Energy Monitor July
Group Economics Hans van Cleef
To tap or not to tap 26 June 2015 Groningen field gas production cut; TTF gas price forecasts revised higher Russia continues to build the controversial gas roundabout of Europe Nuclear deal with Iran could increase OPEC market share
Minister Kamp surprises with gas production cut
Figure 1: Netherlands gas production (in bcm) 90 80 70 60 50 40 30 20 10 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 total gas production Netherlands gas production Groningenfield Source: TNO, www.NLOG.nl
Figure 2: Netherlands gas revenues (in billion euros)
At the end of 2014, Dutch Minister Kamp (Economic Affairs) lowered the cap on the Groningen gas field to 39.4 billion cubic metres (bcm) from 42.5 bcm. He also indicated later that production would not be permitted to exceed 16.5 bcm in the first half of 2015. After the mild winter, with consequent low gas demand, this was not a contentious decision. More interesting was this week’s decision to cap 2015 production in the Groningen gas field at 30 bcm. This is even lower than the expected cap of twice the H1 2015 figure (i.e. 33 bcm). This is possible because the surplus capacity of the gas storage facility at Norg, Drenthe, will also be available. The minister indicated that the safety of the Groningen citizens has the highest priority, and that this should be improved. A further lowering of gas production in the coming years therefore seems likely. At the same time, the minister has to take into account his obligation to secure the energy supply. Therefore, a complete shutdown of Groningen gas field production is not an option. The lowering of production does not completely eliminate the possibility of an earthquake. Obviously, a production cut has various consequences, including financial. This does not only concern the costs of damage as a result of earthquakes. These are compensated for by Nederlandse Aardolie Maatschappij (NAM). The costs involved in making all buildings within the risk area earthquake-proof are put at between EUR 6.5 and EUR 30 billion. It is not clear yet how these costs will be shared between the government, NAM and the occupants. A commonly cited rule of thumb is that lowering gas production by 1 bcm is equal to a drop in gas revenues of EUR 200 million. This has a direct impact on the Dutch government budget. Lowering gas production to a cap of 30 bcm would therefore mean that the Dutch treasury will see revenues drop by more than EUR 4.5 billion compared to 2013. Furthermore, gas imports will increase to meet all obligations (Dutch consumption and exports). These costs, combined with the lower revenues, must be compensated for somewhere. Fortunately there are some financial windfalls, so these higher costs will not automatically lead to increased austerity measures or a rise in energy taxes.
16.000 14.000 12.000 10.000
8.000 6.000 4.000
00
02
04
06
08
10
Natural gas revenues Source: CBS Statline
12
14
The final consequence is that lower gas production cannot be offset directly, and certainly not fully, by higher energy production from renewable energy sources such as solar and wind. Therefore, the Netherlands will become more dependent – now but especially in the future – on gas imports from countries such as Norway and Russia, or countries somewhat further away exporting liquefied natural gas (LNG). Norway has already increased its gas exports to Europe significantly in recent years. LNG can be imported via the Gate terminal in Rotterdam.
2
Energy Monitor July - To tap or not to tap
26 June 2015
Table 1: ABN AMRO oil and gas price forecasts (oil prices in USD/barrel, HH gas prices in USD/mmBtu, TTF gas prices in EUR/MWh) Price
Q3 2015
Q4 2015
Q1 2016
2015*
2016*
Brent
60
65
70
65
75
WTI
55
60
65
55
70
3.00
3.25
3.50
3.00
3.50
20
21
21
21
19
NG ** TTF***
Source: ABN AMRO Group Economics * year average ** Natural Gas Henry Hub *** Title Transfer Facility
Due to the increased tensions between Europe and Russia, higher gas imports from Russia would also likely result in a strange and unwelcome situation. All these consequences demand a well-considered decision by the minister.
TTF gas price forecasts revised upwards Up to now, the effects on the TTF gas price have been relatively limited. After the earlier announcement of production cuts, both volatility and gas prices jumped higher. In a way this is strange, as the lower volume of Groningen gas production can easily be offset by increased imports from Russia and/or Norway, as well as by LNG imports. The price eased somewhat afterwards and is currently trading sideways in a relatively narrow trading range of EUR 20 to EUR 21 per MWh. We had already been expecting a drop in the TTF gas price for some time. This was due to a mild winter (high supply and low demand), resulting in a comfortable starting position at the beginning of the spring season. This was similar to last year. Nevertheless, the recovery of inventories appears to be significantly slower than last year. This is a result of speculation on lower gas prices based on the effects of lower oil prices, filtering through with a time-lag. Demand may therefore increase in the coming months. Moreover, the downside risks appear to be offset by the bigger-than-expected production cut in Groningen. Although we do not believe a major price jump is likely, we have raised our gas price forecasts on the basis of the reduced downside risks. Our expected average TTF gas price for 2015 has therefore risen from EUR 19/MWh to EUR 21/MWh and for 2016 from EUR 18/MWh to EUR 19/MWh (see table 1).
Russia-to-Europe gas supply receives fresh boost
Figure 3: Nord Stream and South Stream pipelines
Source: ABN AMRO Group Economics
In the battle to secure gas deliveries to Europe, Russia made some important steps. The Russian gas company Gazprom agreed with European partners to double the capacity of the Nord Stream pipeline. The pipeline runs from Russia towards Northern Germany, with branches then going to the Netherlands and Denmark. For the Netherlands this decision could provide a very important back-up once Dutch gas production is no longer sufficient to meet domestic demand. Moreover, the Netherlands needs to meet its contract obligations towards other European countries. Finally, the Netherlands still has ambitions to become the gas roundabout of North-West Europe. The extension of Nord Stream means that gas deliveries from Russia to Europe will be less vulnerable to possible tensions between Russia and Ukraine, through which most gas to Europe currently flows. This therefore appears to be an important step in securing Europe’s gas supply. At the same time, Russia signed a preliminary deal with Greece to build a gas pipeline between Turkey and Greece. Earlier Russia cancelled the building of South Stream as a result of European sanctions, which were imposed on Russia after tensions arose surrounding the situation with Ukraine. South Stream’s original route, through Bulgaria, was cancelled by the Russians and replaced with Turkish Stream. This was made possible after Gazprom acquired the transportation section of the company which is building the pipeline. This means that from 2019 gas could be transported via the Black Sea, Turkey and Greece to (Southern) Europe. However, if this is actually the intention of the new agreement, the project still has to meet European competition rules. Besides Bulgaria, which will not receive the economic benefits of the
3
Energy Monitor July - To tap or not to tap
26 June 2015
4.000
pipeline, Ukraine seems to be the biggest loser. After all, the gas flows through Ukraine will become less important for Europe, giving Russia the opportunity to raise gas prices for Ukraine without impacting onward gas deliveries to Europe. The tense relations between Europe and Russia do not seem to be affecting the gas flows, which are important for both sides. By securing gas deliveries to Europe along both the northern and southern routes, Russia appears to be taking major steps towards creating a European gas roundabout.
3.000
An Iran deal, and the possible consequences
Figure 4: EU gas imports from Russia (x mcm) 160.000
6.000
140.000
5.000
120.000 100.000 80.000 60.000
2.000
40.000 1.000
20.000 0
0 04 05 06 07 08 09 10 11 12 13 European Union (28 countries) Netherlands (r.axis)
It seems that the negotiations between Iran and the Western negotiators, also called P5 + 1 (the five permanent members of the UN Security Council plus Germany), could result in an agreement. Whether such an agreement will be signed on 30 June, or several days later, is not certain yet, but this is less relevant. This means there will be a final agreement on restrictions to the Iranian nuclear programme under the supervision of the International Atomic Energy Agency (IAEA). In exchange, the US and European sanctions against Iran will be (at least temporarily) deferred. We have seen the impact on oil prices. Prices initially dropped by roughly 60% last year (from USD 110/bbl to USD 45/bbl), and although they reversed some of the declines to USD 65/bbl, prices remain significantly lower than in recent years. Currently, oil prices are relatively stable around USD 65/bbl for Brent oil and USD 60/bbl for WTI. Nevertheless, downside risks remain:
Source: Eurostat
Figure 5: Iran and OPEC oil production (x 1000 b/d) 4.000
32.000
3.250
31.000
2.500
30.000
1.750
29.000
1.000
28.000
10
11 Iran
12
13
14
15
Total Opec Crude Oil
Lower sanctions against Iran could lead to increased oil exports Peace talks surrounding the attacks in Yemen are ongoing. An agreement could lead to a lower risk premium Oil exports from Libya appear to be increasing again Oil production in the US seems to be stabilizing, but is still around record levels A strong dollar could lead to more pressure on commodity prices. The dollar could appreciate due to a) higher Fed rates (or anticipation of a rate hike), and b) tensions on Greece leading to more pressure on the euro, and hence to a stronger dollar.
A new balance in the oil market seems unlikely in the near term. The oil oversupply could even increase in the coming months if sanctions against Iran are (temporarily) reduced. According to experts, oil production could recover by 500,000 barrels per day. After one year, another approximately 500,000 barrels per day could be produced, and exported. Furthermore, there is a rumour that Iran has stored 10 to 40 million barrels of oil on oil tankers. If true, this amount of oil could come to the market relatively fast, adding more pressure on oil prices. However, the existence of such floating storage volumes is denied by Iranian officials. An official cut in oil production by other OPEC members to create room for extra Iran oil cannot be expected, especially if Russia continues to reject coalition action. OPEC will therefore continue its strategy to maintain, or even increase, its market share.
Source: Energy Intelligence, ABN AMRO Group Economics
Nevertheless, we do expect that the market will start anticipating a balance in the oil market in the course of 2016. This will be the result of
4

Energy Monitor July - To tap or not to tap
26 June 2015
a rise in demand for oil driven by economic growth. Furthermore, we will see lower oil production in countries hit by the current low oil prices (such as Venezuela, Nigeria, Mexico). Finally, it seems that US production is starting to peak. We have therefore kept our oil price forecasts unchanged, with downside risks in the near term, 2015 averages around the current levels and a small recovery pencilled in for 2016. In the longer term (>2020), it seems that a lack of investment in oil infrastructure continues to hang over the market. After all, the current oversupply could turn into a shortage of oil if the necessary investments are delayed for too long.
5
Energy Monitor July - To tap or not to tap
26 June 2015
Group Economics | Commodity Research Hans van Cleef Senior Energy Economist tel: +31 (0) 20 343 4679 hans.van.cleef@nl.abnamro.com
Group Economics Commodity Research team Marijke Zewuster (Head)
tel: +31 20 383 0518
marijke.zewuster@nl.abnamro.com
Hans van Cleef (Energy)
tel: +31 20 343 4679
hans.van.cleef@nl.abnamro.com
Casper Burgering (Ferrous, Base metals) Georgette Boele (Precious metals) Frank Rijkers (Grains, Soft commodities)
tel: +31 20 383 2693 tel: +31 20 629 7789 tel: +31 20 628 6437
casper.burgering@nl.abnamro.com georgette.boele@nl.abnamro.com frank.rijkers@nl.abnamro.com
Copyright 2015 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO"). This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on the energy market. The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer. No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in the document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such information. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information contained in this document after the date thereof. Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether the relevant product – considering the risks involved – is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO reserves the right to make amendments to this material.