Russia’s gas plans still mired in politics
The Kremlin will be focused on pipeline negotiations with the EU and the sanctions threats from Washington
The critical issues facing Russian gas exports in 2019 revolved around its pipelines to Europe and the renegotiation of a transit contract through Ukraine, which was agreed at the end of December. Rules determining use of the Opal (Ostsee-Pipeline-Anbindungsleitung) pipeline, the status of Turk Stream and the approval of Nord Stream 2 were also important. All these issues will continue to grind on into 2020.
Ukraine transit negotiations were resolved at the end of December, ensuring the transit of Russian gas through pipelines on Ukrainian territory for the next five years. Attempts to diversify away from Europe via LNG and pipelines to the east are also underway, while Gazprom’s pricing strategy will also come in for scrutiny as competition with LNG in the European market intensifies.
Nord Stream controversy
The complexity around the Nord Stream pipelines has continued longer than expected. It was originally anticipated that Nord Stream 1 and Opal would attract little controversy in 2019, after the European Court of Justice allowed the extension into Germany to run at almost full capacity with Russia gas. However, in September the court upheld a Polish appeal and reduced the capacity available to Gazprom to 50pc, cutting 10bn m³ from the flows of Russian gas—widely seen as a political move to influence the negotiations with Ukraine. Unless this is resolved, the question of Opal utilisation will roll on into 2020, much to the annoyance of Gazprom and the Kremlin.
The questions surrounding Nord Stream 2—including the issue of if-and-when the pipeline will finally come into operation—will also continue into 2020. The Danish authorities have yet to provide authorisation for any of the three route options that have been proposed. The exact timing of the decision may depend on Russia’s willingness to concede ground over use of the Ukraine transit system—as well as the sanction threats from the White House.
Indications suggest that Gazprom will not be willing to give up market share
The European Commission (EC) undermined the economics of the Nord Stream 2 project when it ruled during 2019 that Third Energy Package rules apply to offshore pipelines. This has given the EC extra control over the utilisation of Nord Stream 2 and the ability to limit Gazprom’s use of it. If Nord Stream 2 is completed in 2020, and there is only the short Danish section left to complete, then the application of EU rules over it will be a central talking point.
Gazprom’s now agreed use of the Ukraine pipeline system could be the key needed to unlock much of the Nord Stream controversy. Under the new arrangement, Ukraine’s Naftogaz will transmit 65bn m³ of Russian gas in 2020 and 40bn m³ annually in the 2021-2024 period.
The previous contract required Gazprom to transport 110bn m³ per annum through the system, but this was rarely the case. In essence, the Ukraine system has been used as a swing source of transit, moving around 85bm m³ in 2018 depending on the balance of European demand for Russian gas and the utilisation of Gazprom’s other export pipelines.
The completion of the Turk Stream pipeline in 2019—two strings of 15.5bn m³ each—means that Ukraine flows should decline in 2020, but capacity will be needed as Nord Stream 2 (55bn m³) will now not be ready on schedule.
Even if a resolution had not been found through the late 2019 deal with Russia, a suspension of supply would only have occured for a few weeks. Although this may have caused a flurry of concern, Europe has adequate gas in storage. The exact needs would be defined by the weather, but a window of up to three months can be survived by European customers.
Russia’s LNG strategy will also continue to advance in 2020. Following the successful launch of the first three trains of Novatek’s Yamal LNG, 2020 will see the launch of Train 4, which importantly will be based on new Russian liquefaction technology, Arctic Cascade. If successful, this would be a major step forward in efforts to become technologically self-sufficient.
Complexity around the Nord Stream pipelines has continued longer than expected
Novatek is also likely to announce further news on two new projects, Arctic LNG-1 and Obskiy LNG, which could take FID as the company moves towards its goal of producing 70mn t of LNG by 2030. Rosneft could also enter the LNG market, as it commences Feed on its 6.2mn t Far East LNG project, while Gazprom may finally take FID on the third train of its Sakhalin 2 project.
One final question for 2020 concerns Gazprom’s pricing strategy in Europe, which is the balancing market for LNG and is heavily influenced by flows of Russian gas. Indications to date suggest that Gazprom will not be willing to give up market share and will attempt to maintain volumes at or close to the record levels seen in 2018.
If this is the case, and new LNG projects start to produce, then the low prices currently prevalent in Europe and Asia could remain for the whole of 2020. Indeed, as the resolution to the Ukraine transit question means there will now be little or no disturbance of Russian flows, then storage in Europe could be at record levels at the end of the 2019-20 winter, implying that prices could be as low as $2-3/mn Btu by the summer of 2020.
James Henderson, Director Natural Gas Programme, OIES