Offshore Energies Magazine - Issue 55 Spring 2023

Day-ahead gas prices at the Dutch TTF hub

100 150 200 250 300 350

100 150 200 250 300 350

TTF (€/MWh)

0 50

0 50

Jan 2022

Jan 2022 Feb 2022

Mar 2022

Mar 2022 Apr 2022

Apr 2022 May 2022

May 2022 Jun 2022

Jun 2022 Jul 2022

Jul 2022 Aug 2022

Aug 2022 Sep 2022

Sep 2022 Oct 2022

Oct 2022 Nov 2022

Nov 2022 Dec 2022

Dec 2022 Jan 2023

Jan 2023 Feb 2023

Mar 2023

Feb 2022

Feb 2023

Mar 2023

Source: ICIS

Source: ICIS

a major LNG importer, with regasification capacity being added notably in Germany. New supplies of LNG came from the US but Norway also stepped up its pipeline gas exports to Europe ( see graph ). However, crisis or not, the Netherlands has not relented on closing Groningen. The huge swing field is producing very little gas, much less even than the Dutch subsoil regulator’s recommended maximum safety level that it imposed to avoid more tremors. And the EU’s unexpected need for a lot more LNG, quickly, does not sit easily with its preference for spot pricing and flexible delivery clauses. LNG producers like to have long-term offtake commitments for nearly all their output before spending their billions. Further, Europe's ambitions for a virtually fossil-fuel free future, no matter how achievable that is, also ring producers' alarm bells. And these projects take a while to deliver their first cargoes. In any case, "in the near term, the global LNG market is expected to remain tight and exposed to supply and demand shocks…. More investment in supply will be needed to meet future LNG demand," Shell says in its 2023 LNG outlook. Underlying market tightness The European gas market had been tightening for a year or so before the formal start of hostilities on February 24. Russia delivered less gas than it had contracted to flow through Ukraine while European utilities' demand for gas for storage injection had been rising during 2021, just in case things turned sour. And on top of that, no sooner had the 2015 "lower 0 50 100 150 200 250 300 350 Jan 2022 Feb 2022 Mar 2022 Apr 2022 May 2022

for longer" catchphrase lost its relevance than large swathes of Europe’s banking sector were following new regulations related to environmental, social and governance (ESG) issues. These have made upstream fossil fuel investments harder to finance and meant less gas around than would otherwise be the case. The Covid-19 epidemic added practical difficulties to the investment problem. Routine drilling and maintenance suffered as working conditions such as social distancing made it hard to do the job on time. The non-OECD-aligned Gas Exporting Countries Forum, which counts Russia, Qatar and Algeria among its more active members, pointed to these and other factors in a report late last year. Preliminary estimates of global oil and gas investment in 2021 show a year-on-year increase of just $12bn, or 2%, despite the attractive oil and gas prices. It said the pandemic severely hit the sector. "However, in the current investment cycle, we witness the recovery pace of active oil and gas rigs and the investment level is slow, primarily due to the impact of ESG measures," it said. The report’s authors – who represent state-owned companies on the supply side – believe that "recent natural gas price fluctuations and supply shortages are proof of inadequate upstream investment levels owing to low oil and natural gas price levels in the pandemic and also ESG pressure in the recovery period." It says gas prices will be driven higher by capital intensity: rising demand leads to higher long-run marginal cost of supply. However, it sees the market back in balance after 2025. Aug 2022 Sep 2022 Oct 2022 Nov 2022 Dec 2022 Jan 2023 Feb 2023

Jun 2022

Jul 2022

Mar 2023

Source: ICIS

2 4 | O E U K M a g a z i n e | S p r i n g 2 0 2 3