So I don’t imagine you’re going to want to suggest what the government could do, but there are obviously going to be different ways of tackling this.
Well I think the attitude at the moment is that we’ve just had the Beast from the East. On the first of March 2018 we saw absolute record domestic demand-
We had snow!
Well more than just a bit of snow. We actually had so much wind that UK continental shelf production had to shut in – it tripped – but on the flip side actually thankfully there was lots of wind, so there was lots of renewable generation which helped the UK balance. But I think the attitude is that we saw record one in twenty demand conditions, and the UK just about balanced. So I think the view is that overall we can survive these short term blips, and that they will be so few and far between that is it worth investing billions of pounds in storage? But there are other forms of flexibility you can look into. You can increase the level of interconnection with the continent. At the moment we have two pipelines, BBL and IUK, and only one export route. You can only export via the interconnector, you can’t export by the BBL. BBL have announced plans as of gas year 19 to make that bi-directional, which would allow the UK to export gas in the Summer, which may help North West European storage to fill, which may help the UK to pull on a more healthy European balance.
