November has started with LNG terminals looking to make space for additional cargoes as LNG in floating storage prepares to start unloading. This unwinding of storage will likely keep LNG sendout in Europe at high levels for the coming weeks. Although LNG has remained strong, Russian pipeline flows fell only a little y/y in October, and we expect OPAL restrictions to have little effect on total Nord Stream flows and overall Russian exports this winter. Spain, as we expected, reverted to taking higher y/y Algerian pipeline flows, whereas Italy was still able to turn down these imports, having dropped over 4.3 bcm so far over 2019. The lack of further downward flex on Spanish takes suggests reverse flows on the France–Spain border may be needed next summer.
LNG – heavy sendout
October as a whole did not see huge gains in LNG sendout, with sendout up 2.33 mcm/d y/y across the markets, in line with incremental sendout seen in previous months. However, the end of October and early November have seen a notable increase in sendout. For instance, Gate sendout jumped from a mean October sendout of 8.7 mcm/d to average 30 mcm/d at the end of the month. Similar jumps were seen in the UK and Zeebrugge. The rapid increase in end-of-month sendout was caused by a combination of high LNG storage levels and a high number of LNG ships floating laden and wanting to unload at the start of November. With Sep-19–Nov-19 contango averaging 5.7 €/MWh over the three months before expiry, there was plenty of incentive to float and store.
Although November should continue to see heavy sendout, the number of LNG ships still laden and floating globally has dropped to > 15, and > three of these are now floating west of Suez and appear to be focused on the European market. With most of these ships likely wanting to unload in the coming six weeks, some of the recent pressure that has built up over the last couple of weeks to clear gas from LNG storage and pave the way for new cargoes will begin to dissipate. Furthermore, developments in the Korean market that should curtail coal-fired generation along with somewhat more supportive takes for Latin American LNG have reduced the volume of incremental LNG that we expect to enter the European market from 13.5 bcm to 9.1 bcm over the full winter period. The biggest changes are to Q1 20 takes, resulting from the timing of coal plant curtailments from Korea, but LNG incremental supply is still expected to be 3.7 bcm higher y/y.
Russian flows – down but not out
Following on from Q3 19, when Gazprom supply to EU markets fell by 4.54 bcm y/y, October saw a y/y reduction in Russian flows to Europe, but this was still a lower reduction than the previous quarter—down by just some 0.06 bcm y/y. October did see flows through NEL going up some 12 mcm/d, which largely offset a reduction of about 16 mcm/d through OPAL. The restrictions on OPAL use by Gazprom that came back into effect in September continue to have a lower impact on OPAL flows than we expected. Over the last two months, OPAL flows have only dropped by an average of 16% y/y, presumably due to greater use of unbundled interruptible capacity that can still be used. In addition, while flows through Velke Kapusany were initially responding upward to offset what was not flowing through OPAL, this movement has increasingly been replaced by greater flows through NEL.
The lower y/y flow reduction came despite sales on the ESP seeing a sequential drop, coming down to 1.23 bcm compared to 1.66 bcm in September. Still, this is a strong y/y growth, and it would have led to a much stronger curtailment of Russian flows in their absence. ESP selling remains focussed on Gaspool and the Slovakian virtual trading point (VTP).
One other consistent picture emerging from the flow data is that flows into Hungary have been consistently strong, with every month since January 2019 showing y/y increases. Over 2019, year-to-October imports have been up by 1.76 bcm y/y—which is strong given how total Russian imports have dropped by 3.9 bcm y/y over this period. Most of that gas has gone to keep Hungarian storage higher y/y, with the country’s storage levels completely full at the end of October 2019—and some 1.97 bcm higher y/y.
Against all this, flows through Russia for the coming months should be getting closer to flat y/y. November has started with low European spot gas prices, and while ESP selling has continued, the incentive to push a lot of gas has not yet factored into decisions. However, with a move into colder winter weather on the way, winter will be one of the better price periods, and both contract nominations and ESP selling should keep y/y drops at a minimum. The biggest risk for 2020 is transit through Ukraine, and while this is still playing out, we expect alternate agreements will allow gas to flow through 2020. With Nord Stream 2 now looking likely to come online for summer 2020, these transit risks will be much lower for winter 2020–21.
Algeria – how much flex is left?
The main question regarding Algerian flows remains over just how much flexibility lingers in its supply contracts to turn down nominations for those southern EU buyers.
In Spain, imports from Algeria were modestly up y/y, adding 0.06 bcm y/y, which contrasts with the monthly y/y reduction average seen thus far in 2019 that has amounted to 0.6 bcm y/y. With there still being a significant gap between hub- and oil-indexed contract prices, the fact that a y/y increment was recorded suggests that flexibility in long-term contracts is running low. Over 2019, the drop in Algerian intakes now totals 5.6 bcm y/y, whereas LNG sendout is up 8.67 bcm y/y and French imports are up 2.38 bcm y/y. The lack of much further downside contract flexibility in Spain for its Algerian imports suggests that any further increments in LNG supply will need to replace French imports and could lead to a reversal of these flows. The strength of other gas supply into Spain this year has largely helped feed a big increase in gas-fired power generation that has raised the power sector’s gas burn by 4.8 bcm y/y.
Italy has greater flexibility to turn down Algerian supply in the fourth quarter. Italian contracts with Sonatrach roll on a gas year basis, meaning that Italian buyers have the flexibility to turn down their takes if they then increase import nominations over the subsequent three quarters. PSV Oct-19 prices were well below the cost of oil-indexed gas from Algeria, offering an incentive to cut nominations. Algerian imports were down by 1.04 bcm y/y in October to 0.64 bcm, suggesting Italian buyers were reducing imports to a minimum. That said, some of the drop may also be the result of contract expiry. Enel let a 4 bcm/y with Sonatrach expire at the end of the 2016–17 gas year, but it was reported to still have make-up gas to take in 2019. It may have taken all of this gas by the start of the 2019–20 gas year, allowing it to turn down October imports. The Enel expiry contributed to aggregate Italian imports from Algeria dropping from 18.7 bcm in the 2016–17 gas year to 18.1 bcm in the 2017–18 gas year and then 12.7 bcm in the 2018–19 gas year. Sonatrach's contracts with Eni and Edison, for around 10 bcm/y and 2 bcm/y respectively, were up for renewal this year. It is unclear if contract volumes have been maintained.
|Fig 1: OPAL and NEL Flows, mcm/d||Fig 2: Russian flows via transit countries, bcm|
|Source: OPAL, NEL, Energy Aspects||Source: Gazprom, Energy Aspects|