Timera Energy

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 value of flexible UK power assets (e.g. engines, batteries, CCGTS & DSR) is increasingly focused on margin capture from price shape and volatility close to delivery. 5 key challenges owners & investors are facing:

1. Prompt value: Quantifying & managing asset exposure to price shape & volatility.
2. Liquidity: Lack of liquid granular products to hedge shape & volatility.
3. Transaction costs: value erosion from execution of hedging & optimisation.
4. Risk adjustment: Appropriate discounting of uncertain extrinsic revenue streams.
5. Pricing options: Structured probabilistic framework to define, price & exercise asset optionality across Wholesale, BM, Ancillary & Embedded Benefit markets.

Two recent podcasts from Columbia Energy Exchange make for some very insightful summer listening:

• Shell’s transition to power: Shell Exec Maarten Wetselaar talks about how & why Shell is reorienting its business model towards power (e.g. recent acquisition of First Utility in UK). He also addresses Shell’s strategy for renewable technologies and the role of gas in response to evolving energy markets.
• Shifting energy landscape: Obama Administration US Energy Secretary Ernie Moniz talks about some key structural drivers transforming energy markets. Moniz sets out a very engaging perspective on the evolution of low carbon technology, the role of nuclear and the impact of climate policy and geopolitics.

Purchasing Manufacturing Index (PMI) data is a useful barometer for economic growth and commodity demand. We last looked at global PMIs in 2017, when they showed synchronised global growth (a tailwind for commodity prices).  In 2018 PMI’s have hit the skids.  Eurozone PMI growth has decreased sharply in 2018, sending a warning signal on gas & power demand growth.  But most importantly for commodity markets, Chinese PMI numbers fell sharply in Nov 18 to the 50 level. Any further declines mean contraction. Weakness here is contributing to the current sell off in commodity markets.

The closure of Rough storage (reducing UK working gas volume by 70%) has structurally changed the UK gas supply flex balance.  Summer/Winter price spreads have doubled (4 to 8 p/th) as alternative forms of seasonal flex replace Rough. Norwegian production flexibility has been the primary source of ‘backfill’. Across the Channel, price spreads at TTF have not moved in sympathy, remaining stuck in a 1-2 €/MWh band. A broader European recovery in spreads will depend on seasonality of LNG & Russian flows, as well as the closure decisions of underwater storage asset owners.

Spot charter rates are an important driver of regional gas price differentials and flows. Rates have surged above $150k per day in 2018 to an all time high. This is partly due to strong Asian LNG demand and longer average journey times. Higher charter rates and a narrowing Asia/TTF spot price spread have seen LNG starting to flow back to Europe over the last 4 weeks as Asian buyers look to be well contracted into the winter.

Timera has just published a briefing pack on the transition taking place in the European gas market. This covers:

1. Analysis of tightening European & global gas market balances
2. Dynamics of 3 key current drivers of European hub prices (LNG flows, switching, Russian flows)
3. Potential paths for hub prices, seasonal spreads & volatility
4. Commercial challenges facing gas players given market transition (capturing asset value, portfolio construction, asset investment)

This pack can be downloaded here: European gas market in transition

A tight European gas market focuses attention on Gazprom as the key marginal supplier of gas as winter approaches. Northern pipeline routes from Russia have hit max flow constraints this year. That leaves the Ukraine route as the key source of additional supply. Gazprom has auctioned ~0.6 bcm of incremental gas since Sep, flagging 1.1 bcm more for auction by year end (& this may rise). But supply outages or a cold snap over winter may see constraints on all Russian entry points into Europe. That means TTF prices rising to (i) push CCGTs out of merit & (ii) attract LNG from Asia.

European hub prices have surged more than 30% over the last 3 months (blue line in chart).  TTF has risen to maintain power sector switching levels as carbon prices have also jumped. Asian spot LNG prices (red line) have followed suit in order to maintain a price spread that continues to incentivise diversion of LNG away from Europe to Asia.  The result is an intensifying focus on how Gazprom will respond.  TTF at 10 $/mmbtu is a shot in the arm for global LNG developers looking to FID new projects.  The threats posed by new price taking LNG supply are not in Russia’s interest. Watch out for a Gazprom volume response.