How LNG Supply Additions Could Affect Gas Prices in Europe? Sergei Komlev Head of Contract Structuring and Price Formation Directorate Gazprom Export* C5, Gas and LNG Supply Contracts Forum Berlin, June 20, 2018 *Views expressed in this presentation are the author s sole responsibility and do not necessarily represent that of Gazprom Export
According to Conventional Wisdom, Doubling of Global LNG Capacity Should Bring European Gas Prices Down, but Historic Precedent of the Opposite Outcome: Ignoring Dependence of Hub Prices on Oil Indexes and Overestimation of LNG Glut Impact Have Let to Hefty Losses for Traders/Midstreamers in 2010 2 ZMB 2
Unique Nature of Natural Gas as Commodity Needs to be Taken into Consideration in Assessing LNG Glut Effects on Hub Prices There are three main features of natural gas as a commodity which make it one of the kind: 1. Market prices of natural gas are set up by two forms of competition gas-on-substitute (inter-fuel) and gas-on-gas competition. No other global commodity is characterized by this duality. 2. LTCs play a leading role in the global natural gas supply and here to stay for years ahead, while a move to exchange-based pricing in other commodities is associated with elimination of the long-term contact arrangements or their radical transformation. 3. Simultaneously functioning different pricing mechanisms in natural gas have direct effect on hub price, making it a hybrid product both on macro and micro level. Assessment of these specific characters of natural gas as a commodity represents not only an academic interest but has sensible practical business-related implications. 3 ZMB 3
Competition with Other Carbons Locks Natural Gas in Price Envelope Global natural gas prices irrespective of their inter-regional differences firmly sit within a price envelop set up by oil (ceiling) and coal (floor), see grey area in the Charts. Source: Shell 4 ZMB 4
Inter-fuel Inter-Fuel Competition Competition Makes Sets Hub up Prices Rangebound Corridor for Natural Gas Prices Ceiling Oil/Oil products parity Floor Coal parity Source: Gazprom Export 5 ZMB 5
Inter-fuel Competition at Work: Oil Price Sets Resistance Level for Natural Gas Prices Source: BP, Gazprom Export 6 ZMB 6
Inter-fuel Competition at Work: Coal Price Sets Support Level for Natural Gas Prices in Europe and US Source: BP, Gazprom Export 7 ZMB 7
and Asia Source: BP, Gazprom Export ZMB 8
Special Arrangements are Required for Gas to Outcompete Coal USD / mcm USD / mcm NBP* compared to UK coal-to-gas switching price 600 500 400 300 200 100 0 NBP actual price Switching price NCG** compared to German coal-to-gas switching price 600 NCG actual price Switching price 500 400 300 200 100 0 Sources: Argus, Platts, IEA *NBP day-ahead **NCG day-ahead 9 What Should One Know about Natural Gas Pricing Fundamentals? ZMB 9
Inter-fuel Competition at Work: Gas Price Corridor Width Gas Price Corridor Width is Determined Mainly by Oil Price Volatility and Stretched from Nearly Zero in 1988, 1995 and 1998 to 13 USD/MMBTU in 2013 Source: BP, Gazprom Export 10 ZMB 10
European Gas Has not Lost it Dependence on Oil, Although Indirect Dependence via LTC is Now Less Pronounced Source: Gazprom Export Correlation ratio 2009-2017 2009-2013 2014-2017 2016-2017 Brent - TTF* 84,3% 82,9% 80,7% 84,4% Brent - TTF 3M 81,8% 77,5% 80,6% 74,0% Brent - TTF 6M 76,3% 63,5% 83,0% 35,7% Brent - TTF 9M 70,7% 48,7% 85,4% -5,0% Brent 3M - TTF 86,2% 84,8% 83,6% 84,0% Brent 6M - TTF 88,7% 89,8% 85,9% 77,0% Brent 9M - TTF 88,7% 91,1% 86,1% 72,2% Brent +3M - TTF 86,9% 86,7% 84,3% - Brent +6M - TTF 81,2% 77,8% 82,0% - Brent +9M - TTF 65,0% 50,4% 75,2% - CIF ARA - TTF 63,2% 42,6% 67,9% 87,4% CIF ARA - TTF 3M 58,8% 38,5% 58,5% 78,3% CIF ARA - TTF 6M 51,5% 27,4% 48,6% 48,3% CIF ARA - TTF 9M 44,4% 12,8% 44,5% 10,2% * Hereinafter TTF Month Ahead 11 ZMB 11
Oil Indexes Retain Their Dominant Position in European Pricing When Quasi-Oil Indexed Contracts are Taken into Consideration, Oil Indexes Retain Their Dominant Position in European Prices* 100% 5,6% 8,9% 9,1% 80% 60% 26,0% 31,7% 33,1% 40% 20% 68,4% 59,4% 57,8% 0% 1Q 2016 1Q 2017 1Q 2018 Oil- and quasi-oil-indexed Hub-indexed Fixed price * Norway is considered as an internal supplier Source: IEA, «Gazprom export» LLC assessment 12 What Should One Know about Natural Gas Pricing Fundamentals? ZMB 12
ACER Report: Correlation between Oil and Gas Still High due to Existence of LTCs Long-term contracts provide as well orientation for hub price formation, so there is a close interdependence between sources (ACER 2017 Report, P. 34) ZMB 13
Do All Exchange Traded Goods Correlate with Commodity Super Cycle? All Exchange Traded Goods Have Strong Correlation with Oil due to Commodity Super Cycle: Not a Sound Explanation Beef Meat, sheep Meat, chicken Swine (pork) Banana, Europe Orange Juice Natural gas, Europe 1990-2016 75% 88% 72% 38% 76% 76% 92% 1995-2016 77% 86% 66% 53% 75% 71% 90% 2000-2016 67% 81% 51% 68% 67% 58% 86% 2005-2016 38% 68% 3% 62% 28% 30% 70% 2010-2016 7% 78% -54% 67% -6% 19% 91% Despite commonalities in price behavior over the last 25 years, commodities by few exceptions had a strong momentum of their own after the 2008 crisis Source: based on IMF and WB data (monthly) 14 ZMB 14
Although Correlation of Gas Prices with Coal Price Increased Positive Price Spreads Between DA and MA Prices Point to Emerging Gas Deficit * At the basis of daily quotes ** Quotes with delivery in the same month are used Source: Gazprom Export 15 ZMB 15
LNG Deliveries to the European Market in Q1 2018 were Down Q1 2017 Q1 2018 change (bcm) change (%) Qatar 5.1 4.9-0.2-3.9% Nigeria 3.5 3.7 0.2 5.7% Algeria 4.0 3.7-0.3-7.5% Russia (Novatek) 0.0 0.8 0.8 Norway 1.3 0.8-0.5-38.5% Trinidad and Tobago 0.2 0.7 0.5 250.0% Peru 1.0 0.4-0.6-60.0% USA 0.8 0.4-0.4-50.0% Angola 0.3 0.1-0.2-66.7% Equatorial Guinea 0.2 0.1-0.1-50.0% Despite growing gas demand in 1Q 2018 (+0.9 bcm or +0.5%) LNG deliveries to the European market fell in 1Q 2018, being attracted by other markets with higher margins Dominican Republic 0.1 0.0-0.1-100.0% Lithuania (re-export) 0.0 0.0 0.0-100.0% TOTAL 16.4 15.7-0.7-4.3% Source: IEA, ENTSOG ZMB 16
USD/mcm USD/mmbtu LNG Ignores European Gas Market Even Though Deliveries are Breakeven at Current Prices on Full Cost Basis 350 300 250 200 150 100 50 0 10.0 9,00 8.5 8,00 7.1 7,00 6,00 5.7 5,00 4.3 4,00 3,00 2.8 2,00 1.4 1,00 0 0,00 US LNG breakeven prices (full cycle costs) US LNG short-run marginal costs (excl. tolling fees) TTF Month Ahead and Futures Germany border price (BAFA) Prices of US LNG deliveries to Spain (Cedigaz) Prices of US LNG deliveries to Italy (Cedigaz) Prices of US LNG deliveries to UK (Cedigaz) Source: Bloomberg, Cedigaz, IHS Calculated on the basis of Henry Hub Futures prices, P = HH * 115% + X where X costs of liquefaction, shipping to Europe, regasification
Liquefaction Volume, MMcm As Contract Obligations are not Fully Met, Costs for Spot LNG Volumes Could be Subsidized 12 000 +Sabine Pass T4 10 000 8 000 6 000 4 000 2 000 Sabine Pass T1 +Sabine Pass T2 +Sabine Pass T3 38% 66% 63% 0 23% 20% H1 2016 H2 2016 H1 2017 H2 2017 H1 2018 LNG trains cap, MMcm Supplies to Middle East, MMcm Supplies to Europe, MMcm % of Contracts Used and Real Volume, MMcm Contracted cap, MMcm Supplies to Latin America, MMcm Supplies to Asia Pacific, MMcm Source: IHS, Gazprom Export ZMB 18
bcm bcm LNG Ignored Demand Hikes in Europe in January-April 2018 Despite Associated Price Hikes 8 6 5,1 5,8 4 LNG Deliveries to Europe, bcm 5,6 5,7 5,3 5,2 4,6 4,3 2 0 January February March April 25 20 15 10 5 0 19,1 Source: IEA, ENTSOG Gazprom Export Deliveries to Europe, bcm 19,7 17,3 16,3 17,4 15,6 15,8 January February March April 2017 2018 17,2 ZMB 19
Incremental Demand For LNG in January-April 2018 Came From Asia 14 12 10 8 6 4 2 0-2 -4 Net LNG Demand Increase in Jan-Apr 2018 vs. Jan-Apr 2017 12,9 0,2-0,5-0,4-2,2-2,2 Asia North America Middle East Latin America* Africa Europe Source: IHS Markit * Excluding Mexico ZMB 20
MMcm/day Year-by-Year North-West Europe Receives Less LNG for Same Size of Asian Premium 100 80 60 40 2014 2015 2016 2017 2018 20 0 *Monthly averages Asian premium is JKM-NBP spread Source: Bloomberg, IHS Markit, Interfax-GGA, Platts ZMB 21
THANK YOU FOR YOUR ATTENTION!