Barometers for LNG market tightness

Our two favourite barometers for LNG market tightness are showing a mixed view of LNG market supply and demand balance.

Timera Angle

EPH continues countertrend acquisition spree

Fresh on the heels of buying 2.3GW of CCGTs from Centrica, Czech based utility EPH announced the acquisition of the 750MW Mehrum German coal plant this week. Why EPH is worth watching:

  1. Countertrend: Most European utilities are focused on decentralisation, decarbonisation, regulated returns & scaling back balance sheets. In contrast, EPH is pursuing aggressive acquisition of unregulated conventional grid scale assets.
  2. Growth: EPH started with 0.3GW of CHP assets in 2009. Installed capacity is now close to 20GW with key acquisitions including 2.3GW of Centrica assets, 2.4GW of UK coal plants (Eggborough, Lynemouth), 4.1GW of Italian gas & coal plants from E.ON, 8GW of German lignite capacity from Vattenfall.
  3. Access to capital: EPH is privately owned and well capitalised. It borrowed more than €3 bn to support its 2012-14 acquisition charge. EPH also sold a 31% stake in its gas assets to a Macquarie led consortium earlier this year, providing fresh powder for further acquisitions.
  4. Coal & carbon: As other utilities decarbonise, EPH has shown a clear appetite for coal and carbon risk. Time will tell whether this risk has been appropriately priced, but it has meant relatively low competition for assets acquired.
  5. Merchant exposure: EPH have also shown strong appetite for acquisition of unregulated & uncontracted assets. Willingness to take on market risk and access to capital has helped EPH pursue a number of bilateral acquisitions (vs competitive bidding processes).

Coal rally driving up European gas hub prices

European spot coal prices have risen by more than 20% since the start of the summer to 93 $/t.  This rally is having some important knock on impacts:

  1. Hub prices Coal prices are dragging up European gas hub prices via lifting gas to coal plant switching levels as we explain here.
  2. Power sector The competitive shift in favour of gas plants has seen CCGT load factors rise over the summer in key power markets such as UK, Germany and Italy.
  3. Gas demand Pan-European gas demand is rising again in 2017, driven by switching dynamics in the power sector.
  4. LNG prices Asian spot LNG prices, anchored by transport cost differentials from liquid European hubs, are also being driven up by rising TTF/NBP prices.
  5. Transatlantic spread The coal driven boost to European hubs has significantly widened the NBP/TTF vs Henry Hub price spread (now above 3.50 $/mmbtu across the coming winter).

Centrica CEO sets out vision of energy transition

‘We are in the foothills of the endgame for oil’. Ian Conn talks about oil, gas, distributed energy, tech innovation & demand side evolution.

5 key takeaways:

  1. Innovation driven cost reductions driving down oil & gas breakevens
  2. Producer focus on market share, but supply crunch risk in 3 – 4 years
  3. Decentralisation of energy system driven by tech innovation at point of energy use
  4. Tech innovation & digitisation (e.g. smarter systems, software, appliances & devices) to empower business & residential consumers with more control & choice
  5. This will drive evolution of the way demand side interacts with energy system, hence Centrica shift to customer services focus (e.g. Hive, distributed CHPs)

Listen here to a great Columbia Energy Exchange podcast with Ian Conn (Centrica CEO).

5 reasons why Trump doesn’t matter

A ‘rogue’ White House can’t stop a business driven shift of the US towards a leadership role in decarbonisation & energy transition. Why?

  1. Paris Accord The current administration will be less disruptive from the sidelines than actively engaging to obstruct progress. China & India are stepping up to fill the void.
  2. States: US states control many aspects of energy policy. States such as California (6th largest economy in the world), New York & Hawai are playing a pioneering role at a global level.
  3. Deployment The US has now deployed 141GW of non-hydro renewables. Much of this is happening in Republican states e.g. Texas has 21GW of wind capacity.
  4. Technology US technology companies smell huge profit opportunities from growth in renewables, storage, EVs, smart devices & enabling software. US capital markets too.
  5. Jobs The US solar sector alone employs 260,000, significantly more than the conventional power sector (gas/coal/oil). Storage & EV jobs are also rapidly growing.

The benefit of US technology and capital market innovation dwarfs any impact of Trump.

Qatar joins the LNG market share battle

23 mtpa of new low cost LNG puts Qatar in a strong competitive position to take on Russia and other LNG projects:

  1. Strategic decision: A lifting of the 2005 moratorium on LNG export expansions reflects Qatar’s intent to join the battle for LNG market share & pursue volume over price.
  2. Cost: This gas is cheap. We estimate ‘all in’ delivered cost into Europe or Asia of around 5 $/mmbtu, versus next wave US LNG at 8-9 $/mmbtu.
  3. Timing: New LNG is likely to come online in a 5-7 year time frame, into a key period where pre-FID liquefaction projects are competing to raise capital and sell offtake.
  4. Competition: Low cost Qatari volumes will displace alternative sources of LNG e.g. next wave US exports & East African LNG. New Australian & Canadian LNG is already likely to be ‘priced out’.
  5. Market impact: 23 mtpa is not huge and this volume will sit below the projects driving the marginal pricing of new LNG. But it may act to somewhat delay price recovery in early/mid 2020s.

The Qatari move is a somewhat of a sideshow in the looming battle for market share between Russia (with 100 bcma of shut in gas) and ‘next wave’ LNG projects.

Timera Snapshot

Russian gas exports continue to rise in 2017

Gazprom exports to Europe have increased again in H1 2017 (up about 12% vs H1 2016). Exports are underpinned by long term oil-indexed contract volumes (see chart). But evidence continues to emerge this year of Gazprom (i) looking to expand market share via hub based sales (ii) allowing greater hub indexation in contracts e.g. via TTF price corridor mechanisms and (iii) moving towards greater supply flex management at hubs.

Derisking drives down UK wind CfD bids

The 2nd UK CfD allocation round for renewables saw 3.2GW of offshore wind and 150MW of waste energy & biomass CHP projects successful (see table). Offshore wind costs plummeted to 58 £/MWh, half that of the 1st CfD round in 2014. This sets up the continued roll out of significant volumes of offshore wind through the 2020s.  Tech innovation is helping cost reductions (e.g. larger turbine sizes).  But lower bids are also driven by government de-risking of project cashflows via the CfD price guarantee mechanism.  It is this that is driving down the cost of capital for offshore wind into single digit IRRs.

UK CCGT margins rise as CSS makes new high

UK baseload Clean Spark Spreads (CSS) for Win 17-18 have broken above levels reached last winter during the French nuke outages. This is being helped by coal prices rising relative to gas, with coal units increasingly influencing peak price setting in the UK. The recovery in CCGT margins should also help momentum behind new build CCGT projects lining up to bid into the next UK capacity auction.

Switching boosting gas demand again in 2017

German peak Clean Spark Spreads (CSS) & Dark Spreads (CDS)

Switching of gas for coal plant drove a more than 20 bcma (4%) growth in European gas demand in 2016.  Gas demand remains robust again in H1 2017.  German peak gas generation margins (CSS) are a useful barometer for pan-European switching.  The chart shows spot peak CSS (49% efficient CCGT), rising into positive territory over the summer (towards 5 €/MWh).  Winter forward prices indicate more switching to come, with peak CSS above 10 €/MWh.

UK supply stack transformation lifting peak prices

Winter 17/18 UK supply stack chart

Coal units have been driven further out of merit in the UK as gas prices fall relative to coal this spring.  Fuel & carbon are not the only drivers of coal unit variable cost.  Variable dispatch costs are rising to reflect the cost uplift of coal unit peaking operation e.g. start cost recovery over short peak bursts.  These factors have helped drive a significant rise in UK spark spreads over the last 2 months.

Timera take on European midstream asset value

See here for analysis of LNG vs Russia dominance of European import growth and implications for midstream asset value.