Low prompt prices at European hubs and scant storage capacity suggest pipe supply to Europe from all the major import sources should continue to slow. However, big drops in pipe supply are not expected as we are now in the gas winter. Gazprom has been working around capacity restrictions on OPAL by a combination of using interruptible capacity on that pipeline and by ramping up flows entering through the southern markets via Velke Kapusany. With Gazprom only needing to ramp up gas through the southern routes by a relatively small volume, the likelihood of a significant loss of Russian gas due to the OPAL restrictions is receding. Norwegian flows should post sequential gains as summer maintenance ends, but we only expect modest y/y gains over winter. The heavy drops in Algerian flows seen this summer are likely to slow as there is little added room within take-or-pay contracts to reduce flows.
Russian flows shifting – but less than expected
One of the key headlines in September was a cut in the amount of capacity on OPAL that Gazprom is allowed to use, following a decision by the Court of Justice of the EU (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). The restrictions came into force on 13 September and we saw two things happen. First, average flows on OPAL dropped by 17 mcm/d on average to 81 mcm/d. This drop is less than expected—average flows on OPAL the last time the restrictions on capacity were in place were around 60 mcm/d. One possible explanation for this is that Gazprom has made more use of interruptible capacity on OPAL. In a clarification on its website, OPAL said in response to the court ruling and the German regulator’s statement implementing that ruling that ‘the usage of regulated interruptible capacity to or from the GASPOOL market area is not restricted, as long as it is guaranteed that these capacities are not transported in the meaning of decoupled or coupled connection capacities’. Certainly, Gazprom has not slowed down the sale of gas into GASPOOL on the Electronic Sales Platform (ESP)—sales in September were in line with previous months.
The second workaround for Russia involves raising flows through Velke Kapusany via Ukraine, which were up by 16.2 mcm/d since the restrictions have been in place, offsetting almost all of the turndown in flows seen at OPAL. We still think continuing to use this route to market will be a challenge due to the heavy flow it sees in peak winter. But that challenge is made a bit easier by flows not being of a huge quantity. The tightest month for spare capacity at Velke Kapusany last winter was January, when there was only around 50 mcm/d of spare capacity.
If only 20 mcm/d of capacity is being used to replace gas from OPAL, that leaves much more headroom than if some 40-45 mcm/d was being replaced, our initial expectation of what the OPAL restrictions would mean. We still think that periods of cold weather will mean getting enough gas down to Velke Kapusany could still be a challenge for the Russian system.
Over Q2 19 and Q3 19, Russian flows into Europe did end up coming off by 4.5 bcm y/y, despite a rise in sales on the ESP of 8.2 bcm y/y. While the workarounds for OPAL should limit y/y losses in Russian flows, we still think high stocks in Europe could well curtail Russian flows by up to 4 bcm y/y over this winter period.
|Fig 1: OPAL and Velke Kapusany flows, mcm/d||Fig 2: Gazprom ESP sales, bcm/m|
|Source:OPAL, EUSTREAM, Energy Aspects||Source: Gazprom, Energy Aspects|
Norwegian flows will be up, but modestly so
Norwegian exports continue to be a source of focus, with Q3 19 supply coming off by just over 6 bcm y/y. We had expected Norwegian supply to fall at least by 4.5 bcm y/y over these three months due to heavier maintenance y/y. There was a continued lack of any price incentive to offset those constraints with flows from flexible fields, leading to a drop in flows from flexible fields of 1.6 bcm y/y over the summer. With the flow of flexible supply likely to be deferred to either October-November or summer 2020, market focus has shifted to the cap on production from Troll and how a ‘deferral’ might play out. We expect little of that 1.6 bcm of gas to be produced in October even if this is likely to mean that the some of the allowed production from Troll is ‘lost’. We have covered this before (see Monthly: EU imports, 5 September 2019), but it is worth repeating that production from Troll rarely ever comes in at the cap, with the last three years seeing above cap production. Just further crashing prices at hubs is hardly what flexibility at Troll was designed for, so being overly bullish on Norwegian flows feels problematic. And while there will be a sequential increase in production as we go through October as summer maintenance has ended, even production coming in flat y/y would be a surprise to the upside for us in October. Having said that, with some new fields coming online, Norwegian production is not likely to fall for long and we do expect a moderate y/y increase in Norwegian flows of around 1 bcm over the coming winter.
Algerian production fell again, but how much flex is left?
The weakness in Algerian flows over the summer largely came in around our expectations. There was a drop in flows to Italy and Iberia, of 3.0 bcm y/y combined in Q2 19, which has continued in Q3 19 (-2.6 bcm y/y). In Spain, Algerian flows were off again in September (-0.7 bcm y/y), taking the reduction in takes to a 3.9 bcm drop y/y over the whole of Q2 and Q3 19. In turn, Iberian LNG sendout increased by 5.8 bcm y/y while imports from France were up by 1.5 bcm y/y. For Italy, the drop in gas flows from North Africa amounted to 0.3 bcm y/y in September, meaning the fall over summer was 1.7 bcm y/y, less dramatic than the reduction in African flows to Iberia.
We expect that there will be a clear economic incentive for southern European buyers to reduce Algerian imports to the minimum possible under take-or-pay contracts in 2020, with hub prices expected to continue to be well below the cost of importing Algerian gas under long-term oil-indexed contracts.
We expect Iberia’s imports from Algeria to total 11.9 bcm in 2020, down by only 0.4 bcm from our forecast of 12.3 bcm for 2019 and imports of 17.5 bcm in 2018 due to expected limited flexibility left to lower supply further under long-term contracts. We estimate that Iberian buyers have 14.9 bcm of contractual supply with Sonatrach that will be in place in 2020. Any gas not taken in a given year that is below the contractual minimum is typically paid for and then taken in subsequent years under take-or-pay contracts (make-up gas). The contract minimum is determined by tolerances that allow takes to drop or exceed the annual contractual quantity in any given year by a predefined percentage.
If the tolerance in Iberia is 20%— a number frequently used in European long-term contracts—it would allow for annual imports to fall to 11.9 bcm without the buyers having to make up for ‘under-taking’ gas in a subsequent year. Our 2019 forecast puts Algerian imports around that minimum level, meaning that firms would not have to take make-up gas in the coming years unless they breached the lower end of their individual thresholds. Iberian buyers have raised their nominated supply for Q4 19 y/y, suggesting they are looking to limit the volume of any potential make-up gas in future periods.
LNG sendout still to be robust in Q4 19
LNG sendout in September came in up by 3.73 bcm y/y, taking full summer LNG send-out to be up by 27.4 bcm. We forecast that LNG imports in October will be up by 3.2 bcm y/y. We continue to think that LNG imports will rise by around 8 bcm y/y in Q4 19, which would actually be a slowdown in y/y growth compared to the last 9 months (average +4.2 bcm/m y/y), but that in part reflects the already high base. Incremental LNG supply will continue to be bolstered by the 22 Mtpa of new US LNG trains that have become operational since October 2018. For all of winter 19-20, we forecast LNG imports into Europe will be up 13.5 bcm y/y.