Pipe supply to Europe will need to slow down with LNG imports set to remain robust in Q3 19. We expect a conservative 7.5 bcm of y/y incremental LNG supply to arrive in Europe that quarter. While nominations from the big long-term contract suppliers showed evidence of declining in June, Russian pipeline imports in June into the western European market stayed largely unchanged y/y as Gazprom continued to sell record-high volumes on its Electronic Sales Platform (ESP). With 1.6 bcm of Russian gas arriving through short-term sales on the ESP, it is clear that Gazprom is aggressively defending its market share. However, for the EU gas market to balance, Russian pipes will need to turn down in Q3 19 in y/y terms by at least 3.0 bcm, and that will require further reductions in European gas hub prices.
The underlying message from June for European gas flows was that there is a reluctance to reduce supply from many sources. Russian flows were the primary culprit, even if they were actually a bit softer in June, with imports down by 0.76 bcm y/y. Almost all of that reduction was in gas going into the southern European gas markets and entering through Romania, with that posting a y/y reduction of 0.62 bcm. Those flows have been consistently lower over 2019 and a large part of that is due to exports of gas from Bulgaria to Turkey falling as well, crowded out by flows on TANAP. For the western EU gas markets, the import changes were smaller and the story remains one of Gazprom aggressively selling volumes on its ESP, with sales climbing by almost 0.6 bcm m/m, reaching another record high, of 1.6 bcm in June. Sales into German hubs were up at an eye-watering high of 1.3 bcm. Over H1 19, all ESP sales have amounted to 5.57 bcm. If those sales had not taken place, the EU storage overhang at the end of June would be near 19 bcm rather than the 25 bcm mark, which would still be high but not as concerning for the market.
For July, Russian flows will drop in m/m terms as Nord Stream will undergo two weeks of maintenance between 17-30 July. But the market really needs to see a y/y reduction in Russian flows for the market to balance and given last year involved maintenance on Nord Stream in July, a y/y drop in flows is not a given. All eyes will be on the ESP, but if Gazprom does sell at its June pace or above, then most of that gas will have to enter via Slovakia and that is a more expensive route for Gazprom to get into the market, coming in around the 3.0 $/mmbtu level (9 €/MWh). However, to choke that supply source off, EU hub prices would have to drop further. For Q3 19, Russian gas flows will still need to drop by at least 3.0 bcm y/y if other supply comes in as expected.
LNG still strong, Algeria starting to fall
LNG sendout in June came in around 8.1 bcm, up by 4.6 bcm y/y but softer m/m by 1.5 bcm. The slowdown was as anticipated, as LNG for Europe was going to peak with global balances having looked the weakest in April and May. A further sequential slowdown in LNG sendout is expected for the months in Q3 19, as NE Asian LNG buying, while still tending towards lower growth than last year, will see a seasonal increase. For Q3 19, we see LNG imports and sendout being up by 7.5 bcm y/y, a slowdown compared to growth of 17.7 bcm y/y in Q2 19. We do think this forecast is on the conservative side and that there is more upside than downside risk, given our assumption that seasonal maintenance to LNG supply trains will be similar to what we saw last year.
While we did expect strong LNG imports, we have been skeptical of strength in Algerian flows as this gas looks far out of the money given the large fall in prices at European gas hubs. EU gas takes from Algeria came off by 1.1 bcm y/y in June and by 3 bcm y/y over Q2 19, which has been largely in line with our outlook. We expect these y/y reductions to continue across Q3 19, with increases in oil-linked contract prices (due to the lagged nature of the link) going to accelerate the reductions. Italian imports from Libya only came in 80 mcm higher y/y in June, as June 2018 provided a more historically normal baseline in contrast to the low imports over most of H1 18. The added 0.9 bcm of Libyan imports in Q2 19 offset some of the reductions in Algerian supply, but we expect less incremental Libyan imports in Q3 19 due to the base effects. We expect North African pipeline imports into Europe to shrink by 2.9 bcm y/y in Q3 19, all Algerian, unchanged from our last forecast.
Gazprom still focused on Yamal expansions
Gazprom released its annual Facts and Figures book last month and the main highlight is in relation to the regional production data. For 2018, Gazprom reported that Bovanenkovo produced 87 bcm of gas, up by 5 bcm y/y, but that number did reflect 2 bcm of production of the last phase of the current development of Cenomanian deposits that Gazprom says will add 30 bcm/y to Yamal production by 2021. Given an assumed stable ramp-up, Gazprom will be intending to add some 12.5 bcm of new Yamal gas into the market in each of 2020 and 2021, provided it will have the Nord Stream 2 pipeline available to get that gas into the market. Also surprising was the good performance from the Nadym-Pur-Tazovsky (NPT) region, where production rose by 22 bcm y/y, a second straight year of healthy gains after five previous years of declines. Those production gains only partially came from new production, with indications that the Urengoy Block 3 field hit its design production cap of 21.5 bcm/y in the last year, with most of that field’s production ramp-up coming in the last two years. With NPT maturing, it does have some annual swing capability. With European demand being much stronger since 2016, when hub indexation widely replaced oil-indexation, NPT production has been stronger than just new field additions would suggest. This does suggest that Gazprom could have more gas to put through the more southern routes. Given Gazprom has the 31.5 bcm/y TurkStream to fill as well as needing to agree an annual quantity for transit through Ukraine, it certainly will have enough pipeline capacity to get that gas into the market.
In terms of Gazprom’s new field developments, the main revisions to its outlook from last year is that it has delayed projected start-up of most developments by three to five years. Even given that, the Yamal region is expected to add some 60 bcm/y of production by 2025, half of that at Bovanenkovo and the other half at the Kharasaveiskoye field, which is expected to ramp up to full production between 2023 and 2025. Outside of Yamal, investment in the NPT is expected to add some 32 bcm/y of new production, all at Urengoy blocks, which could help keep that region from seeing much decline in the next five years. After 2027, the NPT has no new planned fields to come online to offset declines. The rest of the investment is into Eastern Siberia and the Russian Far Eastern district, which are expected to add a combined 53 bcm/y from a fairly small starting point. The bulk of that gas is going to be exported to China or go into LNG production. Gazprom did push back all of its Arctic Shelf projects, with none of those now expected to be producing before 2025.
|Fig 1: Gazprom new field production, bcm||Fig 2: Gazprom production by region, bcm|
|Source: Gazprom, Energy Aspects||Source: Gazprom, Energy Aspects|