The EU market balanced again in August with lower Russian imports, but the result was lower y/y storage injections. We continue to think the y/y summer dip in Russian flows is just a temporary break from another upward production trend as production capacity from the Bovanenkovskoye field is expanding again this year. EU gas markets, which are now very focussed on injections, could well benefit from a forecast y/y gain in gas supply from Russia (+2.4 bcm y/y) and North Africa (+0.4 bcm y/y) in September as southern European gas markets replace high opportunity cost LNG with pipeline imports. LNG supply, which was weak again over the summer, is unlikely to add much to the EU supply picture over the coming winter as the wide JKM–TTF spreads mean Asia is still the destination of choice for available cargoes.
Russian gas imports to help close storage gap
One of the key developments in August was that European imports of Russian gas were softer by 0.35 bcm (-2.4%) y/y to 13.74 bcm (0.44 bcm/d) according to European system operator data. In terms of flow rates, this was some 58 mcm/d below the export rate seen in June this year, although it was higher than the July pace of 0.4 bcm/d that was depressed by maintenance on Nord Stream. The border point with the biggest y/y reductions was Velke Kapusany (Slovakia), where flows were down by 1.0 bcm y/y.
Total Russian gas production in August was 0.19 bcm (0.4%) higher y/y at 54.6 bcm, the smallest y/y increment posted since January. As has been the case all year, the y/y increase has been accounted for by Gazprom, which logged 0.77 bcm (2%) y/y of growth. The reduction in EU imports in y/y terms, despite Gazprom production back up at June flow rates, suggests some downstream pipeline maintenance. Market chatter did have Gazprom redirecting gas it would have injected into storage and instead allocating it to customers to compensate for that maintenance, although that is hard to verify.
Given the European storage gap was still 3.8 bcm higher y/y at the start of September, we expect the market will call strongly on Russian gas supplies over September and October to fill that gap and that those export rates will head back up to at least June levels of 0.47 bcm/d . In September, we expect total EU imports of Russian gas to rise by 2.4 bcm, with such big growth driven by the lack of Nord Stream maintenance in September 2017. Russian exports could well come in around 7.0 to 8.0 bcm higher y/y over all of 2018, with total imports already up by 5.1 bcm y/y over the first eight months. If there is any weakness in imports, it could be in Q4 18, due to base effects on demand numbers, but we expect lower demand will reflect itself in y/y drops in storage withdrawals. 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 Bovanenkovskoye, which will bring the field to its design production capacity of around 115 bcm/y. Gazprom reported that its exploration operations resulted in gas reserve additions of 768 bcm (А+В1+С1 categories) over H1 18, including 667 bcm in the Leningradskoye field (Yamal) and 101 bcm in the Yuzhno-Kirinskoye field (offshore Sakhalin). The exploration is part of an ongoing Gazprom project to replenish its resource base given annual production of just over 500 bcm in 2017.
North Africa: Algerian questions
Flows from Algeria continued to buck the trend of y/y declines set in Q2 18, with Spain for a second month being the main growth destination for Algerian gas. In August, total North African pipeline exports to Europe were up by 0.28 bcm y/y. Algerian gas into Spain rose by 0.5 bcm (72%) y/y as another y/y drop in LNG supply and a fall in gas imports from France pushed Spain to continue to nominate heavy volumes of Algerian gas. Spanish imports of French gas have continued to be low over the whole summer as work on the north-south pipelines to expand capacity have disrupted gas flows into southern France. While that work is likely to continue through September, the low NW European storage levels still suggest that available gas to go south will be low, and Spain will still need to look to Algeria to close its own 0.13 bcm storage gap. The expanded north-south pipeline in France should be complete for Q4 18, removing some of the need for y/y increases in the call on Algerian gas by Spain. Still, that demand for Algerian gas should be coming in 0.3 bcm/m higher over the coming three months.
Algerian flows into Italy increased y/y, but only by 24 mcm (3%) y/y and did show a m/m drop. Demand for Algerian gas was likely higher in July amid Nord Stream works. Libyan flows to Italy were up by 81 mcm (26%) y/y, with the last three months each seeing Italy import just under 0.4 bcm/m of gas from the country. Italy has tended to import around 0.4 bcm/m since January 2016 (with a peak of around 0.47 bcm/m), which suggests that Libyan flows will stay around current levels over the next four months.
As we argued last month, the key to Algerian exports to Italy rests with the new commercial conditions for the 2018-19 gas year agreed in July between Eni and Sonatrach. Eni reported that the terms are ‘in line with the gas market’. While Italy is unusual in having a positive y/y storage position going into September, the wider Baumgarten market has a fairly hefty 1 bcm y/y storage gap to close, so Italian takes of Algerian gas could well continue to post some y/y gains. We expect North African exports to Italy to be up y/y by 0.2 bcm in September and by 0.5 bcm in Q4 18. For 2019, we see flows being flat y/y. While Eni has agreements to sell its own equity gas produced in Algeria, it will take time for Eni to develop the gas for export. We see Italy taking 18-19 bcm of Algerian gas in 2019.
LNG supply into Europe has been scarce with LNG sendout into the region’s markets down across the board (with the exception of Poland) and dropping by 0.91 bcm (21%) y/y in aggregate. While we forecast the EU will import 1 bcm more LNG y/y in Q4 18, we note there is much more pronounced downside risk. Three new trains were originally expected to have started up by early Q4 18—Yamal 2 (5.5 Mtpa), Prelude 2 (3.5 Mtpa), and Ichthys 1 (4.4 Mtpa). But while Yamal has already started, the other two trains look like they could be shifting to only start up in late Q4 18 and be unlikely to provide any incremental gas at all in Q4 18. If those delays are confirmed, this would further drop the volume of available gas to Europe. Even if delays to start-up do not occur, there have been wide prevailing JKM-TTF spreads along the curve out to next March at levels that support the reload of gas from Europe to NE Asia. Given this, there is as great a chance of further y/y reductions in LNG supply to Europe as there is LNG increments.
For 2019, we see Europe taking 15 bcm of LNG and this is based on a slowdown of incremental demand in China because of limited new regasification capacity and a heavy slate of US supply additions. There is sizeable downside risk here as the number depends on much of the planned new US supply coming online as scheduled.