Overall gas imports into the EU market were up by 0.7 bcm y/y in November to 22.7 bcm, with increased supply from Russia and North Africa complemented by a modest increase in LNG sendout.
EU imports of Russian gas in December were higher y/y by 1.46 bcm (11%) at 14.77 bcm according to system operator (SO) data, but Russian flows into Romania (2%) and Poland (3%) were down by a combined 0.14 bcm y/y. Russian flows into Germany were up by 1.1 bcm (28%) y/y, all of which flowed via OPAL. Over 2017, EU imports of Russian gas were higher by 15 bcm (10%) y/y at a record 162 bcm.
Total Russian gas production in December was down by 2.9 bcm (4.3%) y/y, although flow rates were slightly up m/m at 2.05 bcm/d. Gazprom’s output eased in December, down by 2.6 bcm (5%) y/y, although that left full-year 2017 production at a record high of 537 bcm, greater y/y by 53.6 bcm (12%). Gazprom production rates peaked at 1.71 bcm/d in January 2017 and have eased since. While November and December flows were down y/y, this is more likely to be due to weather impacts on demand rather than due to any production issues, with eastern Europe much warmer in Q4 17.
In December, total North African exports to the European market fell by 0.13 bcm (2%) despite some tightness in the key southern gas markets of Italy and Spain. North African flows to Italy were lower y/y by 0.22 mcm at 2.4 bcm, with gas from Algeria down by 0.16 mcm (7%) y/y and flows from Libya down by 55 mcm y/y (9%). Algerian flows into Spain were only marginally higher by 90 mcm y/y to 1.45 bcm. The slowdown in Algerian gas flows into Spain and Italy was not expected given the tightness seen in both European markets over the first half of December. Italy turned largely to storage withdrawals and flows from Russia to help balance the market over the month – again pointing to issues with Algerian contract prices.
According to SO data, LNG sendout into the Western European markets was up by 0.4 bcm y/y in December at 3.26 bcm. Northwest Europe’s LNG imports were higher y/y by a combined 0.23 bcm, although French terminals were the only ones to post a y/y increase, up 0.27 bcm y/y. In the Mediterranean region, Italy increased LNG sendout by 0.09 bcm (21%) y/y, while sendout in Spain was up y/y by 0.05 bcm (3%).
With Europe into its second winter quarter, the call on imports is still very weather dependent. However, with January at least looking like it is tending toward normal/above-normal temperatures, this peak month could see demand soften. The rest of the quarter is more biased to y/y gas demand increases, even with normal weather, given the mildness seen in Q1 17.
We expect EU imports of Russian gas will be down in Q1 18 by 0.4 bcm (1%) y/y and down by 1.5 bcm (1%) y/y over 2018 as a whole. The fall is due to base effects from the record-high 2017 base and more LNG coming into Europe in 2018.
Imports from North Africa also remain something of a hard call—at least for Q1 18. The second half of 2017 was characterised by y/y losses and Algerian gas being replaced with LNG and, in Italy, Russian gas. The LNG market is still tight, with prices into NE Asia above 11 $/mmbtu in early January, and this should discourage LNG from coming into the European markets. However, both Italy and Spain are still living with low hydro reservoir levels, which is providing underlying support for gas demand in those countries. A blustery December boosted wind generation, thus helping to moderate the impact of low hydro, and Italy went back to swapping Algerian for Russian volumes and relying more heavily on storage. While that trend in Italy could continue, we expect higher y/y gas demand across the southern markets, and as such we are retaining our forecasts that Q1 18 North African exports to the EU will be moderately up by 0.6 bcm (5%) y/y over the quarter, with y/y gains in February and March.
For the rest of 2018, the issue for Algerian gas is that it needs to move away from oil indexation to hub indexation in its long-term supply contracts to remain competitive. The increase in Brent prices seen since Q4 17 will start filtering into oil-indexed gas contracts come the start of Q2 18. We expect this to result in a y/y reduction in imports from North Africa over summer 2018, of 1.5 bcm (10%), which is unchanged from last month. A return to fuller hydro stocks in Spain and Italy, which is of course dependent upon precipitation, could further ease Algerian takes in the further-dated quarters.
EU imports of LNG will increase by around 3.6 bcm y/y in Q1 18 according to our latest global balances. For all of 2018, there is even more potential LNG and pipeline supply coming into the market given the continued addition of global LNG supply capacity during the year. We think Europe has sufficient capacity to absorb a maximum of 25 bcm more gas y/y, and we think it will take some 15-20 bcm of that in 2018.