Rethinking forward power markets

Montel Group (00:07.662)
Hello listeners and welcome to the Montau Weekly Podcast, bringing you energy matters in an informal setting. This week is a bit of a mixed bag. We will address the ongoing crisis in the Middle East and the consequences for European and global gas markets. We also plan to discuss the upcoming EU elections and the impact any swing to the right could have on the energy transition. Finally, we take a deep dive into Germany. There's been a lot of talk of deindustrialization, but what is the current situation in the country?

I'm Richard Sverison and helping me to discuss the ramifications of the current geopolitical situation and much, much more is Henning Gleisstein of Eurasia Group. Welcome back Henning, great to have you on the pod again. Thanks Richard, great to be here. So if we start off, before we go into the nitty gritty, some of the details here, if we look at the sort of global geopolitical situation, what are your kind of worst fears here? What could be the three worst scenarios? The worst scenarios really are scary.

But so what really worries me and as you raise your group in sort of analyzing geopolitics is we're approaching mid -year point now and the two conflicts, the one in the Middle East around Israel's invasion of Gaza and Russia's invasion of Ukraine are constantly and steadily escalating. There has been no serious or credible de -escalation effort or success since the start of the year. There's just week after week something

sort of gets a little bit worse versus what it was the previous week. And in terms of sort of what really scares us there is where does this lead? At some point in a conflict, the only way around this is either one side gets totally defeated or you find sort of a Venn diagram overlap where both sides are willing to compromise. And at this stage, neither conflict looks likely to see any form of conflict resolution or compromise. And that basically means that

they are currently escalating. And we've escalated a lot. And so, you know, one of the worst scenarios, I mean, in the Middle East, it is still an outright regional war, which involves Iran, Israel, and maybe some other players in Hezbollah in Lebanon. This is, it's not out of the question. We don't think it'll happen, but it's like I said, it's escalated. And in

Montel Group (02:28.206)
Ukraine, I mean, just now we saw Antony Blinken in Kiev. He says, maybe US weapons should be used to be firing at Russia. And I don't know what the Russian reaction will be to that, but it will be a reaction. So, you know, it's constant for the escalation, which, you know, it's a slippery slope. And at some point before you know it, you are actually in an outright regional war rather than a bilateral conflict. And it wouldn't take much for that to happen, do you think, to trigger that? Well, that's the...

That's a tricky question because this constant step -by -step escalation has yet to lead to that conflagration regionally. And we do actually think most conflict parties, let's start with the Middle East, Iran, Saudi Arabia, the United States, they desperately want to avoid a regional war. And Israel probably as well, although Prime Minister Netanyahu is doing little to de -escalate in Gaza.

And in Ukraine, I mean, I don't think Russia wants a war with NATO. NATO doesn't want to with Russia either, but it's not out of the question. And that's the scary part. Absolutely. It's very, very frightening. But if we then, Henning, say, what does that mean for, you know,

if we turn to the energy and what it means for maybe there's, I mean, you know, people's lives are at stake. So it seems a bit kind of flippant to talk about, but about the impact on gas markets here. But, you know, that's what this podcast is about. So if you can talk a little bit about what the consequences of that kind of escalation could mean for global gas markets. I mean, we've talked before about, you know, potentially the closure of the Straits of Hormuz. Is that...

looking more likely now? It's part of the same scenario. And as you say, if the Straits of Hormuz close and or we have a much escalated war in Ukraine, then indeed probably oil and gas prices are not what we're most worried about. But it's still a valid point to be concerned about. And we don't think the Straits of Hormuz will be totally shut down because Iran gets virtually all its revenue from selling out of it. So does Saudi Arabia.

Montel Group (04:41.454)
But it's again, it's not out of the question. If I mean, and all it needs to happen is a single tanker to be attacked. And then you see the headlines and the images of a burning tanker. And then what you would maybe see is a U S naval convoy, you know, escorting all ships through hormones. And you see massive delays. That's, that's not a shutdown of straight of hormones entirely, but it would causing.

credible delays, and then we will be talking about oil prices in the hundreds. I mean, you guess is as good as any mine. I don't know, $150 a barrel. And the global economy isn't particularly strong, and that would push things into recession. It's a bit similar in Ukraine, although not quite as drastic anymore, because Russia can't cut off much more gas to Europe. It can a little bit. You know, those LNG flows from Novotek are still going to Europe. There's still some transit gas through Ukraine. That could both

end, but that would not cause, in our view, at least winter shortages in Europe anymore. The preparations there are underway, but it would cause another spike in prices this winter. Maybe not as crazy as two years ago, but still really high. Again, Europe is literally crawling out of recession, and that would potentially tip it right back in. These could be attacks on oil refineries, on pipelines, or just a cessation of flows. There are many options. I think energy markets are

Blase is maybe a little bit too arrogant, but it's the energy markets and the media and public have kind of gotten used to this. They're like, well, you know, there's these conflicts in the Middle East and Ukraine. It's really tragic, but the world has adjusted and it has adjusted, but that doesn't mean it'll continue to adjust, especially since we're seeing this constant escalation. So Henning, are you an optimist here or are you a bit more of a glass half empty person at the moment? I've always been in the last two years on the optimistic side and so far touch wood.

that's been warranted. But this creeping sort of escalation creep really is a bit worrying. But I'll stay glass half full. We'll somehow get there. Yeah, fingers crossed. But this week we've seen a couple of key events. First of all was the death of the Iranian president. What's Eurasia's view here? What happened? Do you think this is just a tragic accident or where there are other darker forces at play? Well, we're not on the ground in Iran. So,

Montel Group (07:03.79)
We don't know. At least team says, and our sources in the US government in particular, they say, looks like it was an accident. And I mean, that's what Iran's messaging is, that it's an accident. But the timing is terrible. I mean, OK, it's not like. But it's not entirely impossible that it wasn't an accident. There could be international players at hand, but there could also be domestic players at hand. Raisi was very unpopular in Iran.

There'll now be an election. We don't think it'll totally destabilize Iran, but it's worth keeping in mind that Iran has actually seen pretty strong public opposition and riots against the leadership over the past, actually, decade quite frequently. So it's not out of the question that this happens again. But at the moment, we think that the elections will go ahead as planned and announced and produce a new leader within the current regime.

And do you think there'll be any consequences at all for energy, for gas supplies in the region? I mean, Iran is planning an LNG export terminal as well. Would that be affected by instability in the country? The Iranian LNG export terminal has been talked about since before I started looking at energy markets and I think Qatar will suck the North field empty before that happens.

Okay, fair enough. But that's not to say I mean they could build a pipeline. I don't think the Iran election and leadership contest now will actually impact energy supply much. But that said, they are part of the wider conflict in the Middle East, which do have the potential to impact things. There's a lot of things that can happen here. It's like we in the past, we've seen the Houthi attacks on tankers in the Red Sea, which have kind of sort of shied or

died away because the the ship is that were being targeted by the hooties have rerouted. And but you could still see Hezbollah becoming active in northern Israel. And that's not really an oil story, but it's an escalation story. You could see a militant Iranian proxy militants attack Western oil facilities in Iraq. That's actually one of the bigger concerns. And

Montel Group (09:25.198)
like I mentioned earlier, a potential attack or an incident in the Strait of Hormuz could also happen. So that's the issue. There's a lot of little things that could still happen in this conflict. And as long as the conflict continues to escalate, this likelihood is there. And markets are quiet at the moment, but that doesn't mean that they'll remain quiet. It's a very shaky situation that we're in. Yeah. And if we move a little bit further,

We're talking Iran and going further west to Israel and the crisis in the Gaza Strip. We've seen over the past seven days, arrest orders being issued for both Netanyahu and the leader of Hamas or key players in the Israeli government, also Norway, Spain and Ireland coming out to recognizing a Palestinian state. Is this a part of the same kind of creeping escalation that you're talking about Henning? Or is this...

an attempt to de -escalate it? No, I think this is part of the problem of continued escalation. Now, I don't want to accuse Norway, Ireland and Spain of this. Neither really the ICC, the International Criminal Court, they are doing their job. And I'm not a lawyer, so I can't really judge the cases. But the issue is here, and this is why it's part of the escalation, you can make a credible point on both sides of the argument in each case. So if you start with the ICC,

If you, let's say, are supportive of Israel, you would say, well, this is proof that the ICC is being used opportunistically because why is a democratic state leader as Netanyahu being accused here if other leaders, government leaders in the past who have started wars with many casualties have not? Now you can flip this around though, quite easily saying 35 ,000 dead civilians, humanitarian catastrophe.

Even the US has put some sanctions on parts of the IDF, the Israeli Defense Forces, and it is warranted. The problem is here though, this makes things really awkward. Just imagine, for instance, countries that recognize the ICC, and let's say Israeli leadership is invited to a state visit. Let's say Germany. Would the Germans have to arrest Netanyahu because they've signed up to the ICC?

Montel Group (11:42.702)
And so they either have to ignore the ICC, which is awkward because there are signatories to it and modified it, or they have to not invite him or arrest him. And so that's part of the complication, it's part of the escalation. It actually supports Netanyahu in Israel as well. His popularity is being supported by this because the Israeli public is furious about this. Whether outside of Israel we like this or not is irrelevant. That's the public view. And then if you talk to the, or about the recognition of

Palestine, if you are anti -Western inclined and you look at a global map of countries that have recognized Palestine, you see a gaping hole in North America, most of Western Europe, Japan, Australia, so the West, with three very recent exemptions now. But this is, it really is, the map is quite shocking, I find. And you can use that in saying here, this is...

Proof that the West, especially the United States and the EU, essentially in maybe UK, never really had the two -state solution on their mind. They were always sort of in line or in the bed with Israeli politics and this, and it was never a credible solution. You can flip this around, of course, and say, no, the only way toward a two -state solution is to recognize Palestine is an authority and an independent state. Better just do it.

And I mean, arguments saying like, yeah, but Hamas is in power. That's a terror regime. I can understand that, but you can recognize the Fatah leadership in West Jordan and other countries with what we in the West call terrorist governments are recognized as well. I mean, Afghanistan, the Taliban. So it's part of the escalation. But I mean, these recognitions that you mentioned yesterday, these recognitions that you mentioned yesterday, they

They really put pressure on Israel. I mean, Norway, Ireland and Spain are not exactly countries known for opportunistically meddling in geopolitics, really not. So it puts pressure on Israel without a doubt. And what kind of impact could it have on energy, do you think? If any, it's just part of that, you know, that trapping up of the situation. Yeah.

Montel Group (14:00.942)
Yeah, in itself, it has zero impact on energy or power price, gas or oil prices. But it is part of what we worry so much about. It's like little step by step. And by itself, single steps don't mark a dangerous escalation for oil markets or for the war itself. But it's one of those things. I mean, suddenly you've taken 10 steps and before you know it, you are in a situation where you find yourself very difficult to reverse. And then the outcome can be, can be, doesn't have to be outright war.

And as we've talked about already, there are very few steps being taken or signs of de -escalation here and trying to calm the situation down, which is the why part. That's precisely the worry. There are many steps that are as small as they are that escalate, but there's virtually none that point towards, can we sit down and de -escalate? There's no major initiative underway at the moment, and that's a bit worrying. Absolutely.

Let's turn to Europe now Henning. I know that, you know, I'm sure Eurasia has looked into detail about what's happening in the European elections, both for you, parliamentary, but also in terms of the new commission. It appears that the far right or the right or far right maybe is going to make gains. How do you see that? So here we are more optimistic. The European parliamentary elections look like they will, you know, produce a

shift to the right from the center left to the center right, but not to the ultra right. The ultra right across most of Europe has lost traction, some traction, at least recently. AFD Germany, it's actually across Europe, it's deflated a little bit. That doesn't mean that it's not a long -term threat to Europe and democracy as a whole, and not just in Europe, but this parliamentary election, we think, will genuinely produce a

moderate center right wing European Parliament with the consequence of the European Commission, which we actually think might not be entirely bad. I don't want to get into the partisan, you know, that gives me away as a center right wing. It's just it produces, we know there's been a lot of talk behind the scenes between the current parliament and those who think there will be in parliament. All right. So there's actually a lot of constructive debate at the moment to prepare.

Montel Group (16:27.726)
from this parliament to the next so that it provides opinion with some regulatory and some policy continuity, but also some proactive reform that actually improves things. So I'm cautious and optimistic, yeah. Excellent. So, I mean, there were fears or concerns that the energy transition could sort of be slowed down or the brakes we put on or even like a full -on backlash. Do you think that's likely to happen? No, I do not.

I don't think there'll be full on backlash at all. In fact, this is part of this dialogue that's happening, which I think is quite constructive. I talk about this a lot and maybe I'm over killing that cat a bit, but this Antwerp declaration from February is really important. It was signed in late February in Antwerp and it had very few signatories at the time, but Ursula von der Leyen was there, Belgian Prime Minister was there, a lot of heavy industries were there and just a few months later.

It's got well over a thousand signatories. It's got cross -partisan support. And that support is talking about Venn diagram overlap. You have progressive politicians, so lefties basically and greenies who are saying, we need to decarbonize heavy industry in order to A, decarbonize because it's green policy. And also because those are unionized jobs, steel, chemicals, you know, they vote progressive by normally. But now you have conservative politicians who are previously a little bit opposed to this.

are saying, actually, we think this is a good idea as well because these heavy industry steel making, chemical making, cement making are really important strategic assets for increased defense spending, for reshoring, French shoring, and all of that sort of stuff that's going on. So they're actually planning to put a policy into place that continues the green transition and just puts a industrial policy on top of it. It won't be as snazzy as the IRA, the inflation reduction app in the US, because that's tax breaks, which the European Union

doesn't have authority over. But we do think once the new parliament comes in place and they all get to meet each other, which takes forever, but towards the end of this year, there will be an industrial initiative. And I think that's a positive sign because it combines sort of energy security with energy transition and you can combine them. They are actually part of the same issue. I say this a lot, sort of if your fossil fuel imports have become prohibitively expensive and unreliable,

Montel Group (18:54.158)
politically and economically, the signal is pretty clear here. You invest into domestic clean energy assets. And I think that's the overlap. No brainer really Henning. Is this part of the Net Zero Industrial Act as well? Is that part of the same kind of initiative, one of the legs of that piece of legislation? It's part of it, yes. Green Deal and then there's national initiatives. But I think there'll be another one. That's the cautious optimist to me. I mean, I've given it

probabilities, maybe 60 % likelihood that some new industrial initiative will come out of Europe before the end of this year or at the turn of the year. That's just on top of everything that we've had already. In fact, beyond the Antwerp declaration, there's another one, this thing called Reboot Europe. It's a similar, if you look at sort of what they're looking for on the web, on their homepage, it's very similar demands. It's just, it's got a little bit more support from central and Eastern Europe. And it's that again, it means you have the Antwerp declaration, which is like a Northwest European.

thing and then the reboot Europe thing, which is more central and Eastern Europe, but they're both calling for the same thing. And I think that's quite positive. Although, I mean, there is still a lot of opposition, you know, in certain center -right populist parties against wind, onshore wind. Yes. And we see now in Italy as well with the ban of solar and agricultural land. So these are also aspects that have to be taken into account here. Yes. That's why I said cautious optimist, 60 % likelihood, which means there's a...

high risk that nothing will happen because yeah, indeed. I mean, onshore wind, Poland is lagging here. You mentioned Italy. Italy, unfortunately as a whole is lagging behind other big EU economies in terms of the green transition, whether it's wind, whether it's solar, whether it's hydrogen. I mean, if you compare that to Spain just next door, they're really a world leader now. Germany, I mean, France always does this thing in a slightly different way, or the UK.

it's not in the EU anymore, but it's unfortunately lagging a little bit behind. So, I mean, let's then turn to Germany, Henning. You know, we've seen dramatic falls in both power and gas demand. You know, is this a trend that is set to continue? And if we can put some numbers to it, that'd be great as well. I think I've heard something 15 % drop in power, 20 % gas. Has that switched at all? Or is this falling?

Montel Group (21:21.934)
demand set to continue. So, Duresh Gupta, we're currently reviewing this a little bit because until a few weeks ago, we were of the firm view that power and gas demand in Germany would continue to decline for several reasons. Mostly positive efficiency gains, whether it's household or industrial efficiency gains. It's an insane success story what's happened here. And I think industry and governments and households don't get enough credit for this.

Fuel switching away from gas, you know, a lot of fancy offshore wind that's happening. We talked about negative prices with you recently. So it's, it's, yeah, also, but also recession, bit of loss of heavy industrial output, especially ammonia. But there's, there are a couple of cautious signs of a return of demand, power and gas. Now on the gas side, I really do not think Europe or Germany in particular will bounce back.

to anywhere near pre -crisis level, so 2021 levels. This is permanent. So that ammonia production in Germany, I don't think is going to come back. Germany does not need ammonia production to be a wealthy economy. It's really not part of, I mean, it's a couple of companies that make it and it's a loss for them, but they can import substitute. We have managed in Germany to come through this energy crisis at the cost of a 0 .3 % recession, which is pretty low and record employment.

which means other investments have been made, whether it's in orders, whether it's battery making. So there is success here. And that means that we don't need as much gas overall in Germany as, or Germany doesn't need as much gas overall anymore as it used to. And that I think is prominent. And that's, it's actually willingly made so in order for German energy to become cost competitive again, or its industry to be competitive, we need slightly cheaper energy than it is now. We don't need it to be.

vastly cheaper anymore because we still want investment. But the thing is what is required is less gases in the system. So that won't come back. The power, I'm not sure about because this defense spending increase in Germany and actually all of Europe is mostly materializing in Germany, parts of the Netherlands and parts of Central Eastern Europe.

Montel Group (23:41.358)
And that's energy intensive stuff. That's chemicals, steel, ammunition, explosives, tanks. It's energy intensive stuff that you need here. And that's really becoming quite noticeable. And then of course, the economy itself is nowhere near booming, but it's not in recession anymore. So it's a marginal improvement. And you can see that in power consumption already. And in fact, in Germany, gas consumption in April this year was higher than it was in April last year.

And I think that's quite a strong leading indicator because obviously we're not in winter heating anymore and it wasn't particularly cold. So, and then you've got all the data center and AI stuff and electrification of transport. Who knows, maybe that will increase power demand again. Standing against that rooftop solar that takes millions of households off the grid. And these efficiency gains that are bang on all the time. We're reviewing this. I don't know. But I'll put it this way. I think in the power side, the demand destruction of the last two years,

looks like it's bottomed out and the question now is whether it actually sort of increases now or sort of flatlines. I'm not sure. And the implications there for renewables rollout are quite clear, aren't they? I mean, you know, there needs to be more renewable, more green energy. But at the same time, we've talked beforehand about negative prices and that's also hampering a little bit of those investment signals or maybe...

creating some hesitancy amongst investors, would you say? I'm not sure because when we talk to investors like from suspension funds who actively look at this sort of stuff, they often say like, actually we're sort of counting the negative electricity hours by country and where they're increasing the most, that's where we invest into storage solutions. Because that's a direct signal for battery electrolysis unit or power cables, the unsung heroes of the last two years.

I maintain this, it's becoming a bit of a fad of mine, but Europe's really good at building power cables. And it's much better than North America or Australia. One of the main reasons why there weren't power outages or rolling outages, load shedding over the last two winters was that Europe is masterfully connected with power cables and it's increasing, it's getting better. I know Montell wrote about this as well, that Germany continued to export electricity to France in 2022.

Montel Group (26:02.958)
while its gas system was collapsing. France now exports electricity back to Germany because Germany shut down its nuclear power stations. There's now a Viking link between Denmark and the UK. This is a really, really big asset. China's invested into this as well, and it really helps because if you can build overcapacity of renewable assets, then build storage facilities close to that overcapacity, and then build power cables that connect everything.

then you have a stable grid and Europe has a good and stable grid. I think it's a massive success story, the EU electricity market. And look at the United States, they don't have that. That's why Texas, I mean, you know, they've got oil, they've got gas, they've got renewables, they've got absolutely everything. Wind, Australia, the same thing. They have electricity outages all the time because they don't have interconnection lines. So that's a very important point. And I think also,

you know, the flip side of negative prices is providing incentives for storage and batteries. I mean, that surely should, you know, should be, should accelerate, that kind, that side of the market. But Henning, just finally, I mean, Germany, if you see that power demand, is maybe bottoming out potentially rising as well. Does that, what implications does that have for the country's plans to build new capacity? I mean, it's, you know, there's talk of,

big centralized gas units which are hydrogen ready, put that into quote marks, but is that going to happen? Germany will need something as backup as much as I'm in favor of all these offshore wind parks and hydrogen and battery solutions and power cables, but you do need some form of asset at the back. The French have nukes. Britain will have nuclear power stations. I mean, they cost insane money, but once they're there, they work.

And Jomi has decided not to do that, which, okay, fair enough. They can do that if they want, but they have to do something because they've got the coal phase upcoming 2030. And I think that's where the 10 gigawatt of gas assets comes in the hydrogen readiness. And they didn't even say how they're going to get them hydrogen ready or a low carbon solution, whatever. So they're going to have to do something. And I could, okay, that's one way to do it, but I really think they're going to struggle to get those.

Montel Group (28:17.966)
to near net zero or low carbon solutions because the problem with natural gas is it is a fossil fuel. And that means Germany has to import that fossil fuel. And so the cost of import. And then you have to add on top of that a price either for CO2 or for decarbonizing that fossil fuel. And so it's a double cost. We might as well just invest in something different. So I think they're going to be economically challenged.

I think the CCS thing only works in areas with really cheap natural gas like the United States where gas is virtually free. Now you can add the CCS cost on top of it and it'll probably work. But I'm not sure about Germany. I guess Norway has a chance to really support this through all the pipelines and stuff. That's the plan. But as of now, it's only a plan. It's not a reality. Absolutely. But Henning, we could talk for hours on these topics and we have done when we meet up. But I think...

Let's hopefully we can meet again, talk again later in the year and where there is signs of de -escalation of some of the geopolitical tensions. Fingers crossed. That would be great. Thank you. Thank you Henning. Thank you for being a guest on the Montel Weekly podcast. Always a pleasure. Thanks a lot.