Weekly Overview: Oil Indexation, More Financials and Gas-Fired Power
News of another gas contract renegotiation surfaced this week, with the buyer, the Danish marketer Dong, having successfully claimed over $500mn in refunds from one or more of a range of suppliers, including the Danish Undergound Consortium, Russian Gazprom and Hess. Local press however identified Gazprom as the counterparty in talks earlier in the spring. Most of the lump-sum amounts were paid out in first half 2016, said Dong, with the remainder due later this year.
With hub trading in northwest Europe so extensive, there cannot be many contracts in the region linked to oil that might need to be indexed off gas instead. Dong buys 2bn m³/yr from Gazprom in two contracts and at the time the contracts were signed, oil indexation was still the norm. Nord Stream was the means and the Denmark-Germany border the transfer point. Indications from Dong are that this has either been re-indexed to hub pricing, or soon will be, as it refers to unwinding oil hedges.
But as well as indexing gas contracts to hubs, Gazprom is in other cases solving the problem by lowering the base price so that the new price better reflects gas market conditions – at least in the early stages.
The last few reported arbitration results have gone the seller's way, with Dutch GasTerra and Gazprom announcing that they were justified in extracting the price charged to Italian Eni and Lithuania's Lietuvos Dujos respectively. So there are risks to mounting legal challenges to the contract price, even in today's oversupplied gas market, although Eni is not taking the defeat lying down.
Dong's victory emerged from its 2Q results, the tail-end of the reporting season that was dominated by red ink as companies struggled against the headwinds of weak demand and rising debts, with a few bright spots on the horizon. Among them was news of Indonesian state-owned Pertamina deciding to take an African position with a bid for French independent explorer Maurel & Prom. There was also a big crop of bidders for gas-prone blocks offshore Cyprus in the island's third round with Exxon and Qatar Petroleum teaming up for a joint bid in one block, Eni bidding for all three blocks, and Statoil and Cairn also in the running.
The UK refused to be bounced into an early approval of the French-Chinese investment at Hinkley Point C, a decision that at least admits the possibility that it will not be approved as the government seeks to draw a line under the past. There are a number of possible grounds for concern, including the very high price of the electricity that is sold – relative to where the wholesale price is today – and the prospect of a financially-crippled EDF either leaving an ugly building site or needing to be bailed out by its Chinese partners, effectively putting 7% of UK power output under the ownership of the Chinese communist party. UK prime minister Theresa May also raised security concerns about Chinese involvement at Hinkley Point in her previous job as interior minister.
China's dismissive attitude to the UN court ruling on its activities in island-building and land grabs in the South China Sea, and its human rights record at home, could be reasons for the UK to take a more arms-length relationship than that advocated by the last finance minister, George Osborne, whom May found 'gung-ho' where Chinese investment is concerned. Osborne is now in the political wilderness. The decision is now due early autumn, when the secretary of state for energy, Greg Clark, has combed through the reputed 90,000 pages.
Building gas-fired plant instead would be a quicker, cheaper and less controversial way of filling the UK's supply gap, with a multitude of traders able to deliver gas to the network by pipeline or LNG tanker at a much lower price than that implied by Hinkley Point C's £92.50/MWh. Carbon emissions would be higher with gas than the zero obtained at point of generation from nuclear – absent a sufficiently high carbon price to make carbon capture and storage work – but the decommissioning would be cheaper and safer. But the government may be watchful of gas’s share of generation -- which in 1Q 2016 reached 38%, half as much again as a year ago, as coal plants were retired – rising too steeply.
Not all countries are anxious about capping gas in power generation. Malta is anxious to start LNG imports and a new floating storage facility will arrive there next month. The island is now commissioning a modern gas-fired plant to wean itself off dirtier diesel-burning power plants. Malta and Cyprus are the only two EU states without access to natural gas – but that won’t continue for long.
William Powell