The Unstoppable Rise Of European Power Prices

1. Recession Could Soon Become Reality

- Despite recent attempts to redefine the concept of economic recession, economic data firmly points to the inevitability of one amidst soaring inflation, weakening manufacturing, and generally worsening purchasing power.

- Going back into history, the US economy has always experienced a recession within two years of every quarter when inflation was above 4% and unemployment was below 5%, and even the IMF questioned the narrative of the global economy avoiding one this time around.

- Usually a rock-solid recession litmus test, US Treasury yield curves have inverted and the spread between 2-year and 10-year bond yields hovers around -20 bps, the most inverted since 2000.

- The IMF expects that global growth could slow to 2% next year, a level effectively amounting to a recession given underlying population growth.

2. European Power Prices Go Haywire

- The decommissioning of another turbine at Gazprom’s Portovaya compressor station has brought Nord Stream 1 pipeline gas flows to some 20% of nameplate capacity, sending European gas and power prices soaring.

- Even if the much-talked-about turbine does arrive in Russia, it seems that Gazprom will not be pumping gas at a rate higher than 40%, implying the squeeze will be long-term.

- German power contracts have soared to record highs this week, with the baseload Q4 contract hovering around €475 per MWh, with the year-ahead price trending between €350-370 per MWh.

- Month-ahead prices of Europe’s main spot gas contract, the Dutch TTF, spiked this Wednesday at €205 per MWh (equivalent to $67 per mmBtu), an all-time high.

3. Iraqi Export Hike Delayed by Construction Setbacks

- Iraq has been long looking to expand its loading capacity in southern ports but delays to a pumping station project initially assumed to start in Q2 will keep maximum export levels at their current level of 3.3 million b/d.

- Moreover, the deterioration of two sea lines feeding jetties from the Basrah terminal has been hampering a long-mooted ramp up in exports, with pump rates down 25% compared to previous loading levels.

- Repairing the aging sea lines would take approximately two years, bringing the total capacity of Basrah jetties to 2 million b/d, potentially lifting export capacity above 4 million b/d.

- According to Platts data, Iraqi oil production stood at 4.38 million b/d in June including output from Kurdistan, the total being more than 100,000 b/d below the 4.509 million b/d target for the same month.

4. Japan Confronts Uneasy Nuclear Relationship

- Power generation from nuclear power plants in Japan totaled just 4 GW in Q2 2022, but nuclear’s prospects are looking rosier as several units will return from maintenance next quarter.

- 2023 might see the grand restart of the once-powerful industry in Japan, with three nuclear reactors set for a restart after a lengthy 12-year hiatus, almost tripling current levels of generation by Q4 2023.

- With coal trading at $250/mt and LNG not falling below $24/mmBtu throughout the summer months so far, Japanese power generating firms have started buying light sweet Vietnamese crudes for power generation.

- In the meantime, Japan’s nuclear regulator approved the release of treated radioactive wastewater from the Fukushima nuclear plant into the sea next year, having gone through a public review process.

5. Europe’s New Taxonomy Creates Challenges of Its Own

- The new energy taxonomy of the European Union – a system that classifies sustainable investment in the EU – is supportive of new nuclear power capacity whilst keeping gas “green” enough will be tricky, writes Rystad Energy.

- The EU taxonomy sets a direct emissions limit of 270 g CO2e/kWh for new gas power plants, implying gas would need to rely on abatement technologies such as CCS which are not yet market-ready.

- New gas plants are only allowed if they are to replace existing coal capacity, with Rystad expecting that some 45 GW of coal plants will be shut down in the EU between 2026 and 2031, replaced by more than 51 GW of natural gas.

- Europe’s nuclear fleet is set to see a net generation loss of almost 22 GW by 2035, driven by a hefty 48 GW of capacity that is set to be decommissioned, and the expectation is that the new autonomy can at best bring the rate of capacity losses to zero.

6. Exxon Just Cannot Stop Finding New Oil in Guyana

- Not producing a single barrel of oil before 2019, the offshore waters of Guyana have experienced a production bonanza as US major ExxonMobil has ramped up production at the Stabroek block to 360,000 b/d.

- Whilst discoveries at Stabroek have already totaled more than 11 billion barrels in recoverable oil reserves, the Exxon-led consortium operating the block added two new discoveries this week.

- Both the Seabob and Kiru Kiru expanded previous resource estimates for the Yellowtail and Cataback fields, respectively, encountering high-quality sandstone reservoirs with 30-40m of net oil pay.

- Boosting previous plans by 200,000 b/d, Exxon now expects to produce 1.2 million boed offshore Guyana, coming from at least six FPSOs (currently there are only two).

7. The Middle East Gauges its CCUS Capabilities

- The Middle East might become the world’s leading region to capture carbon dioxide, with market participants forecasting that the regional market could grow to 50 mtpa in a decade.

- The world’s leading oil producers, Saudi Arabia and the UAE already account for 10% of global annual CO2 capture, at 3.7 mtpa, mostly coming from use in enhanced oil recovery.

- There have been increasing numbers of pilot projects focusing on capturing CO2 in flue gas from fossil-fuelled power plants, with coal plants having as much as 15% of CO2 in their exhausts.

- Throughout the 2020s, North America and Europe are set to dominate the carbon capture and storage market, buoyed by the former’s new CCUS tax credits and the latter’s increasingly tightening carbon market.