December 9, 2022

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EU Gas Cap Deal No Closer Ahead of Council Meeting

EU member states are no closer to reaching an agreement on capping wholesale gas prices ahead of next week’s European Council meeting, sources told Energy Intelligence on Friday.

The Netherlands and Czech Republic have this week pitched fresh proposals in a bid to end months of political deadlock over capping gas prices, however the various proposals could cause more headaches than provide a solution at the Dec. 13 meeting.

Balancing Proposals

The Dutch government, which has opposed capping gas prices, on Monday proposed price caps for government-owned or state-supported gas buyers.

The proposal, seen by Energy Intelligence, suggests the record gas prices Europe experienced in August was due to government-backed companies buying gas to fill storage sites ahead of winter.

The “dynamic low price cap” would prevent government-backed buyers from bidding too much for gas, the Dutch government suggests.

“It could apply to both the buying and (future) selling transactions of these parties and therefore could include their purchases and sales at the spot/(Dutch benchmark) TTF month ahead/(over the counter) OTC or other markets,” according to the document.

The document did not disclose at what price the cap would be triggered, however it does state that the cap would be reviewed each month.

A day after the Dutch pitched their alternative cap plan, the Czech Republic, holding the EU presidency, unveiled a plan to cap prices if they exceed €220/MWh ($67/MMBtu) for five days on the front-month TTF contract, and exceed an international LNG reference price by at least €35 for five consecutive days.

In comparison, the European Commission's price cap proposal in November, deemed by market players as a largely symbolic measure, would cap prices if the TTF front-month contract remained above €275/MWh for two weeks and exceeded a global LNG reference price of €58 for 10 consecutive days.

The Czech government’s proposal was discussed by EU diplomats on Wednesday, however sources told Energy Intelligence that no agreement has been reached.

“There are two opposing camps. The current proposal is still not enough for the pro-camp. The opposing camp has suggestions to improve the current proposal but I think that it’s rather a 'gesture of constructivity' than a real change of hearts. I expect a heated debate on Tuesday,” one Central European diplomat told Energy Intelligence.

One European diplomat in favor of a strong price cap told Energy Intelligence that there is “no final agreement yet.” Asked whether an agreement is closer compared to two weeks ago, the source said: “I hope so. But will not be sure till Dec. 13.”

Commercial Opposition

In the run-up to the council meeting on Tuesday, the Intercontinental Exchange (ICE), host of TTF trading, and the European Central Bank (ECB) both warned capping gas prices could, in fact, drive prices higher and in turn risk financial stability.

In a memo sent to the European Commission, ICE warns that a cap will impact the flow of liquidity to utilities and energy firms to enable them to hedge exposure to future gas prices. These firms will likely turn to uncapped OTC markets, which tend to be more expensive and volatile, according to the exchange operator.

“Greater reliance on OTC markets for gas trading leads to higher risks that counterparties default and energy firms require government support,” the memo, seen by Energy Intelligence, states.

The ECB published a formal opinion on Thursday, warning that the commission’s market correction mechanism in its current form risks “financial stability in the euro area.”

"The mechanism's current design may increase volatility and related margin calls, challenge central counterparties' ability to manage financial risks, and may also incentivize migration from trading venues to the non-centrally cleared over-the-counter market.”

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact

Eric Thorp, London

TotalEnergies Takes $3.7B Write-Down on Novatek

TotalEnergies said on Friday it would write down $3.7 billion on its 19.4% stake in Novatek after deciding to no longer recognize its shareholding in the Russian gas independent on its books.

The decision, which will also see Total withdraw its two directors on the board of Novatek, will slash the size of the French major's proved hydrocarbon reserves by around 1.7 billion barrels of oil equivalent, or close to 14% of its total.

It was made after Total's own board determined that Western sanctions on Russia were ultimately preventing its criteria for “significant influence” over an investment from being met. The impairment will be recorded in the fourth quarter, a Total statement said.

Major Holdout

In the wake of Russia's February invasion of Ukraine, Total in March said it would no longer provide capital for new projects in Russia.

But, unlike many of its fellow majors such as Shell and Exxon Mobil, the company stopped short of announcing its intent to exit the country completely.

CEO Patrick Pouyanne has argued that Total’s LNG-focused interests in Russia helped bring vital gas supplies into Europe and are subject to any sanctions.

Russia has been a strategic region for Total, especially in LNG. It accounted for 496,000 barrels of oil equivalent per day of the company's production, or more than one-sixth of Total’s global oil and gas output, in 2021.

Total, the second-biggest Western LNG portfolio player, has stakes in two major Russian liquefaction projects alongside Novatek, including 20% of the 19.8 million ton per year Yamal LNG, which shipped its first cargo in late 2017; and 10% of Arctic LNG 2, where the first train is expected on line next year but which faces an uncertain future due to EU technology sanctions.

A Tough Sell

Even if Total had opted for an immediate exit from Russia, divesting the 19.4% in Novatek would have been a hard task, as BP is discovering over its 19.75% holding in Rosneft.

A decree from Russian President Vladimir Putin requires his approval for the sale of any assets deemed strategic to the state through the end of next year.

Further, Total noted it could not sell the stake given prevailing shareholders’ agreements. It is forbidden for Total to sell any asset to one of Novatek’s main shareholders who is under sanctions, it said.

One of these, Novatek founder and CEO Leonid Mikhelson, is under sanctions in the UK, while the other, Gennady Timchenko, is blacklisted in the UK, EU and US.

Furthermore, Total said its two directors on the Novatek board — Arnaud Le Foll and Dominique Marion — were encouraged to abstain from voting in Novatek board meetings due to European sanctions, especially on financial matters.

“They are therefore no longer in a position to fully carry out their duties on the board, which might become an issue for the governance of this company,” the French major said, adding they have been withdrawn with immediate effect.

Pressure Builds

Total, which had faced criticism over its decision to initially stay the course in Russia, pulled out of the Kharyaga oil field in July, transferring is 20% stake to state-run partner Zarubezhneft.

Then, in August, it sold its 49% stake in the Terneftegas natural gas joint venture to Novatek. That followed allegations — which Total categorically denied — that condensate from the Termokarstovoye field developed by Terneftegas was being refined into jet fuel for the Russian military.

In September, Pouyanne told investors that "fundamentally, we don’t think our future's with Russia," as Total puts a greater focus on LNG and renewable power in the US.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact >

Tom Daly, London


In Brief

Spain-France Pipe Plans Shift to Carry Only Hydrogen

Spain, France and Portugal have dropped plans to transport natural gas on a proposed hydrogen pipeline connecting the Iberian Peninsula and France. The new plan calls for the pipeline to transport renewable hydrogen only to allow it to be eligible for EU funds.

The newly dubbed “H2Med” replaces the “BarMar” project first proposed in October by the three countries, a project which itself sought to replace the long-stalled MidCat onshore natural gas pipeline crossing the Pyrenees. The new plan was announced during a meeting between the leaders of the three countries and European Commission President Ursula von der Leyen in Alicante, Spain.

H2Med will consist of a 455-km offshore line between Barcelona in Spain and Marseille in France costing around €2.5 billion ($2.63 billion). A second 248-km, €350 million onshore line is also planned between Portugal and Spain as part of the larger project.

Spanish Prime Minister Pedro Sanchez said the project is to be completed by the end of the decade and is expected to transport 10% of the EU’s 2030 hydrogen consumption, or 2 million tons per year.

The final cost of the project still depends on the parties involved and how much it would receive in European funds, a Spanish environment ministry source told Energy Intelligence.

The countries will present H2Med’s application as a Project of Common Interest on Dec. 15, which would make it eligible for EU funds.

The EU wants to produce some 10 million tons of renewable hydrogen by 2030 and import an additional 10 million tons by the same date, as part of its REPowerEU plans.
Jaime Concha, Copenhagen

Another Section of Russia-China Pipeline Goes into Operation

The Tai’an-Taixing section of the China-Russia east-route natural gas pipeline went into operation this week.

According to PipeChina, the section can be connected to China’s West-East gas pipeline in Taixing, Jiangsu province, thus allowing gas from Russia to reach Shanghai.

The Tai'an-Taixing section, which belongs to China-Russia east-route southern section, has a total length of 750 kilometers and a designed annual gas transmission capacity of 18.9 billion cubic meters. It can enhance the gas supply capacity of the Yangtze River Delta region by about 50 million cubic meters per day.

The China-Russia east-route natural gas pipeline starts from Heihe in Heilongjiang, divided into the northern section (Heihe-Changling), the middle section (Changling-Yongqing) and the southern section (Yongqing-Shanghai). The northern section and the middle section have been put into operation in 2019 and 2020 respectively. In September this year, the southern section from Yongqing to Tai'an was put into operation.

This week, the key tunnel of the China-Russia east-route natural gas pipeline across the Yangtze River was completed.

Up to now, over 28 billion cubic meters of natural gas have been delivered on the pipeline.
Staff Reports

Woodside, Baker Hughes in MOU to Reduce Emissions

Baker Hughes and Woodside Energy have signed a memorandum of understanding (MOU) to explore ways to potentially decarbonize the Australian independent’s natural gas operations.

Under the MOU, the companies would “explore potential business arrangements and initiatives” that can support Woodside’s climate strategy or its customers’ chosen decarbonization pathways.

The companies aim to “identify projects for potential collaboration” in Australia, Asia and the US, including Karratha Gas, Pluto LNG 2 and Angel CCS.

Specific Baker Hughes technologies that could be deployed include: lower-carbon solutions such as hydrogen and ammonia, electrification and NET Power technology; emissions detection, measurement and abatement; carbon capture and storage, including CO2 compression, offshore flexible flowline technology and corrosion inhibitors.

Baker Hughes and Woodside have long worked together on gas and LNG projects, including the recent award to the services firm to provide equipment for the expansion of Woodside’s Pluto LNG onshore processing facility in Western Australia.

“Collaboration is key to making progress toward emissions-reductions goals in the energy transition, and we are pleased to be working alongside our long-time customer Woodside to help them further their own climate change strategy," said Baker Hughes CEO Lorenzo Simonelli.
Luke Johnson, Houston


Data Snapshot

LNG Netbacks at Key Receiving Terminals

LNG Exporter Netbacks Between Key Receiving Ports
($/MMBtu)AlgeriaAustralia WestAustralia EastMalaysiaNigeriaNorwayOmanPeruQatarRussiaTrinidadUS GulfUS East Coast
Dahej, India26.1326.6026.1326.6025.6625.5127.1625.0227.0626.1925.3224.9925.39
Sodegaura, Japan26.6128.2028.2228.3426.5122.3827.7525.1827.6028.7525.6624.6026.73
Zeebrugge, Belgium46.8744.7344.1644.8546.2046.6545.7344.1845.5644.2246.3445.0846.46
Huelva, Spain31.7929.8729.3729.9831.1530.8930.7629.2630.6229.4131.2129.9731.22
Isle of Grain, UK41.9139.8139.2639.9341.2941.6940.9439.2940.6439.3241.4040.1741.51
Everett, US4.382.602.992.704.033.840.013.553.302.184.62----
Created with Highcharts 9.0.0($/MMBtu)QATAR TO NORTHEAST ASIANetbackNetback4. Jul18. Jul1. Aug15. Aug29. Aug12. Sep26. Sep10. Oct24. Oct7. Nov21. Nov5. Dec10203040506070Energy Intelligence

LNG Market Indicators

Spot LNG Pricing
Latest WGIDailyDaily Chg.Chg. From Latest WGI
NE Asia30.0029.51-0.01-0.49
SW Europe31.4032.460.611.06
Futures Pricing
($/MMBtu)Chg.LatestPreviousWeek Ago
Henry Hub, US (futures)0.286.255.966.28
NBP, UK (futures)-0.4542.3342.7841.15
European Spot Pricing
Chg.LatestPreviousWeek Ago
Dutch TTF1.0643.2742.2041.00
Zeebrugge (Belgium)--------
German NCG-0.2239.0239.2436.95
NBP (UK)0.6142.8342.2239.16
US Markets
US Spot Prices
Sabine Pass, Louisiana0.245.004.764.82
Corpus Christi, Texas----0.004.39
Cove Point, Maryland0.315.264.955.22
Elba Island, Georgia--------
Nymex Henry Hub Futures
Near Month0.286.255.966.28
Second Mth0.266.085.826.17
Third Mth0.215.575.365.58
Created with Highcharts 9.0.0($/MMBtu)GLOBAL GAS PRICINGUS NymexDutch TTFNE AsiaJan '22Feb '22Mar '22Apr '22May '22Jun '22Jul '22Aug '22Sep '22Oct '22Nov '22Dec '220255075100125Energy Intelligence