European gas prices jumped last week on three issues that could potentially tighten the winter supply-demand balance, and we expect prices to maintain most of those gains until there is more clarity on some of the risk factors. The event providing most risk premium is potential French nuclear outages due to safety anomalies. If there are no significant changes in available French nuclear capacity this winter, then the Q4 19 balance will remain loose enough for gas prices to drop low enough to encourage full coal-to-gas fuel switching. If outages are significant—over 14 GW of capacity is at risk—winter 2019-20 prices will be a couple of euros higher. We expect prices to be volatile this week as the recent Court of Justice of the EU (CJEU) ruling revoking Gazprom’s full use of the OPAL pipe will put more pressure on Gazprom and Ukraine to reach a transit agreement. However, Gazprom’s online sales platform (ESP) will likely allow Nord Stream flows to remain robust through winter, making the CJEU ruling less impactful on the supply-demand balance than it might have been.
French nuclear issues: once bitten, twice shy
European gas markets were roiled last week by three separate issues but the ultimate effect on the supply-demand balance depends on how events play out. The most immediate result has been a tightening of Russian supply owing to the CJEU ruling on OPAL (see E-mail alert: Court ruling on Opal dents winter balances by up to 9.0 bcm, upping ante on securing Ukraine transit agreement, 10 September 2019), but the issue that could have the most serious impact on the winter balance is the abnormalities in French nuclear power plants (see E-mail alert: EDF announcement on nuclear plant anomalies raises spectre of high winter outages, supporting markets, 11 September 2019).
There has not yet been enough information regarding the anomalies reported in some of EDF’s nuclear units to determine how many reactors might be affected. A report last week by French regulator ASN suggested five plants are likely to be affected by the anomalies. We have slightly moderated our previous analysis to now expect the 11 units at those plants as being at risk of outages, with a combined capacity of 14.4 GW, compared to 12 units previously. Every month that 14.4 GW of nuclear capacity is out of service, French nuclear generation would drop by over 10 TWh per month assuming the other nuclear maintenance outages are unchanged y/y. If all of that loss is replaced by gas-fired generation, it would add 2.0 bcm per month to gas demand. As of Monday morning (16 September), there was no significant change to the French nuclear maintenance schedule, although we do not think that any big changes to the schedule will be made before ASN indicates the nature of any remedies that EDF might need to put in place and over what schedule.
Given the likelihood that the schedule for French nuclear plant outages will need to be altered for the coming winter, the market will be reluctant to price out some of the risk premium added last week until there is greater clarity from ASN and EDF.
How much will Russia redirect?
Flows through OPAL, which originate from Nord Stream, slumped over the weekend after German regulator BNetzA ordered Gazprom to drop back to using only 50% of the available capacity on OPAL. Part of the fall in flows has been offset by higher Russian flows through the 0.2 bcm/d capacity Velke Kapusany borderpoint. However, maintenance is scheduled to cut delivery capacity at Velke Kapusany by 0.14 bcm/d for two weeks starting 23 September, so that route will only provide limited respite in September. An expected tightening of Russian supply supported prompt prices extending through Sep-19 on Monday morning, with the BOM contract up by 7% from Friday’s close.
Once maintenance is over, we think it likely that flows through Velke Kapusany will ramp up, replacing more lost Nord Stream flows than indicated by current nominations through the border point. Supply nominations from Ukraine into Slovakia for today’s gas day rose to almost 0.16 bcm, up by almost 10 mcm/d on average versus flows over last week. Extrapolating that across one month would mean flows through Velke Kapusany would only offset around 0.3 bcm per month of the 1.5 bcm per month expected loss in supply through Nord Stream. A 1.2 bcm per month drop in Russian supply would tighten the European market considerably. But part of the reason behind the sluggish pace of the uptick in Russian transit via Slovakia could be because it is taking some time for Gazprom to ramp up some of the Nadym-Pur-Taz gas fields that will be needed to replace the lost Bovanenkovskoye fields.
As we pointed out in our recent Europe Outlook: Winter Outlook, 13 September 2019, some of the OPAL restrictions on supply may be offset by Gazprom selling Griefswald-delivered supply on the ESP and letting other market participants move the gas down OPAL. About 50 mcm of gas for Q4 19 delivery has been sold on Gazprom’s ESP since the CJEU ruling was made on 10 September.
We still think it unlikely that Gazprom and Ukraine will manage to reach a transit agreement at the scheduled 19 September meeting given how far apart the two sides are in terms of the annual committed transit volumes. It has taken the two parties several rounds of discussions before previous agreements have been cemented. If an agreement does get announced, then the main impact will be to reduce the contango in the winter curve, particularly narrowing the Q4-19–Q1-20 spread, which was trading around 2 €/MWh on Monday.
Market doubts on proposed Groningen cuts
Issues surrounding Russian supply and French nuclear availability will dominate trading this week, although we could see some limited downward price movement surrounding the proposed Groningen cap for gas year 2019-20. We stated last week that the Netherlands would struggle to meet demand under the proposed 11.8 bcm cap (see E-mail alert: Proposal to drop 2019-20 Groningen production by 6.1 bcm y/y likely to be unachievable, 10 September 2019). In the days following the energy ministry’s announcement, Groningen customers such as Engie and Dutch industrial users have said that the plan’s assumptions are flawed, providing support for our case that the 2019-20 cap may not shrink by as much as proposed.
|Fig 1: Potentially affected French nuclear units||Fig 2: Russian pipeline flows, mcm/d|
|Source: Various, Energy Aspects||Source: OPAL, Eustream, Energy Aspects|
|Fig 3: Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source:Country SOs, GIE, Energy Aspects|