Here’s a focus on the range of possible prices expected from a variety of demand scenarios—primarily weather-driven—in the U.S. and Europe and how Russia has shifted the results.

John Harpole, Founder & President, Mercator Energy

Dr. Robert E. Brooks, Founder & CEO, RBAC Inc.

John Harpole (00:18): I am really here to introduce our next speaker, and I'll make this quick. Given the lack of ability to utilize math in calculating by some folks in our world today, I was excited to see that our next speaker, Dr. Brooks, is an applied mathematician. He's an energy economist, and he founded RBAC, which ostensibly is built to advise clients on how they should look at the forward price for natural gas. He's an expert on European gas models, TTF Dutch Harbor. He's an expert on JKM Jam, Japan, Korean marker, Asian natural gas prices and certainly how they influence the Henry Hub price here in the U.S. So please give a warm welcome, a Hart Energy welcome to Dr. Brooks.

Dr. Robert Brooks (1:15): Hello everyone. So as John said, I'm the founder and CEO of a company called RBAC. RBAC has been founded to provide analytics capabilities to the energy industry consultants, industry participants even FE and other organizations that are associated with energy in both the United States and around the world. So I first learned about the natural gas industry while I was in college, actually as a graduate student. We were looking at the whole question of what would happen if you deregulated natural gas in the United States. So I've actually been involved with understanding, learning about and understanding the natural gas industry in North America for 50 years. So about 20 years ago as actually a little bit more than that the natural gas industry was completely turned around as far as regulation is concerned in the U.S. And companies began to be much more interested in how to understand market dynamics that they didn't really have to understand very or quite differently prior to that.

(2:58): And that the incentive for RBAC to build and to license simulators that looked at supply demand balancing and price forecasting around the United States, Canada and Mexico, which is what we've been doing now for about 20 or 25 years. So a couple of years ago, a company called Refinitiv asked RBAC to join them together in a collaboration to do forecasting study, near term forecasting for the next three years on a seasonal basis for natural gas as part of a product that they deliver in their icon platform. So we started working with them actually in 2020 on this and then repeated the study last year.

(3:53): This was actually before there was a major disruption in Europe as a result of the invasion of Ukraine by Russia although there were certainly some indications even back then in the fall of 2021 that something bad might happen as Russia was stationing many maybe a hundred thousand troops or so just north of the Ukraine border in Belarus and in Russia. So the first part of this presentation is going to be talking a little bit about the presentation that I made at the World Gas Conference in Korea several months ago in May. But then we're going to have an update to that because as we all know things have evolved enormously in Europe since that time.

(4:55): So the original assessment that Refinitiv and RBAC did was largely oriented around the question of demand: demand in Europe, demand in North America and demand in Asia. And the idea of the study was to look at a wide variety of different demand possibilities and then that could provide upper and lower bound on expected prices in Europe, North America and Asia. So this is what we did. Refinitiv provided regression models that were largely based on weather and different weather scenarios. It was done in a fairly straightforward manner. On the supply side, we built our models based on data from Rystad Energy. One of the other speakers today is going to be from Rystad Energy. And then we had our own models of pipelines in LNG. So we put together this model and ran these scenarios over a timeframe beginning in 2021 ending just after the winter completed of 2023 and 2024.

(6:15): This is a diagram that just shows how the various components of our simulation system are put together. You can see here on the upper left we have a diagram that talks about supply curves. We've got a representation of pipelines representation of LNG moving from various sources to various destinations, demand functions, schematic that just shows demand functions. So if you combine detailed models of all of those things together and run them through the G2M2 scenario and solver, then you end up with lots and lots of data results that involve expected production, expected deliveries to consumers flows of LNG, flows along pipelines and prices.

(7:11): So I wanted to show you first of all what our price forecast was from last year. So in October of 2021, as you can see, TTF (title transfer facility), which is in the Netherlands and is the primary pricing point for Europe, you can see that the expectation was that prices were going to actually be quite high and to move up into range seldom scene in Europe in the first winter. That is last winter. So imagine that this whole curve was actually created originally you see before the winter, before last winter. But then they were going to come back down again from these lofty heights and then the following winter, which is now our upcoming winter prices, were going to also rise but be considerably lower. And then in the third year, then they would follow a similar kind of a path. But what actually happened, as you can see, we updated this study in April in preparation for rural gas conference and you can see that they changed markedly.

(8:23): And of course this was because the Russians had invaded Ukraine on February 24 and had changed that dynamic completely. So you can see the range of prices still quite a bit, especially in the following year. But the most interesting thing besides prices jumping up to $15 or $20 more than what our previous forecast had been is that the range of possibilities for this next winter, for the upcoming winter, our upcoming winter. Now this, I don't know, some kind of vibrations or something cause it to flip by that, but in any case, it's still quite a range of possibilities for this next winter. Really quite a range between low and high for this coming winter and then the following winter the same. So this is Europe but what was happening in Asia? So in Asia, our original forecast also showed that prices would be going up last winter, which of course they did, but then coming down and flattening out really quite markedly this coming winter and then the next one as well.

(9:35): But the update was quite different. Again, you could see prices went quite a bit higher in this last winter and then stay high for the next couple of years, but not a whole lot of differentiation. So a very different kind of forecast for the next couple of years. And to some degree, that also responds to a question of the earlier presentation about correlation between these different areas between Asia and Europe and North America. And you can see that the structure, the forecast here is very different and it doesn't have that same variation that we saw in the forecast for Europe. So what about Henry Hub? Probably something more of interest to the folks in the room and you can see again we had 19 different forecasts and you can see how volatile or how diverse you might say the forecasts are and how related they are or how dependent on weather and so terrific distribution here.

(10:52): And the black curve I didn't mention before is the average of all of these. So you can see the average running last year around into the $5 and $6 range and about the same for this coming winter. But the update was a little bit different. But interestingly enough, in spite of the fact that European and Asian prices have gone up so much higher and expected to be high for the next couple of years, you notice that actually it hasn't really changed too much. The forecast that we're getting from our modeling exercise. So again following what the last speaker said North America is still pretty isolated and from the rest of the world in spite of all of this LNG. And as the prices are largely driven by domestic rather than by international activity. Now that's what we had expected and again what we delivered to the World Gas Conference.

(11:55): But what has happened since then, and of course what has happened is that Russia has largely restricted or completely shut off gas supplies into Europe map that just shows, you can see the little black marks there that show where they've been totally shut down or partially shut down. And you can see actually I could probably change on the Nord Stream from largely shut down to totally shut down at this point. So all of that gas that previously had flowed into Europe from Russia most of it has been shut down. And as a result actually prices have gone through the roof as you can see, not just in Europe but also in Asia. And it doesn't look like they're going through the roof in North America, but that's just because of the scale here. But you can see they've really come up a lot in Henry Hub and in North America as well most recently.

(12:58): So how did the actual prices compare with the with forecast that we did back at the World Gas Conference in May? And you can see we were doing actually quite well until the Russian invasion really got going, at which time they completely diverged. So actuals completely diverged. And so what this is basically saying is it's all fine and well to do your forecast regarding weather, but you better not forget about geopolitics. Geopolitics in this case looks like it trumps weather in terms of what is going to happen with prices. So in the end if we look at August prices seem to be declining in these areas in September, but in August, they reach their peak and you can see comparing the forecast that they're twice or more compared to the forecast that we did just last May. So tremendous impact that has been created by not just Russia has done, but also the response that the EU and North America, U.S. have made to that response, the sanctions and then Russian counter response to the sanctions. So what has Europe done? Okay, well prior to the war, Europe had about 26 LNG import terminals. You can see them here. And now there are an additional almost doubling here, 21 new LNG projects. So part of the rush, the European strategy of course is to make up for this gas through LNG, and I believe the last thing I heard was 60% to 65% of the LNG coming into Europe is now coming from the United States.

(14:55): So we decided to do another update to the project where instead of looking at these weather scenarios, we said, well, why don't we look at different Russian gas strategies and European gas strategies regarding Russian gas? And so what we did was we created a number of different scenarios. Some of these scenarios involved getting back to sort of the norm and you can see the ones that have the lowest prices here, the blue and red one where prices would come back to normal because everybody would be friendly again and so forth, not very likely. The other scenarios you can see involve especially high prices, still a very big range but depending on how severe the cutbacks of Russian production flowing into Europe, then prices could remain in this $60-$70 and even higher range for the next several years. On the other hand, if the flow cutbacks were not quite so severe, then you can see that prices could come down but they would remain relatively similar.

(16:12): This chart, I'm just about out of time, but it shows the three major components of European supply. You can see production being pretty flat under all scenarios - European production, that is - but again, you can look at the middle chart, which is pipeline imports into Asia, into Europe, and you can see that the red and blue are very unlikely that sort of getting back to normal. The other scenarios more or less about the same amount of gas coming in. And then LNG, you can see the scenario is that it's likely to be very much higher LNG coming in to replace that pipeline gas. So we're almost done here. I think I've pretty much explained the conclusions here. I think they're all pretty obvious in as far as prices are concerned. Interestingly enough, this demand for LNG is pulling Henry hub price up much more than the earlier forecast said. And the other thing I think that is really important is that the prices are high enough, their demand in Europe is high enough so that it's attracting LNG cargoes away from Asia which ends up resulting in higher prices there. So that's it for my presentation. I hope you've found it interesting. As I've been saying to the other participants here, we're very lucky to be involved in the energy industry because it's always interesting. There's always something new going on. Sometimes good, sometimes bad, but still always interesting. So thank you very much.

JH (17:52): Doctor, 26% of the GDP for Germany is the industrial base in Germany. And at these prices we're seeing the de-industrialization of Europe. You said something that geopolitics trumps weather all later today at about four o'clock. I'll be picking up where you left off here, but in this future scenario in Europe, how do you model when geopolitics is so much more important evidently than weather?

RB (18:31): Well, I think what I've shown is that if you have a good simulation system, you can model these different impacts and the impacts are going to be on price. But this particular approach that we've taken is not a total model that would also look at what the effect on the economy of the country is going to be, right? So that's a little bit different modeling kind of approach, but I think the Europeans are getting pretty depressed, pretty pessimistic about what's likely to be happening. Their inflation rates [are] much higher than ours at this point. The amount of money that they spend on energy, the population is going to be even worse than it is now. I mean it's continuing to go up, and I think there's a lot of concern that those industrial facilities are going to have to shut down a lot of them and what kind of impact that's going to make on the rest of the world. It's unknown, but it's not good at this point.

JH (19:34): I'll speculate quite a bit about the four o'clock 70% of the fertilizer facilities in Europe have closed. 70% of the nitrogen fertilizer facilities have closed. And so I look at that relative to demand destruction, but it's almost impossible to see demand destruction when people are choosing how they're going to heat their homes. And so those are the kind of models I'm interested in seeing in the future and they just don't seem to be out there.

RB (20:02): I think the Europeans are a little more stoic than Americans, and so they are more likely to respond in terms of reducing the demand or the temperatures that they're going to be keeping their houses during the winter. So I think that they will pull through, but they're not going to be very happy about it.

JH (20:24): And unlike California, that announced yesterday that natural gas supply to your home heating furnace and California's going to be banned by 2030. At least they haven't banned at your gas.

RB (20:38): Well, this is going to be difficult I think to achieve. But on the other hand, California is known for sitting unrealistic targets that they end up either forgetting about or just not achieving. So we'll see. Newsom's not going to be the governor forever so one can always hope that we can get something better but we don't know. We’ll see.