The EU market balanced in July with lower Russian imports being offset by higher takes from North Africa, with the bulk going into Spain. Despite that, the future of flows from North Africa remains uncertain, hinging on exactly what the new commercial terms are in the contract agreed between Sonatrach and Eni for the next gas year. Given that the two companies effectively agreed to allow Eni to market Algerian gas internationally, more hub-based pricing terms seems likely and that should help support Algerian volumes into Italy. Meanwhile, the y/y dip in Russian flows seems an aberration and a return to y/y gains is likely in the coming quarters as production capacity from the Bovanenkovskoye field is set to expand this year.
Russian gas production capacity expanding
European imports of Russian gas should recover in August after two weeks of planned maintenance last month curbed flows by 1.44 bcm (11%) y/y to 11.54 bcm in July according to European SO data. The outage cut supply through Nord Stream by 1.9 bcm in July, while flows to Europe via other Russian pipelines only partially compensated, with a net 0.45 bcm rise. Other routes could not ramp up full-month flows further due to maintenance earlier in the month at two other major border points: Mallnow (Poland) and Velke Kapusany (Slovakia).
Total Russian gas production in July was 2.5 bcm (4.8%) higher y/y at 53.2 bcm, with all the y/y increase accounted for by Gazprom, which logged 2.8 bcm (7%) of y/y growth. The y/y increase in Gazprom production is likely to be maintained in 2019, with a third gas production facility set to start up in H2 18 at the Bovanenkovskoye field, which will bring the field to its design production capacity of around 115 bcm/y. In 2017, the Bovanenkovskoye field produced 78 bcm. Gazprom also announced its intention to start the full-scale development of the Kharasaveyskoye field, which is 100 km north of Bovanenkovskoye and mostly onshore on the Yamal Peninsula and only partly offshore in the basin of the Kara Sea. The field has large gas reserves, which amount to 2 tcm (C1+C2 categories). The start of gas production from that field is slated for 2023, with a design capacity of 32 bcm/y. Kharasaveyskoye gas will be sent through a gas pipeline to Bovanenkovskoye and then into Russia’s Unified Gas Supply System.
Given the European y/y storage gap is still wide, the market will call strongly on Russian gas supplies over Q3 18. This means we expect total European imports to rise by 8.2 bcm y/y in 2017. If there is any weakness in imports it could be in Q4 18, due to base effects on demand numbers, but we expect most of that will reflect itself in y/y drops in storage withdrawals.
North Africa: Algerian questions
Flows from North Africa in July bucked the trend of y/y declines set in Q2 18, with Spain the main growth destination for Algerian gas. In July, total North African pipeline exports to Europe were up by 0.28 bcm y/y. Algerian gas into Spain rose by 0.34 bcm (41%) y/y, after three straight months of declines, as pipe supply mostly offset a hefty drop in LNG supply. Algerian flows into Italy fell, but only by 54 mcm (5%) y/y, far lower than declines in previous months. Demand for Algerian gas was likely higher in July amid Nord Stream works. Libyan flows to Italy were flat y/y.
For Algeria, July’s big news was the Eni–Sonatrach relationship. The two companies agreed commercial conditions for the 2018-19 gas year, which Eni said were ‘in line with the gas market’. The two parties also began negotiations to extend gas supply beyond the current contract, which ends in September 2019. If there has been a significant move from oil-indexation to gas-indexation in those contracts, Eni would unlikely further reduce its takes of Algerian gas. The two companies also agreed to link Eni's upstream activities in Algeria by building a 180 km pipe between their existing BRN (block 403) and MLE (block 405b) fields. Sonatrach said the pipelay would be a ‘fast track’ construction and Eni feels that would allow it to realise cost savings.
Potentially most importantly, Sonatrach reportedly agreed that Eni will be allowed to export any gas that it discovers in levels deeper than it currently produces at BRN and MLE. Eni would then be able to sell on the export markets any gas no longer needed domestically by Algeria, given the development of Eni’s solar renewables project in Algeria with Sonatrach. These agreements suggest the end of Sonatrach’s exclusive marketing of Algerian gas, a significant change to Algerian gas policy, and pave the way for an eventual expansion of Algerian exports to Italy, at a time when Italy is preparing for the potential receipt of Azeri gas in 2020.
Naturgy (formerly Gas Natural Fenosa) announced the extension of its 9 bcm/y long-term gas contract with Sonatrach, due to expire in 2021, until 2030. Pricing details were not provided.
Meanwhile, the UK’s Petrofac and JV partner Bonatti (Italy) have boosted output at Algeria’s onshore Alrar field. The companies won an engineering, procurement and construction (EPC) contract in 2013 to extend Alrar’s life and add new compressors. Flows at Alrar have reportedly risen by 54% to 24.7 mcm/d (adding 4.5 bcm/y) since new compressors started in June.
We expect 2018 North African exports to the EU to be up by 0.8 bcm y/y, with Q3 18 flows up by 0.2 bcm y/y and Q4 18 flows largely flat. For 2019, we see flows being flat y/y due to the agreements signed with Eni on selling equity gas, as it will take time for Eni to develop the gas for export. We see Italy taking 38–39 bcm in 2019 under the new contract , flat y/y.
We forecast Europe (including Turkey) will import 5 bcm more LNG y/y in Q4 18 (4 bcm y/y to the EU), though there is downside risk given the wide prevailing JKM-TTF spreads. Three new trains are set to start up by early Q4 18—Wheatstone 2 (4.4 Mtpa), Yamal 2 (5.5 Mtpa) and Ichthys 1 (4.2 Mtpa)—but these volumes could be easily absorbed by NE Asia, if strong demand there continues through Q4 18. For 2019, we see Europe taking 18 bcm of LNG. There is sizeable downside risk here as the number depends on all planned supply coming online as scheduled.