Montel Magazine 3 2021 - Cold comfort Vol 22 No. 3, 2021 - Page 22

carbon market has been reluctant to let it go . “ The tight situation in the gas market is a major price driver ,” says Marcus Ferdinand , a manager of Oslo-based energy service Thema Consulting .
If the rally in carbon is breathtaking , the gains in gas are something else . By early September , benchmark prices on the Dutch TTF hub had climbed almost twentyfold from the record lows of around EUR 3 / MWh that followed last year ’ s first lockdowns . A cool start to the year drew down inventories . Weak pipeline flows , elevated demand and an absence of LNG then stymied restocking . Asian gas demand has been so strong it has effectively absorbed all the additional LNG the US has brought to market . Europe has had to price gas at levels close enough to the Japan / Korea Marker , a spot LNG reference , to attract vessels away from the longer route to Asia . But the JKM has been maintaining the premium it needs to retain supply – soaring in recent weeks above EUR 60 / MWh for deliveries in the winter months as the region wrestles with its own perceived shortages .
Attention has focused on whether Russia ’ s contested but physically complete Nord Stream 2 pipeline to Germany can alleviate the situation by offsetting disappointing flows via Ukraine and Poland . Following years of US and eastern European pressure to abandon the project , the remaining hurdle is now regulatory . Germany ’ s federal network regulator needs to certify the 55bcm / year pipeline for compliance with EU competition rules .
Observers say the process could last until December – or even next summer – depending upon the extent of EU scrutiny . Sikorski estimates the EU to be missing up to 16bcm of gas . “ Ukraine is also going to be about 12bcm down , so when you add those two together we are about 28bcm down or more than 25 % lower year-on-year .” Most of the depletion is concentrated in Russian exporter Gazprom ’ s own European storage . “ If we have a very mild Q4 , then lots of these issues go away very quickly ,” says Tom Marzec-Manser of commodities consultancy Icis . “ That period between 1 October and certainly 1 November if not some point into November itself is going to be crucial … No one knows what the weather forecast will be – that ’ s the bottom line .”
Gas for next summer – which is almost half the cost of delivery next month – appears to be pricing in an eventual start for Nord Stream 2 . But a cold winter could push a deficit of European gas all the way into spring 2023 , Marzec-Manser says . Gas prices have kept rising to redirect gas into storage and allow more coal for power . A task made more difficult by rising coal prices . As European industrial gas consumers wonder whether they could be compelled to shed consumption to keep people warm in the months ahead , China has been scouring the world for non-Australian coal .
“ China is freaking out about coal inventories ,” says an analyst at a trading house in Singapore . A 15 % year-on-year rise in power use – largely met with coal – has outpaced a more modest rise in the country ’ s coal mining output . By early September , China – which consumes more than half the world ’ s coal – had enough stocks to cover 10 days of demand . Stocks will need to rise to 20 days to ride out the risk of winter consumption spikes comfortably . Yet cargoes before November were looking difficult to source , leaving little buffer to restock before December . “ They are running out of time … If you get a cold wave – two weeks , three weeks – and you are sitting on 10 days [ of supply ] in China , that is a national disaster .”
The cargoes China has tended to secure abroad have also been of lower energy value . It has leaned heavily on Indonesia to replace the Australian coal it has banned over a diplomatic dispute . Heavy rainfall and government restrictions have hampered volumes out of Indonesia . The world ’ s biggest coal exporter is still likely to provide 60m tonnes of the 70m tonnes of expansion in global seaborne supplies this year , the analyst estimates . Yet it only has around two thirds of the calorific content of the coal required . “ It ’ s like you are replacing 60m with 40m tonnes – so there is basically a shortage of energy .”
Indeed , coal stocks are at multi-year lows in India , Europe and the US as well . Newcastle coal – a benchmark for the Pacific basin that is home to most use – has more than tripled from last year ’ s lows . Engie Energyscan analysts potentially see prices breaching their 2008 record of around USD 200 / t in both Asia and Europe .
Yet the greater relative rise in gas has rendered coal more competitive for European power generation – and that is despite record emissions costs as well . Average German gas plants would lose EUR 5 / MWh selling power for the coming quarter at prevailing fuel and CO2 costs , by Montel estimates . Their hard coal counterparts would earn about EUR 25 / MWh . The two were still right in the middle of summer . “ We are going to burn a lot of coal for the coming winter ,” says Bjarne Schieldrop , chief commodities analyst at Sweden ’ s SEB bank .
Agora Energiewende , a Berlin-based think tank , expects record German emissions growth this year . Normally a prolonged runup in demand and prices should attract a supply response . Yet miners have struggled to rise to the occasion with supply out of Australia and South Africa even falling this year .
A cold shoulder from finance is part of the reason the coal is staying in the ground , says Tim Buckley , a Sydney-based director at the Institute for Energy Economics and Financial Analysis . “ The divestment movement has starved the coal sector of capital . Capital flight is rampant … whether it is debt , equity or insurance – it is only going in one direction .” Buckley cites BHP . The Anglo-Australian miner is willing to pay AUD 275m ( EUR 171m ) to anyone willing to take the company ’ s Mt Arthur coal mine in New South Wales off its books . The writedown in August – from a prior valuation of AUD 550m – followed an earlier impairment of AUD 1.6bn at the start of the year and comes despite near-record high coal prices . Buckley says the mounting seriousness of net-zero climate targets around the world is dawning on institutional investors – as are the alternatives to deploy their capital . New projects like the Adani Carmichael mine of central Queensland – billed five years ago to have an operational life of 90 years – will be lucky to get 15 years , says Buckley . He highlights India , its target market , as an example .
New solar can be secured in the world ’ s second largest coal producer , consumer and importer at 2.5 rupees / kWh ( EUR 29 / MWh ). That is less than half the long-term average cost of domestic coal generation . It is also well below present costs , which are likely to prompt utilities this winter to cut power rather than burn imported fuel at a price they cannot pass on to consumers . “ Now that is India – but it is also the world ,” Buckley says . “ We are going to see a near-term boost in [ coal ] profitability – and a medium-term acceleration of investment in renewable energy … because , at the end of the day , poor people in India and poor people in emerging markets can ’ t afford to buy this power , whether it is LNG or coal .” n
Montel Magazine 3 – 2021