Pipe supply to Europe has started to slow down, which will help ease the looseness in the European summer balances. The biggest development has been the slowing of Russian imports, despite still strong selling on Gazprom’s Electronic Sales Platform (ESP). Russian flows are now on track to drop by 4 bcm y/y over Q3 19, with a weak July likely to be followed by similar August and September. North African imports are on track to fall by 3 bcm y/y over Q3 19 as Algerian gas flows have continued to drop, in line with our expectations, and growth y/y in Libyan flows looks like it has ended. We had been expecting a conservative 8 bcm of incremental LNG supply y/y to arrive in Europe over Q3 19, around half of the increment seen in Q2 19. LNG sendout slowed in July to 3.3 bcm, the lowest for any month so far in 2019. A slowdown in sendout should continue, although more US trains starting to ramp up and weak NE Asian imports should mean imports and sendout in the EU will be up 8 bcm y/y over all of Q3 19.
Russian flows coming off—finally
The main development in July was a large 1.5 bcm drop y/y in Russian flows. Nord Stream underwent maintenance between 17-29 July, but the big drop predominantly came from flows through Velke Kapusany (-1.2 bcm y/y). Selling on the ESP saw an increased proportion of Gazprom’s short-term gas going to Central European hubs. However, total ESP sales in July amounted to 1.1 bcm (-0.5 bcm m/m) and it was the first month not to register a m/m gain since the introduction of the platform. Forward selling of ESP gas for August was already at 1.2 bcm at the start of the month, with more short-term gas sales still to come, suggesting less of a y/y fall in total Russian flows is likely in August. While nominations under long-term Russian contracts will continue to drop, the heavier selling of gas on the ESP will limit that. We think that Russian gas imports are on track to fall by around 4.0 bcm y/y over Q3 19. For August, the forward ESP sales suggest the y/y drop in supply could be lower than seen in July, but a y/y fall in Russian supply of at least 4 bcm is likely needed for the EU market to balance.
We expect Russian flows to stay strong in Q4 19, particularly if the risk for Q1 20 of no transit agreement for Russian gas through Ukraine still exists. Trilateral talks between Russia, Ukraine and the EU have been scheduled to restart on 16 September, but the two main sides remain far apart in terms of demands. Russia appeared to up the pressure on Ukraine by offering to extend the existing contract for a year, although the Ukrainian side saw this as Russia just buying time to finish the Nord Stream 2 (NS2) and TurkStream pipes. It seems unlikely that a new agreement will come out of the 16 September talks.
While we do see this as a process fraught with difficulty, the costs to both sides of not having gas transiting Ukraine this winter suggests some form of temporary agreement—such as that already offered by the Russians—will need to be accepted if a more permanent deal cannot be reached. Still, for Q4 19, continuing underlying risk of no agreement will keep the contango between the Q4 19 and Q1 20 contracts wide enough to encourage participants to keep gas in storage. As such, nominations of Russian gas, combined with potentially more sales y/y on the ESP could even lead to a y/y increase in Russian supply into the European market.
For Q1 20, there is still an outside chance that the first 27.5 bcm/y line of NS2 starts operating. Gazprom expects an announcement from Denmark on the environmental impact assessment of the southern route around Bornholm in late September or early October. Permission from Denmark by then would allow NS2 to finish pipelaying on the first line five to seven weeks later, meaning the pipeline could be physically completed in November. With testing and filling still to be completed, that would potentially allow operation of the pipeline in late February or March. NS2’s operation is not all that central to the Q1 20 balances, provided transit through Ukraine is available, as much of the first gas going through NS2 will only change the route to market of gas rather than expanding supply levels. Having said that, if Q1 19 is very cold, the operation of NS2 could provide incremental gas supply, which would further limit the call on EU storage and moderate European winter hub prices. Potential US sanctions on the pipelaying companies also add to the uncertainty. If Denmark finds another way to avoid granting the pipeline access in September/October, then the timeline for pipeline completion could extent to the period when US sanctions could be in place, creating a more material headwind to pipeline completion.
Algerian supply continues to fall while increase in LNG tapers
Two other key parts of our Q3 19 balances are a 3 bcm y/y reduction in North African flows and a slowdown in LNG sendout growth to 8.0–10.0 bcm y/y.
Algerian flows to Italy and Iberia were weak in Q2 19 (-3.0 bcm y/y) and in July (-0.87 bcm y/y), and are largely on track to deliver our expected reductions over Q3 19. The strength in Libyan flows of 0.9 bcm y/y in Q2 19, which partially offset the drop in takes from Algeria, eased as expected to only a 80 mcm y/y rise in July. For the remainder of Q3 19, we expect an even greater drop in North African imports y/y as gas storage in the southern markets begins to fill. However, the y/y storage surpluses are smallest in the southern markets, so the downward pressure on market balances will not be as extreme as in Northern European markets, suggesting that any further y/y drop in imports from Algeria beyond our current forecast for Q3 19 is unlikely.
LNG sendout in July came in around 6.9 bcm, up by 3.3 bcm y/y but softer m/m by 1.2 bcm. The slowdown was what we anticipated, as LNG supply for Europe was going to peak in Q2 19 with global balances having looked loosest in April and May. For all of Q3 19, we see EU LNG imports and sendout rising by around 8.0 bcm y/y, a slowdown compared to growth of a revised 15.6 bcm y/y in Q2 19. A couple of new US LNG trains (4.0 Mtpa Cameron LNG T1, 4.5 Mtpa Corpus Christi T2) have started exports and will ramp up production over Q3 19. As such, LNG supply into Europe is still likely to rise y/y, although August and September could see the lowest y/y increments of the year.
|Fig 1: Gazprom ESP sales by delivery hub, bcm||Fig 2: Gazprom production by region, bcm|
|Source: Gazprom, Energy Aspects||Source: Gazprom, Energy Aspects|