We expect EU imports of LNG to grow by 4.9 bcm y/y in Q1 19 as the influx of cargoes continues. That said, European demand remained sluggish in December and we see that continuing in Q1 19 barring a shift in weather to be much colder than normal. The combination of high LNG supply and lower demand y/y has been reflected in imports of North African pipeline gas, and we expect to see the latter continue to be crowded out in Q1 19 (-1.3 bcm y/y to 9 bcm). Higher LNG availability during summer 2019 will support y/y EU import growth of 12.0 bcm, while total pipe imports will drop by 5.3 bcm y/y.
Import dynamics focussed on LNG
The biggest story in the EU market over Q4 18 was the counter-seasonal increase in LNG into Europe. This continued in December, with LNG port receipts up by 3.5 bcm y/y and sendout higher by 3.0 bcm y/y. Given that December was no colder than normal and January set to be seasonally normal, Northeast Asian buyers have been given very little reason to top up stocks. The response in the JKM curve has been dramatic, with January starting with limited residual buying for Feb-19, which is now below 9 $/mmbtu, having spent most of Q3 18 trading around 13–14 $/mmbtu. The price weakness, combined with persistently high freight rates at a 100,000 $/d rate, means that the market is still going to make more LNG available to Europe. In particular, LNG from Yamal is likely to stay in Europe and EU reloads look uneconomic. We still expect four new supply trains to be starting or ramping up in Q1 19. The 4.5 Mtpa Corpus Christi and the 5.5 Mtpa Yamal T3 both began LNG exports in December, while the 4.5 Mtpa Sabine Pass T5 and the 3.5 Mpta Prelude project are beginning production and should add supply in Q1 19. Shell said on 26 December that it had started natural gas and condensate production at Prelude, though there is no date yet for a first export cargo. Given new supply on the horizon and mild Asian weather, we now expect LNG available to Europe in Q1 19 to be some 4.9 bcm higher y/y.
For summer 2019, the 4.0 Mtpa Cameron LNG T1, 4.2 Mt Ichthys T2, 4.5 Mtpa Corpus Christi T2, 1.3 Mtpa Elba Island T1-5 and 4.4 Mtpa Freeport LNG T1 are still expected to be adding volumes into the market. All of this upcoming supply and a very mixed outlook for global demand mean that we think that European LNG takes will expand by 12.0 bcm y/y over summer 2019.
Over December 2018, Spain was the exception to the rule, posting a 0.2 bcm y/y fall in LNG sendout, albeit a smaller y/y drop than in November 2018. While Spain did have another low-demand month on higher hydro generation and mild weather, it again took more gas y/y from France, at the expense of both LNG and Algerian piped gas. While some of that was probably LNG imported into France, and was helped by healthy French balances, the dynamics pushing one of Europe’s largest LNG importers not to attract any of the excess spot cargoes continues to be symptomatic of the lack of transparency and liquidity in the Spanish gas market.
Russian flows – unchanged for now
While the call on EU storage continued to dip y/y in December 2018, by some 5.0 bcm, pipeline imports from Russia were largely unchanged y/y, with only a 0.2 bcm (1%) y/y fall. The most interesting developments regarding Russian supply were a 0.66 bcm y/y increase in flows through Velke Kapusany and a 0.36 bcm y/y reduction of flows via Poland. Gazprom Export sold 0.43 bcm of short-term gas through its Electronic Sales Platform (ESP) for December 2018 delivery, with most of that coming through Velke Kapusany, accounting for most of the swing in Russian flows, with Polish transit numbers likely softening on lower EU demand. The other development is that flows through Romania fell for the third straight month, by 0.36 bcm y/y. The drop, which includes some Russian gas that is transited all the way into western Turkey, has coincided with the start-up of gas flows on the TANAP pipeline, raising questions about just how much appetite there will be in western Turkey for TurkStream gas when it begins to flow in Q4 19. We note that the sharp fall in import of Russian gas was driven by financial problems faced by the seven private companies that take Russian gas via the Trans-Balkan pipeline—these firms are increasingly being priced out of the market by state-owned Turkish company Botas.
The most remarkable thing for the ESP sales was that it included one 0.7 mcm sale of day-ahead gas delivered in GASPOOL, showing a desire to sell even into the very short-term markets.
Early December 2018 saw Gazprom commission the Bovanenkovskoye field’s third and final gas production facility and the Ukhta–Torzhok 2 (UT2) pipeline, paving the way for the monetisation of the field’s final 30 bcm/y production phase. UT2 links to Nord Stream 2 (NS2), so the resulting bump in Russian production is only likely to be seen once NS2 starts flowing, and even then it is likely to be a gradual ramp-up as that gas will be playing a role in backfilling declines from the long-standing production centre of Nadym-Pur-Taz. By mid-December 2018, NS2 reported that 370 km of its 1,200 km had been built, with that pipeline having a target start-up date of end-2019. We suggest that Q4-19 will price at a premium to Q1-20 as the NS2 start draws near.
Russian gas exports for the rest of this winter will still be sensitive to underlying res-com demand, so a cold Q1 19 could help support takes, particularly in January, when the y/y difference in demand will be most significant. In the February-April period, any incremental Russian supply to Europe is a stretch given how cold parts of that period were in 2018 and how much pipeline supply was used then. Still, we expect Q1 19 Russian flows to come in only some 0.4 bcm lower y/y. We could see some further easing in takes during summer 2019 given an expected reduction in EU storage injection requirements, particularly during April, dropping imports of Russian gas by 5.3 bcm y/y to 76 bcm during summer 2019.
North Africa – better prospects on lower oil prices?
Increased EU import of North African supplies remains a function of some fairly new and opaque oil-indexed contracts with Spanish and Italian buyers, as we noted last month. Algerian flows had a weak Q4 18, with combined Spanish and Italian imports coming in 1.66 bcm lower y/y (including a December fall of 0.63 bcm y/y). Italy saw the bigger y/y drops: some 0.45 bcm in December 2018 and 0.97 bcm over all of Q4 18. In Italy, demand was down in every month in Q4 18, dropping in aggregate by 2.1 bcm y/y on milder weather, more hydro generation and higher LNG imports (+1.35 bcm y/y over the quarter). As for Spain, Q4 18 imports from Algeria were 0.69 bcm lower y/y, while demand was only down across the quarter by 0.5 bcm y/y. The loss in market share for Algerian gas came largely because of the 0.24 bcm y/y increase in imports from France. Higher takes from France have been a consistent feature since the creation of a unified French hub on 1 November, with Spain now able to get better access to prices in line with those seen in NW Europe.
One thing that will help Algerian exports in summer 2019 has been a softening of oil prices over December 2018 and January. That drop in crude prices will start to weigh on Algerian contract prices come summer 2019. Still, even with a reduction in contract prices, the likely drop in NW European hub prices expected this summer will mean North African pipeline imports will remain commercially challenged. We expect that European imports of North African gas will shrink by 1.9 bcm y/y in summer 19 and by 4.8 bcm y/y over all of 2019.