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For today’s Soundbites, we talk about the European energy crisis with Zeba Mirza, a senior research analyst with Foyston, Gordon & Payne. We talked about changing supply chains, where the profits are, and how Europe is faring. And we started by asking about the current state of the continent’s energy reserves.

Zeba Mirza (ZM): So, the good news is that they were actually able to refill to 90% of capacity. But there is a belief out there that the refill actually happened through miraculous new supplies and that is a bit of a misconception. Only a third of the additional LNG which went to the E.U. actually came from increases in supply. Two-thirds of it was actually LNG imports which were diverted away from Asia, mainly from China. So, these were factors which helped the E.U. refill gas in this year, which may not be repeated for next year. The other thing to keep in mind is flows of gas to Europe through pipeline actually declined very sharply in Q3. But for the first half of this year, they were almost close to normal, which is also not going to be repeated for next year. So, there were external factors which helped them refill gas in this year, which may not be there for next year. And that’s why I’m always concerned about energy complacency. We should be thinking about how this is going to be executed for next year.

The impact on Russia.

ZM: You know what, it’s not hurting them at all. At all! They actually started to cut supplies on the Nord Stream initially maybe at the end of June, start of July, and then more dramatically in September. So, year to date, flows on pipelines, they’re down by about close to 60% for Russia. But the price they’re getting for that is absolutely astronomical. Their gas revenues in this year are actually higher than they’ve ever had in prior years. Their oil production and their oil export has not been impacted at all. If you look at the period from 2017-19, they used to export about 4 to 4.5 million barrels a day. They are exporting the exact same amount right now. So, honestly, I get the sense they’re not hurting at all.

The impact on prices.

ZM: We complain about energy prices for North America, right? But we actually have the cheapest energy in the world. When we look at the E.U., their prices are soul crushing. If we just, for instance, compare to August, European LNG prices were as high as close to $90 per MMBTU [metric million British thermal unit]. And how does that compare historically? That is 15 times higher than the price they normally used to pay on average. Right now, prices in the E.U. have come down to $29 to $30/ MMBTU [metric million British thermal unit]. But even that price, is six times higher than the price they used to pay on average in the last, like, five years.

Diminishing demand.

ZM: We are seeing demand destruction in the E.U. We call it successful, but it’s a bit of making a virtue out of a necessity. They were trying to reduce gas demand by 15% between the period from August of this year to March 2023. So far, year to date, European and U.K. demand destruction has been about 12%. So, they still need to do more. The two largest sectors are the residential sector and industrial. So, the residential is about 30 to 40% of European gas demand. Industrial is another 25 to 30% of gas demand. So, when you reduce gas demand it’s both recessionary and it’s uncomfortable. It’s not easy. Industries where natural gas is a higher share of the energy mix are going to be hurt. So, industries like fertilizer, like steel, like aluminum, they’re all going to have a very hard few years in front of them.

And, finally, regions that are benefiting.

ZM: So, when you look at energy prices, when they’re high, there’s really nobody who wins actually, except, I guess, the upstream guys who produce it. But in the long term, this is going to really supercharge LNG markets. Even before the war happened, there was a very solid growth outlook for LNG. And the people who will be able to feed that demand will actually be the Atlantic-basin’s LNG suppliers. So, in the Middle East, that would mainly be Qatar, and then it would be the U.S. I think they would emerge as the beneficiaries of these new supply chains as they evolve.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Zeba Mirza of Foyston, Gordon & Payne.

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