Timera Energy

5 factors currently impacting energy company gas portfolio construction:

1. De-carbonisation: The focus/value of gas portfolios is evolving with the energy transition. Big gas players looking to diversify e.g. into power / CCS / alternative fuels.
2. Power sector linkage: Growing gas & power market dependency driving gas portfolio diversification options e.g. Shell buying First Utility, Equinor expanding offshore wind.
3. LNG market growth: Rapidly expanding LNG supply & liquidity = key source of new growth e.g. utilities (Uniper) and traders (Vitol, Trafigura) growing portfolios.
4. Trading: Companies targeting growth in trading to increase returns & manage risks. E.g. Equinor buying Danske Commodities; Uniper global trading expansion.
5. Refocusing: Companies are also shifting focus within the gas supply chain e.g. Engie & Centrica pivot towards energy services.

Jessica Gervais has joined Timera as a Senior Analyst in Dec 2018.  5 things Jessica has done prior to joining our team:

1. Platts Analytics: Head of Modelling for European Gas & Power.
2. Eclipse/Platts: Senior Analyst, helping build Eclipse’s European gas analytics capability.
3. ArcelorMittal: Head of Gas Sourcing & Trading, leading the development of ArcelorMittal’s European gas trading capability.
4. Cargolux/CRP Henri Tudor: Spatial modelling of aircraft noise and emissions for a cargo airline.
5. EPSCI: Jessica studied fundamental and applied Physics and Chemistry at France’s top ranked engineering university.

Jessica is already busy analysing merchant battery value capture for a client as well as working on expanding Timera’s gas analytics capability.

We are continuing to grow our team and are currently looking for:

1. Managing Consultants
2. Analysts

We offer:

• Very competitive packages including direct participation in company value growth.
• Significantly more flexibility and autonomy than other companies, covering e.g. location, work hours & remuneration structure.

An open, innovative & entrepreneurial environment with a variety of stimulating analytical challenges across the rapidly evolving energy industry.

A ‘day after’ reaction in 5 points:

1. Impact equivalent to an immediate zero capacity price outcome for all CM participants
2. Cashflow hit likely to swing some older coal/CCGT plants cashflow negative
3. Debt repayments on more highly leveraged assets also at risk e.g. engines
4. BEIS claims CM suspension ‘poses no threat to security of supply’… Seriously?!
5. Interests of most market participants & government look to be aligned in reinstating CM, but may accelerate reform

More detailed thoughts to follow in a feature article on Monday.

David Stokes (Timera MD) will be speaking at the European Autumn Gas Conference in Berlin on 9^th Nov (11:30-12:00). The presentation on ‘Investment Opportunities in European Gas & LNG Infrastructure’ will cover:

1. Market tightening: Why hub prices have doubled since Jul 2017 & what’s next
2. 3 key drivers: How LNG flows, switching and Russian flows are driving marginal pricing
3. Value capture: How market evolution and roll-off of LTCs is shifting asset value nearer to delivery
4. Portfolio construction: How energy companies are restructuring gas portfolios in response
5. Asset investment: How market transition is causing a structural shift in gas asset risk/return profiles

The Shell led Canada LNG project sets out a marker for the next wave of supply:

1. Size & timing: A $14bn initial project of 14mtpa from 2 trains is scheduled to deliver gas by 2025. Further trains are likely to be cheaper once transit infrastructure is in place.
2. Supply gap: This project breaks a hiatus of major FIDs since 2016. The slow pace of investment may cause the LNG market to swing into deficit by 2022 if Asian demand growth continues at current rates.
3. Market risk: The recent surge in TTF prices to 10 $/mmbtu may have helped the FID decision. But project partners carry substantial market risk across the 5+ year development window.
4. Capital: The project (& market risk) is being backed by the balance sheets of oil majors (Shell, Petronas, PetroChina). This may be the dominant financing model for next wave.
5. Model: The project illustrates the key ingredients required to get past next wave FID: low cost of capital, low cost reserves, ability to bear market risk & market access.

The closure of Rough storage has structurally altered NBP vs TTF price spread dynamics. NBP trades at a premium to TTF over winter as the UK draws on Norwegian and Continental flexibility to balance the market.  This reverses to a discount across summer as the UK exports UKCS production that is surplus to domestic demand.  Relatively frequent market shock events impact the spread (in both directions). These are typically relatively short in duration but can create significant value uplift from locational flow flexibility (e.g. for IUK/BBL capacity & NCS flex).

The chart shows Siemens numbers on large gas turbine (>100 MW) units sold. 2017 saw a shock decline and conditions do not look to be improving. This is despite substantial cost reductions (700 to 500 €/kW) and efficiency improvements (54% to 56%+ HHV) in CCGTs across the last 2-3 years. Gas turbines are being squeezed by development of renewables on one side and smaller distribution connected flex capacity on the other (e.g. engines & batteries).  A recovery in sales seems strongly dependent on a switch from coal to CCGTs in large developing markets (e.g. China & India).

A mild winter and well covered positions across Asian buyers have caused a sharp slowdown in demand for spot Asian cargos during the first half of winter.  LNG trading desks have been focused on Europe as an outlet for long portfolios.  This has driven down the Asian / TTF spread (reflecting lower cargo value for Asian delivery) and caused a sharp increase in European LNG imports.  The increase in imports has been focused on the liquid markets across NW Europe (NL, UK and to some degree FR).

The market focus in 2018 was firmly on Chinese LNG demand growing at record speed.  This somewhat drew attention away from South Korea’s LNG demand growth which in 2018 grew by ~10 bcma (> 20% higher in 2018 vs 2017).  The primary driver of the surge in LNG demand was the power sector.   A series of nuclear shutdowns (caused by a scandal over faulty parts) caused a surge in gas demand from the power sector.

The chart shows clearing prices for the GasTerra virtual storage contract, auctioned biannually on ICE. This is the most mature & transparent price benchmark for storage capacity value in Europe.  And it doesn’t paint a pretty picture for seasonal storage on the Continent.  Capacity prices have stagnated across the last 5 years at or close to intrinsic value (driven by the prevailing summer/winter price spread).  The premium of capacity prices over the TTF summer/winter spread (~0.8 €/MWh) primarily reflect additional intrinsic value from monthly shape (rather than extrinsic value).

Growth in price responsive LNG supply is driving an increasingly important relationship between TTF & Asian spot LNG prices. The chart shows an analysis of historical volatility of the SGX Singapore Sling LNG price (annual & seasons). Asian spot price volatility can be seen rising in 2018 versus previous years.  The chart also shows structurally higher LNG spot price volatility in winter than summer. It will be interesting to see the extent to which this trend continues across the current winter.