Colder-than-normal weather in January boosted total European gas consumption, with the market balancing on record high LNG sendout. The cold prompted Russian gas pipeline imports to log their first y/y increase in three months, which offset the need for North African gas. Europe’s well-supplied market ended January with a widened y/y storage overhang of 4.3 bcm, which has grown to 6.7 bcm as of 9 February. Further softening in JKM prices over the month and further liquefaction capacity additions make Europe the prime destination for LNG cargoes. We forecast European LNG imports to expand by 12 bcm y/y over summer 2019, with demand for Russian and North African pipeline exports falling by 5.3 bcm and 2.0 bcm y/y respectively.
LNG set to stay strong
European LNG receipts in January reached the second-highest level since 2011, at 6.6 bcm (+5.3 bcm y/y), which encouraged record sendout of 7.6 bcm (+4.3 bcm y/y). Muted Northeast Asian demand due to mild weather and brimming LNG stocks continued to soften the JKM and its spread to the TTF, with the JKM front-month contract closing at 7.3 $/mmbtu on 11 February, from 8.8 $/mmbtu a month earlier. Additional volumes from the ramp-up of Sabine Pass T5, Corpus Christi T1 and Yamal T3 further weighed on LNG prices and added available volumes for Europe. The largest source of incremental supply in January came from the three Yamal trains, which are now in full operation and in January exclusively sold gas into the European market. We expect most Yamal cargoes will be sold into Europe through the summer. We forecast European LNG receipts to expand by a hefty 12 bcm y/y to 35 bcm over Q2 19-Q3 19 as more LNG is put onto the water by the start-ups of Ichthys T2, Cameron LNG T1, Corpus Christi T2, Elba Island T1and Freeport LNG T1, adding as much as a combined 14 Mtpa of liquefaction capacity.
The biggest increase in LNG sendout came from the UK, rising by 1.4 bcm y/y in January. The consistently positive NBP basis to the TTF has seen the UK take some 4.3 bcm more LNG y/y over the last four months. The next biggest increases in sendout occurred in France (+0.9 bcm y/y), the Netherlands (+0.7 bcm y/y) and Italy (+0.5 bcm y/y). Even Spanish LNG sendout, which had declined y/y most months in the last year, saw a small uptick of 0.1 bcm y/y in January as port receipts were up by 0.5 bcm y/y. Aggregate European LNG stocks stood 0.2 bcm higher y/y at 2.5 bcm as of 11 February. With port receipts still looking solid for the rest of February, there are few signs that the trend of higher LNG receipts is coming to an end.
Pipes sensitive to demand
While incremental LNG is landing in Europe largely due to a combination of buoyant global supply and tepid global demand, European pipeline gas imports are still attuned to underlying demand. January saw lower-than-normal temperatures across Europe, driving higher demand and encouraging the first y/y increase in Russian flows since October 2018. The jump in Russian pipeline imports in January (+1.8 bcm y/y to 15 bcm) was characterised by quicker flows via Velke Kapusany (+2.8 bcm y/y), which more than offset a softening of imports through Poland (-0.3 bcm y/y) and Romania (-0.7 bcm y/y). Imports of Russian gas were higher y/y in January, but nominations for the rest of winter and coming summer should soften y/y. End-user demand is set to fall y/y for the rest of Q1 19 as 15-day forecasts point to milder weather and we assume a reversion to normal weather, while there will be less need for injections in the coming summer given high storage levels.
We expect Gazprom flows to see both a volumetric and a geographic shift once the first 27.5 bcm leg of the Nord Stream 2 (NS2) pipeline enters operation, scheduled for end-2019. The utilisation outlook for the pipeline took a knock last week when the European Council agreed a number of amendments that would extend the EU gas directive regulations to pipelines with non-EU countries. While those amendments allow derogations to be provided to pipelines already in service before the law is formally in place (meaning NS1 flows should not be affected), the amendments are being introduced to ensure that Russian gas will still transit through Ukraine, even if it is in lower volumes. The text agreed by the Council passed through trilogue on 12 February and the enforcement of the gas directive principles in the case of NS2 falls to Germany as expected, although German regulators will have to demonstrate the NS2 pipeline is broadly compliant with the directive, apply and secure a derogation, or face enforcement action by the EU. The trickiest aspect for Gazprom is the directive’s third-party access rules, which limit a single company to maximum use of 50% of a pipeline’s capacity. For 2020, that would mean a maximum of 13.75 bcm of gas could be brought into Europe through NS2, with another 13.75 bcm of gas available from 2021 when the second line of the pipe is completed. Gazprom has 30 bcm of additional Yamal gas waiting to be monetised from the last phase of Bovanenkovo, which was announced as completed in Q4 18. How fast the field ramps up to 30 bcm is a question, but most of that gas should still be able to flow on NS2 in the next two years, despite any limits on pipeline capacity utilisation. Not being able to use all of that pipe is only likely to be a significant problem for Gazprom from around 2023, when other Yamal gas fields are expected to come online and would need to be transported to market through NS2.
Unlike Russian gas, pipeline imports from North Africa in January fell by 0.4 bcm (11%) y/y as Algerian flows into both Spain and Italy shrank. For Spain, Algerian imports fell by 0.17 bcm (11%) y/y, largely due to strong imports from France (+0.21 bcm, 63% y/y), flows that have been a constant since the unification of the French hub into a single zone in 1 November 2018. With imports from France—plus more available LNG—likely to grow, it is hard to see Algerian gas flows being strong. Enagas forward nominations suggest Spanish takes from Algeria will drop by 0.4 bcm y/y in March. Italian imports from Algeria are likely to behave similarly this summer, with LNG takes also up. The main upside to both is that oil-indexation in Algerian contracts should prices begin to fall from Q2 19 onwards. Still, given the downward pressure on hub prices, we expect pipe imports from North Africa to fall by 2.0 bcm y/y to 14 bcm this summer.
|Fig 1: Aggregate European sendout, y/y, bcm||Fig 2: Spanish imports of Algerian gas and lagged Brent price, bcm y/y, $/bbl|
|Source: System operators, Energy Aspects||Source: Enagas, Refinitiv, Energy Aspects|