Gas and power market analysis - August 2020 - BP

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Gas and power market analysis
August 2020
Disclaimer
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                                                       Confidential                                            2
Market Summary
The NBP Month Ahead contract averaged $1.40/MMBtu in May, its lowest level in over
15 years (NBP: €4.50/MWh, 12p/th).
Robust imports and slow demand recovery has resulted in record seasonal storage levels,
supressing prices:
Demand recovery: Although COVID-19 related control measures are easing globally,
various restrictions remain in place, limiting demand recovery:
   − LNG imports in several countries begin recovery, but have remained low as
     pandemic related restrictions reduce energy demand. This has compounded an
     already well supplied situation and US LNG exports have dropped.
   − Across Europe power demand and industrial demand for gas have started to
     recover as control measures aimed at limiting the spread of the coronavirus are
     lifted.
• European pipeline flows soften: Russia pipeline flows to Europe were down 19% in
  June relative to the same time last year, driving a decrease in European pipeline flows.
• Record seasonal storage levels: European gas storage levels have been above historic
  levels since mid-2019 and have remained high throughout 1H20.

                                                                                Source: BP Analysis   3
Gas prices reach historic lows in 2Q20
  • NBP, TTF and JKM reached historic lows in May-20, with the monthly average price ~65% lower than Dec-19.
  • TTF averaged $1.8/MMBtu in 2Q20, down 60% YoY.
  • The drop in prices comes against a backdrop of strong gas supplies, record high storage levels, and weak demand
    due to the spread of COVID-19.

Global gas benchmarks                                           European gas benchmarks
$/mmbtu                                                         €/MWh
                                                                30
14

12

10                                                              20

 8

 6
                                                                10

 4

 2

                                                                 0
 0
                                                                     2015       2016       2017        2018         2019        2020
  2015            2017     2019     2021          2023   2025
                                                                            PEG           PSV        PVB           NBP           TTF
          European coal switching    Oil parity
                                                                      PEG = French gas
          HH                         JKM                              PSV = Italian gas
                                                                      PVB = Spanish gas
          NBP                        TTF                              NBP = British gas
Futures as of 21/07/2020                                              TTF = Dutch gas           Source: NYMEX, ICE, Heren, S&P Global Platts ®   4
As gas prices stay low, US producers shut-in LNG
• Reports indicate various LNG shipments from US terminals have been cancelled during June and July 2020 as
  low gas prices make shipping the LNG uneconomic.
• LNG exports from the US in June were less than 50% of nameplate capacity.

US LNG exports & export capacity                                             LNG costs vs global gas benchmarks
Mt/month                                                                     $/MMBtu

7
                                                                              12

6
                                                                              10

5
                                                                               8
4

                                                                               6
3

                                                                               4
2

1                                                                              2

0                                                                              0
    Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20          Jan-18 Apr-18      Jul-18   Oct-18 Jan-19 Apr-19           Jul-19   Oct-19 Jan-20 Apr-20

                         LNG exports         Export capacity                              Other costs - lower bound                      JKM                 NBP               TTF

                                                                                   LNG cost calculated as:
                                                                                   Henry Hub front month price + costs (fuel costs, regasification, shipping, entry charges)
                                                                                   Note: This does not include a tolling fee cost.

                                                                       Confidential   Source: BP Analysis, Wood Mackensie, NYMEX, ICE, Heren, S&P Global Platts ®                    5
Global LNG deliveries begin recovery
• Global LNG deliveries (excluding Europe) fell 9% YoY in Apr-20, following weak demand due to the spread of COVID-
  19 and subsequent containment measures.
• Demand has started to recover towards the end of 2Q20 as countries ease COVID-19 containment measures.
• Although global deliveries (excluding Europe) have recovered over 2Q20, Jun-20 deliveries are still 6% down YoY.

Global LNG deliveries excluding Europe
bcfd

45

40

35

30

25

20

15

10

5

0
     Jan               Feb                   Mar                           Apr           May                      Jun

                                                     2019           2020

                                                     Confidential                                      Source: BP Analysis   6
LNG send-outs fall as low prices curtail global supply
• LNG send-outs have fallen as European storage levels have hit historic highs, reducing European LNG demand.
  Combined with reduced global supply, this has led to fewer exports to Europe.
• Despite falling to ~220mcm/d in Jun-20, monthly European LNG send-outs remained high.

Monthly European LNG send-outs
mcm/d
400

350

300

250

200

150

100

 50

  0
   2011       2012       2013            2014         2015             2016              2017             2018             2019             2020
                  UK    France   Italy      Spain     Netherlands          Belgium         Lithuania        Poland        Portugal

                                  N.B. data does not incorporate all regasification facilities in Europe, but rather can be used as a proxy for LNG send-outs
                                                                                                                              Source: Official TSO Statistics   7
European gas & power demand recovers
 • As COVID-19 control measures ease across Europe, gas and power demand has started to recover.
 • As the pandemic spread, energy demand fell as industry and working practices changed.
 • Italy and Spain introduced control measures in March, and relaxed them in June, as represented by dashed lines on
   the graph.

Spain power demand                                                    Italy industrial gas demand
                                                                    mcm/d
GW/d
800                                                                 50

700

                                                                    40
600

500
                                                                    30

400

300
                                                                    20

200

100                                                                 10

 0

                                                                     0
                                                                     1-Mar 15-Mar29-Mar 12-Apr 26-Apr10-May24-May 7-Jun 21-Jun 5-Jul

                                              Graph dates refer to 2020 and 2019 data has been aligned to match weeks   Source: SNAM, ENTSO-E   8
EU-27 renewable generation exceeds fossil fuels, as
       global capacity continues to grow
        • During 1H20, renewable electricity generation exceeded fossil fuel generation in the EU-27 for the first time, with
          renewables growing 11% and fossil fuel generation falling 18% YoY.
        • According to the bp Statistical Review of World Energy 2020, the share of global electricity generation from wind,
          solar and other renewable sources reached 10% in 2019, up from 9% in 2018.
        • Solar and wind electricity generation grew 24% and 13% respectively in 2019, to a combined total of 2150TWh.

Global Solar power generation                     Global Wind power generation                                  Electricity generation by fuel
TWh                                                TWh                                                            Other, 1%                                          Oil, 3%
800
                                                  1600
                                                                                                                                        Renewables*,
                                                                                                                                            10%
                                                  1400                                                                                     Nuclear
                                                                                                                                         energy, 10%
600                                               1200
                                                                                                                                        Hydro electric,
                                                                                                                                            16%
                                                  1000

400                                                 800                                                                                  Natural Gas,
                                                                                                                                            23%

                                                    600

200                                                 400
                                                                                                                                           Coal, 36%
                                                    200

 0                                                    0
      2005 2007 2009 2011 2013 2015 2017 2019             2005 2007 2009 2011 2013 2015 2017 2019                                             2019
         North America                South & Central America            Europe
         Asia Pacific                 Middle East                        Africa
         CIS                          Total   N.B. * Renewables includes electricity generated from wind, solar, geothermal, biomass and other sources of renewable energy.
                                                                        Confidential                                                                                           9
                                                                                                  Source: bp Statistical Review of World Energy 2020, Ember, ENTSO-E
Carbon prices reach 14-year highs
• EUA prices have risen during 2Q20 and reached €30/tonne of CO₂ for the first time in 14 years on 13th July 2020.
• EUA monthly average pricing was €20 in Apr-20 and €23 in Jun-20, a rise of €3 over 2Q20. As of 22nd July, the
  monthly average price for Jul-20 is €28.
• The UK will leave the EU Emissions Trading Scheme (ETS) on 1st January 2021 as the Brexit transition period
  ends. A UK ETS will be formed to replace the EU system.

EUA carbon futures
€/tonne of CO₂

30

25

20

15

10

5

0
 2017                            2018                            2019                            2020

                                                                                                               Source: ICE   10
European pipeline flows soften further
         • Total European flows for 2Q20 averaged 170 mcm/d lower than in 2Q19, driven by decreased Russian flows.
         • On 01-Jan-20, European pipeline flows from Russia fell, and have not recovered to 2019 highs.
         • Average Russian daily pipeline imports to Europe in Jun-20 were 390 mcm/d, 90 mcm/d lower than Jun-19.

 Europe pipeline imports
 Total                                                                                            Russia
mcm/d                                                                                              mcm/d
1000
                                                                                                   500
  900

  800                                                                                              400

  700
                                                                                                   300
  600

  500                                                                                              200
        Jan   Feb    Mar     Apr    May     Jun     Jul    Aug     Sep     Oct    Nov     Dec            Jan   Feb    Mar   Apr   May    Jun   Jul   Aug    Sep     Oct     Nov    Dec

 Norway                                                                                           Algeria
mcm/d                                                                                            mcm/d
                                                                                                  150
 350

                                                                                                  100

 250
                                                                                                   50

 150                                                                                                0
       Jan    Feb   Mar     Apr     May     Jun     Jul    Aug     Sep     Oct    Nov     Dec           Jan    Feb    Mar   Apr   May    Jun   Jul   Aug    Sep     Oct    Nov     Dec
                                                           2016               2017               2018                2019         2020
Total flows are from Russia, Norway, Algeria & Libya; Russia flows are to Central and Western Europe only                                            Source: Official TSO Statistics   11
European gas inventories remain significantly above
seasonal norms
• Robust pipeline imports and record high LNG deliveries in 2019, combined with a warm 2019-2020 winter saw
  European storages end 1Q20 at historically high levels for the time of year.
• Storage levels have remained high in 2Q20. European gas inventories were 9 bcm, or ~10% higher at the beginning of
  Jul-20 compared to the same time last year.

European GIE storage
bcm
125

100

 75

 50

 25

  0
      Jan   Feb      Mar      Apr       May            Jun            Jul           Aug            Sep            Oct           Nov            Dec

            11-15 Range             2016                      2017                       2018                       2019                       2020

                                    N.B. data from GIE does not incorporate all storage facilities in each country, but rather can be used as a proxy for total storage
                                                                                                                                  Source: Gas Infrastructure Europe       12
Seasonally high European storage levels
      France, Italy and Spain in particular have sustained high inventories.

Germany                                                                        France
bcm                                                                             bcm
25                                                                              15
20
                                                                                10
15
10                                                                               5
 5
 0                                                                               0
   Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec                                   Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
 Italy                                                                           UK
bcm                                                                              bcm
20                                                                               6

15                                                                               4

10                                                                               2

 5                                                                               0
     Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec                                 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
 Netherlands                                                                    Spain
bcm                                                                               bcm
15
                                                                                 3
10
                                                                                 2
 5                                                                               1

 0                                                                               0
     Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec                                 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
               11-15 Range          2016          2017                                       2018           2019            2020
                                           N.B. data from GIE does not incorporate all storage facilities in each country, but rather can be used as a proxy for total storage
                                                                    Confidential                                                         Source: Gas Infrastructure Europe       13
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