2020 is looking like a year of plenty for EU gas markets, particularly where gas supply is concerned. While Groningen production is the main downside risk for supply, that is going to be more than made up for by additional Norwegian, Russian and LNG supply. That means Europe will need to create more gas demand from power. While gas prices will need to ease in relative terms, flat prices are going to be more sensitive to developments in the coal and carbon markets.
The Dutch government has indicated that Groningen production for the 2019-20 gas year could drop to about 17.4 bcm, followed by another drop to 13.6 bcm in the 2020-21 gas year, so Europe will see a combined 6.0 bcm y/y reduction in Groningen supply over those two gas years.
On the flipside, 2020 will see the first 27.5 bcm line of the Nord Stream 2 (NS2) pipeline start flowing gas sourced from Yamal (Russia). That gas will be part of the next stage ramp-up of 30 bcm/y at the Bovanenkovskoye field, although a large chunk of that gas will be backfilling natural declines from the Nadym-Pur-Tazovsky (NPT) region in Russia. Still, a rapid ramp-up of the last leg of the current Bovanenkovskoye investment programme would possibly outpace NPT declines, though incremental gas is unlikely to be more than 10 bcm over the first three years of the operation of NS2.
The significant growth in supply in 2020 will come from global LNG, which will (at least for a while) start to increase ahead of global LNG demand growth. Starting with liquefaction, the supply-heavy nature of the balances mostly comes from the expected large production increases in 2019. The year 2019 is promising a 42.6 Mtpa increment in annualised supply capacity, which will add supply throughout all of 2020. Demand looks like it will lag supply growth, with Chinese growth slowing over the coming two years (but still averaging an incremental 9 Mtpa) on import infrastructure constraints. With the Chinese LNG juggernaut starting to look constrained on import capacity until 2021, other LNG demand growth looks light, pushing some 35-40 bcm of added gas into Europe for the 2020 balances compared to 2018.
The supply growth will require considerable demand-side response in terms of the coal-to-gas fuel switch. In the key western European power markets, coal-to-gas switching would provide maximum additional gas demand of 40 bcm/y on 2017 numbers, meaning the market could be just about balanced provided that almost all the potential fuel switch is realised. While this means lower flat prices relative to coal, expected higher oil prices (85-90 $/bbl) are expected to keep global coal around 100 $/t, while European carbon is forecast to come in above 30 $/t. As such, the fuel switch should be exhausted around 22 €/t (7.5 $/t), which would keep the arb with Henry Hub (3.5 $/t) open.