Weekly Overview: Energy Outlook Brighter for Buyers
UK major BP and Paris-based International Energy Agency both commented on the outlook for energy this week, expressing similar diagnoses: the former said that it would take up to two years for oil and product inventories to sink to the point where prices rebounded; while the latter, speaking about gas, reckons the heavy over-supply situation will last until 2018 at least, with prices not recovering significantly until early next decade.
In the meantime, new supply from the US and more acutely from Australia will struggle to find a home at prices that satisfy the seller, although Europe is a likely destination for some of the cargoes from Cheniere’s Sabine Pass terminal in the Gulf of Mexico. Russia meanwhile is already suffering from weak demand, Gazprom seeing its margins from exports sink to the point where it barely makes more profit abroad from each cubic metre than it does from sales at home, where independent producers and state Rosneft are eroding its market share.
But the rough coincidence between the oil and gas oversupply cannot be pushed too far. True, comparisons have been made between gas and oil from a trading viewpoint, to the extent that the methods for discovering the price of oil or naphtha have been extended to LNG too. But its natural characteristics make oil so much cheaper and easier to move around the world or to store in tankers than gas, that oil producers do not need to fine-tune their developments with the needs of their buyers quite so precisely.
This was a point made by Erik Johnsen, deputy director-general of Norway’s oil and energy department last month. Norway’s gas production will decline if there is no certainty of demand in Europe, and that is despite the flexibility that comes with having landing-points in four liquid and – in aggregate – significant markets: UK, France, Germany and Belgium.
“What we do depends on decisions downstream,” he said at Flame Conference. The country can maintain output at 100bn m³/yr until 2025, but thereafter it has to decide whether Norwegian gas is needed. When he was asked what clarity the European Commission (EC) could provide to help Norway decide, he said: “You will never get a message from a politician that a commercial player can act on. And if EU policy makers are trying to massively reduce gas, that means there won’t be the need for the sort of gas we are talking about.”
The impression that the EC is trying to reduce the use of gas is widespread, despite the advantages of gas as a way of decarbonising at least until something better – that is, affordable and sustainable – comes along. Nuclear is another way of decarbonising, although there is a financial cost, particularly if the decommissioning cost is included in the bill, and it takes years to build.
But despite the low outlook for gas and electricity prices and the weak economies on both sides of the Channel, the governments of UK and France remain committed to the EDF-led plan to build the expensive nuclear plant at Hinkley Point C. This week, EDF announced it was calling an extraordinary general meeting late in July, to discuss recapitalising the company with €4bn, of which the government is to inject up to €3bn. It might be online by 2025, but if not, 3.2GW of despatchable capacity will have to come from somewhere else, all things being equal.
The UK Department of Energy and Climate Change told NGE this week it was “fully confident that Hinkley Point C will go ahead. Keeping the lights on is non-negotiable. The government needs to take responsible decisions on how we are going to power our country now and for the next generation.”
However, the UK will not sign a contract until the final investment decision has been taken, and the timing of that is still uncertain. The chairman and CEO of EDF is consulting the company's central works committee on both the project and the partnership with China General Nuclear Power Group, which will be joining it as the junior partner. Only after that process is over will the decision to go ahead be taken.
The French government has repeatedly stated its absolute commitment to this project, which is extremely important to both countries. French economy minister Emmanuel Macron wrote at the end of May to UK parliament to assure it that France’s intentions were serious: “I can appreciate that a certain amount of impatience may be creeping in as the project is key for the UK's energy and climate policy. It is also necessary, in the interest of all, that EDF follows due process before committing itself to an investment of this magnitude,” he said in his letter, conceding at the same time that electricity prices were plummeting.
In the nearer term, the UK is using the capacity market, which is structured in order to deal with a shortage in anticipated capacity whether that is due to a delay in construction of Hinkley Point C or any other plant.
One plant, the 800-MW Carrington combined-cycle gas turbine, is expected to open later this year and other gas plants have won agreements through the first two auctions, including over 800 MW of small scale gas and larger plant. This is not quite the dash for gas that the UK appears to need, given the narrow margins and the impending closure of coal plant, but in these uncertain times, investors are holding out for the best – regulated – returns they can get on their capital.
Shell slams on the anchors
At its investor day, Shell was also downbeat about more gas investment: already committed to the giant, over-budget Gorgon field and related LNG project off Australia and with the massive Prelude vessel afloat and undergoing early commissioning, it is unlikely to make more of these “lumpy” investments upstream for some years.
An exception is its expansion of the Sakhalin Energy plant in Russia’s far east, Russia’s only LNG export terminal. It will be fed with gas from the Kirinskoe field, and that work comes under its strategic cooperation with the operator, Gazprom. Another element of that is Nord Stream which, Shell says, Europe needs. There, Shell and its European partners will be protected from weak demand, as all the line's capacity belongs, for now, to Gazprom.
However, buying BG brought it enough raw material to fashion a profitable venture with high-margin production, bigger than expected savings and a pipeline of projects, the least efficient 10% of which will be sold, affecting operations in up to ten countries. The remainder will require a much-reduced capital expenditure programme. Its plans though are based on an oil price that will not return to the mid $60s/barrel until 2018, so it might have been cheered by this week's three-day rally taking the Dated Brent crude benchmark almost to $53/barrel on June 9.
The world’s biggest trader of flexible LNG, Shell is looking at developing markets in far-flung regions, such as north Africa and Asia, remote from natural gas. Starting off in a small way, perhaps by encouraging governments to see the benefits of floating regas and storage as a way of greening their power and heating sectors, and then gradually ramping up their deliveries until they are big enough to justify an onshore facility.
William Powell