09
May
2023

‘LNG alone cannot solve the problem of Europe’s security of supply’: Axpo Solutions

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Marco Saalfrank heads the continental Europe merchant trading division at Axpo Solutions, the sales subsidiary of Swiss-based energy provider Axpo. In this interview with LNG Business Review, which took place at the sidelines of the Flame gas and LNG industry event in Amsterdam earlier this month, he reflects on what has been a momentous year for the energy industry – a period that has seen Europe shed its ‘sink’ label and become a key demand driver in the global LNG market. At the same time, Europe’s energy landscape is still characterised by an unprecedented level of uncertainty, making it challenging to predict how the next winter will pan out, Saalfrank stresses.

Fragile situation

Saalfrank joined Axpo, which until 2012 was known as EGL, in 2001 and has since held a number of positions in the trading department of the company. But despite having over 20 years of experience in the energy sector, the repercussions of Russia’s invasion of Ukraine in February last year have made it “very difficult to make forecasts,” he admits. “The reduction in Russian gas flows has brought Europe to a situation never seen before.”

With Europe in urgent need of finding alternatives to Russian pipeline gas, “LNG was the clear option – but LNG alone cannot solve the problem” of its security of energy supply, he warns. While the continent’s energy sector managed to survive last winter with minimal disruption, this was in part achieved through “severe demand destruction. That demand is currently not coming back as before – that’s why Europe is doing well at the moment.” However, “the situation has become more tight and more fragile, and we’re exposed to global events related to Europe, but also globally,” he adds.

Europe will most probably not go in the direction of buying oil-indexed LNG.

“What is happening in Asia and in the US is having a bigger influence on prices in Europe. Most probably this will remain the case up to 2025-26 when more liquefaction projects, for example in the US, Russia and Qatar, will come on stream. Up to then the LNG market will remain tight and in competition with Asia.”

At the same time European buyers appear unwilling to commit to long-term contracts which some observers see as necessary to avoid the extreme price swings of the past 12 months. According to Saalfrank, Axpo does not anticipate a run towards long-term LNG contracts in Europe “as there are too many risks,” such as the EU’s Fit For 55 package that calls for a decisive push towards more renewable investments and a progressive shift away from fossil fuels, including natural gas.

“This will inevitably lead to a reduction in gas-fired production,” with the gas fleet being relied on mostly for balancing purposes, he says.

Supporting the green trend

Against this backdrop, Axpo has a long-term view to diversify away from natural gas.

In Switzerland, where around 60% of the electricity produced comes from hydropower, it is already the largest renewable energy producer through its hydro, wind, solar and biomass assets. By 2030, it aims to have 1.2 GW of solar capacity in place in the Alps and residential areas – up from 0.2 GW currently. Together with IWB, the city of Basel’s energy utility, Axpo began operations in August last year at the 2.2-MW AlpinSolar facility, the largest alpine solar plant in Switzerland – a project that Axpo says benefits from reflections off the snow and its location above the fog.

Axpo’s commitments abroad include a 24.1% stake in the 400-MW Global Tech I wind farm offshore Germany’s North Sea coast and the launch of wind power activities in Finland in March. IT is also investing in storage and battery solutions, including in Sweden, where it will build a 20-MW facility, scheduled to be delivered in 2024.

Meanwhile, on 27 January it announced the sale of its 5% share in the Trans Adriatic Pipeline (TAP), which ships gas from the Shah Deniz field in Azerbaijan to Europe, to TAP shareholders Fluxys and Enagás. The sale formed part of Axpo’s “three-pillar business strategy, focusing on our Swiss business, renewable energies and trading [and] origination,” Axpo said at the time – but it stressed that its trading and sales arm Axpo Solutions “will continue to market for the long-term gas volumes secured from the Shah Deniz consortium.”

Axpo continues to develop its renewable energy business through power purchase agreements (PPA) which Saalfrank says reflect a growing trend of supporting the buildout of renewable capacity through this type of deal, with markets shifting away from a subsidy-based model. For example, in April Axpo and Vienna-headquartered chemical firm Borealis signed their second long-term PPA in six months, which in this case involves the supply of power to Borealis from a recently commissioned wind farm in Kröpuln in western Finland from 2024.

“We are a pioneer in PPAs and are inviting European companies to sign long-term agreements to support the green trend,” says Saalfrank.

A ‘hypocritical’ position

Commenting on the rebound in oil-linked long-term contracts agreed on between Asian buyers and US sellers since last year – one of the main topics of discussion at the Flame conference in Amsterdam – Saalfrank says that, though the LNG sector’s winners of last year were sellers who had oil-indexed contracts and sold cargoes on the spot market, Europe, despite its strong appetite for LNG, “will most probably not go in the direction of buying oil-indexed” due to public and legislative pressure to disentangle the continent’s energy markets from fossil fuels.

It’s early to say whether aggregation demand in Europe will work.

According to Saalfrank the reluctance by European buyers to sign long-term LNG import contracts is frustrating producers for whom long-term commitments support the buildout of new export capacity. He argues that flexibility clauses in contracts could play a part in reconciling these two positions, though some exporting countries “are more reluctant to allow redirection clauses,” in contrast with US producers who allow “some degree of flexibility.”

All this leaves European buyers in the somewhat hypocritical position of relying on LNG, which will continue to be produced and find a way to premium markets like Europe if needed, despite decarbonisation targets set by the EU, Saalfrank highlights. And while some countries, such as the UK, have banned vessels carrying Russian LNG from their ports, expectations that Russian gas will continue to find a way into Europe, both as LNG and as pipeline gas, create uncertainty over what level of LNG volumes will continue reaching the continent. Specifically, Russian gas flows are expected to continue through the pipelines that reach Europe via Ukraine and Turkey, though questions linger on whether these links will also see curtailments in the future, says Saalfrank.

Meanwhile, European legislators, under pressure to tackle the spiralling energy costs crisis of the past 15 months, have come up with a series of market interventions aimed at strengthening Europe’s cohesion in purchasing gas while attempting to prevent future excessive price swings. They include launching a joint purchasing programme and a gas price cap that would be triggered in case certain conditions materialise.

“Based on our own analysis, we did not see cases throughout 2022 when the cap would have been triggered as defined by the market correction mechanism” if this scheme had been in place, says Saalfrank. “This is in fact positive,” he adds, echoing growing scepticism on the effectiveness and need for a price cap among market participants and the understanding that LNG volumes would simply find a way to other, more lucrative markets than Europe.

“In 2022 the [wholesale gas] market actually worked well. To cap the wholesale price at a certain level could be suboptimal, if not dangerous.”

And while much focus has been put by European leaders on the joint gas purchasing programme, it is down to market participants to ultimately reach commercial agreements to source the gas: “It’s early to say whether aggregation demand will work – there’s no obligation to enter into a contract [for industry participants].” Saalfrank believes that, most likely, the scheme “will not bring more gas to Europe – it will just be sold in a different way.”

Spot cargoes now account for a fraction of China’s LNG supply.

AggregateEU, the new EU mechanism that enables demand aggregation and joint gas purchasing by European companies, was established on the back of the EU Council’s ‘solidarity regulation’ that was adopted in December 2022 to address the continent’s energy crisis. The regulation obliges, among other things, EU member states to aggregate demand for volumes of gas equivalent to at least 15% of their respective storage filling obligations – though the purchasing of gas by companies remains entirely voluntary.

Both EU and non-EU companies, with the exception of Russian entities, can participate as sellers. The system is managed by the Prisma European trading platform and allows companies to aggregate their gas demand and match it with the most competitive supply offers on the global market.

The first round of demand aggregation and tendering was launched by Prisma on 25 April with tenders due to be held regularly through 2023 against targets for EU member states to fill up their storages to 90% levels by November. EU storage was 61.76% full on 7 May compared to 36.36% full on the same day in 2022.

According to the EU Commission the mechanism should be particularly beneficial for small entities, helping them secure gas at competitive levels by finding new suppliers. Companies from the wider Energy Community, which consists of the EU alongside Albania, Bosnia-Herzegovina, Georgia, Kosovo, Moldova, Montenegro, North Macedonia, Serbia and Ukraine, are allowed to participate.

While Axpo will “support the scheme, buyers will still have to put their bids and find an agreement on conditions and collaterals” with potential sellers, meaning there are no guarantees that the transactions will be concluded and translate into more supplies to countries that need them, says Saalfrank.

Asian rebound

Beyond Europe’s shores, all eyes are on Asia and whether gas demand there will recover, leading to the return of fierce competition with Europe – as observed a number of times since the start of 2021 – to secure LNG cargoes.

Unlike Europe, “south-east Asia does not have a diversified procurement strategy, through production, pipeline and storage gas,” Saalfrank notes. “So far they have focused on long-term contracts, while China has been reducing its exposure to the spot market in the past year, and spot cargoes now account for a fraction of its LNG supply.”

According to Saalfrank, different scenarios show that China’s post-lockdown economy will be “doing well this year. It could be that in the future there’s an increase in demand again and China will have to have more gas and looking to diversify their procurement through more LNG purchases,” he concludes. - BB

Contact the editor:

Kostya Tsolakis
[email protected]

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