- Fears of a strike in Australia, the world’s largest exporter of liquefied natural gas (LNG), have recently pushed up European gas prices – and analysts expect volatility to continue in the near term.
- “There is so little flexibility in the market that the slightest provocation will result in big price changes,” said Jacob Mandel, senior research fellow for global energy markets at Aurora Energy Research.
- The sharp price swings in energy markets in recent weeks come as the euro zone continues to distance itself from Russian fossil fuel exports following the Kremlin’s large-scale invasion of Ukraine.
Liquefied natural gas (LNG) storage units at the Grain LNG import terminal, operated by National Grid Plc, on the Isle of Grain on August 22, 2022 in Rochester, England.
Dan Kitwood | Getty Images News | Getty Images
The looming threat of strikes at Australian natural gas facilities will keep global gas markets on edge, energy analysts told CNBC. Traders fear a prolonged production halt could tighten global supplies and drive up European prices.
US energy giant Chevron and unions representing workers at the Gorgon and Wheatstone projects in Western Australia are holding daily talks this week to reach agreement on wages and job security. The Fair Work Commission, Australia’s independent industrial relations tribunal, is mediating the discussions between the two sides.
If no agreement can be reached, the strikes are scheduled to begin at 6 a.m. local time on Thursday. The long-running dispute escalated further on Tuesday when a union alliance announced plans for a two-week strike starting September 14.
“In response to chevrons [duplicitous] When we claim that our EBA negotiations are “unresolvable”, the Offshore Alliance expands protected industrial action [demonstrate] that our collective bargaining is anything but ‘stubborn,'” the Offshore Alliance said in a Facebook post.
“Offshore Alliance members have yet to exercise their legal workplace rights to take protected industrial action and our bargaining claims will appear increasingly reasonable as Chevron’s LNG exports from Gorgon and Wheatstone dry up.”
In response, a Chevron Australia spokesperson told CNBC: “We are attempting to narrow the disagreement with Gorgon and Wheatstone downstream employees and their representatives through further negotiations mediated by the Fair Work Commission.”
There is so little flexibility in the market that the slightest provocation can result in major price changes.
Jacob Mandel
Senior Research Associate for Global Energy Markets at Aurora Energy Research
Strike fears in Australia, one of the world’s largest exporters of liquefied natural gas (LNG), have recently pushed up European gas prices – and analysts expect near-term volatility to continue.
Jacob Mandel, senior research fellow for global energy markets at British consultancy Aurora Energy Research, said the global natural gas market is currently “very tight” and “very little supply flexibility” means strikes in Australia could drive up European gas prices.
“Prices have basically changed quite significantly based on small pieces of news about what happened with these two facilities, because there is so little flexibility in the market that the slightest provocation will result in big price changes,” Mandel told via video conference CNBC.
He said European gas prices could rise to more than 40 euros ($42.9) per megawatt hour if the strikes go ahead as planned. The first-month gas price at the Dutch Hub Title Transfer Facility (TTF), a European benchmark for natural gas trading, traded at 33.5 euros on Tuesday.
The TTF contract rose sharply to around 43 euros last month. However, TTF prices have now fallen and remain well below the extraordinary increase last summer to over 300 euros.
“I think it’s extremely unlikely that prices will get anywhere close to where they were last September, where they reached these huge record highs,” Mandel said. “Prices reached these highs under exceptional circumstances that could theoretically have been repeated. However, in Europe we have taken many measures that could prevent prices from reaching such highs.”
“That doesn’t mean prices could rise above that 40 per megawatt-hour level, and if something else happens — a sudden winter storm or something like that — that can certainly create pressure.” [prices] higher,” he added.
Kaushal Ramesh, head of gas and LNG analytics at research firm Rystad Energy, said looming labor disputes at Chevron’s Gorgon and Wheatstone plants suggested near-term volatility could continue until a resolution was found.
“We still don’t believe there will be a material impact on production,” Ramesh said, citing the resolution of other similar disputes. He noted that it could be difficult for Chevron to extend the strikes if they go ahead.
“Whatever monetary impact Chevron might have from giving in to workers’ demands is likely to be only a fraction of the lost revenue if production were significantly affected,” Ramesh told CNBC by email.
“So these are political developments and things can get irrational, but so far Asian buyers haven’t been too worried. This winter, Japan and Korea will have an additional 6 GW of nuclear power available compared to last year.”
The sharp price swings in energy markets in recent weeks come as the euro zone continues to distance itself from Russian fossil fuel exports following the Kremlin’s large-scale invasion of Ukraine.
Last month, the EU reached its target of filling gas storage facilities to 90% of capacity about two and a half months ahead of schedule, boosting hopes that the EU has secured enough fuel supplies to keep homes warm in winter. Nevertheless, the region’s gas market remains sensitive.
“Europe’s gas markets remain nervous, as evidenced by August’s price surge amid the threat of a strike by LNG workers in distant Australia,” said Henning Gloystein, director of energy, climate and natural resources at policy consultancy Eurasia Group.
“Real disruptions” are possible this winter, Gloystein said, including outages from Norwegian winter storms or a cut in remaining Russian gas to Europe. He warned that a halt to pipeline transit through Ukraine or a halt to Russian LNG supplies were two significant risks for Europe.
A “big question mark” that adds a risk premium to costs in Europe is the future of transit of Russian gas through Ukrainian territory, which is scheduled to expire at the end of next year, Mandel said.
Oleksiy Chernyshov, the CEO of Ukraine’s largest oil and gas company Naftogaz, told CNBC in mid-August that the Russian gas transit agreement was “actually quite a complex issue.”
“I just wanted to make it clear that Ukraine is actually handling this transit for the benefit of EU countries that consume Russian gas,” Chernyshov said. “We clearly understand that some countries cannot give up and stop consumption immediately because they need it to prepare for the winter.”
A spokesman for the European Commission, the EU’s executive arm, told CNBC that the gas transit deal is “still a long way away” and they cannot speculate about what the situation will look like in 18 months. “It is also not our place to speculate or comment on the interest of either party in extending such a contract,” they added.
The spokesman said that under the EU’s REPowerEU plan, the bloc’s goal is to “completely phase out Russian imports of fossil fuels as quickly as possible.” They noted that Russian gas now accounts for less than 10% of the EU’s pipeline imports, compared to around 50% before the energy crisis triggered by Russia’s full-scale invasion of Ukraine.