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Russian gas to replace LNG glut: Wood Mac

Declining European indigenous gas production to be substituted by more Russian imports as LNG market tightens

Global LNG oversupply is likely to taper off from 2021 onwards, leaving fewer spot cargoes available for import into Europe and the continent leaning instead on more Russian gas imports, Massimo Di Odoardo, vice-president, global gas and LNG research at consultancy Wood Mackenzie told the European Annual Gas Conference (EAGC) in Paris on Tuesday.

While a number of new LNG export projects in the US are due to come onstream in the coming months, things will slow down after 2020, with just a few new liquefaction facilities entering the market in the 2022-2024 period. With Asian LNG demand expected to grow—and thus less LNG available for other regions—and with declining indigneous production, Europe will turn to Russian gas to make up for the shortfall.

Shut-in risk

By contrast, through 2020, and with subdued Asian demand, “all eyes will be on supply” amid continuing ramp-up of recently commissioned facilities and the arrival of last projects in the current supply ‘wave’, says Di Odoardo. “Forward curves are not going to be as attractive [as they were going into this year], so hedging opportunities are not going to be as good” for sellers into European markets, which might lead to a higher risk of a US production shut in, he predicts (echoing similar risks flagged by trading house Vitol last month). 

So far this year, a number of factors have avoided a potential US LNG shut-in, including that off-takers of much current US production are utilities and portfolio players, at least some of whose value chain costs—be it liquefaction, shipping and/or regasification capacity—are sunken. Forward prices for 2020 have also been more robust this year than they might otherwise have been, due to a continuing risk of no deal between Russia and Ukraine over post-December gas transit. 

Limited coal-to-gas switching in Europe has been another bearish factor in this year’s gas market

But the picture might look different next year, warns Di Odoardo, with the prospect of high storage stocks—unless Europe has a very cold winter, and some commentators are suggesting that even the bitterest of winters will not be enough to clear the overhang—narrowing summer-winter spreads and subduing injection demand next summer.

Moreover, European utility buyers have been prioritising spot LNG cargoes, nominating lower on their long-term take-or-pay pipeline contracts so far this year. So-called ‘make-up’ volumes will have been taken at some point, and with Norwegian and Russian contracts renegotiated to have increased exposure to spot prices, there is the prospect of a feedback loop where lower European hub prices encourage nominations of NBP or TTF-linked contract volumes, which serves only to further depress prices. While the global LNG market could try to respond, it looks more likely to have to blink first.  

The announcement from Equinor, Norway’s largest gas producer and also the seller of Norwegian state-owned firm Petoro’s volumes, earlier this year that it would move European gas sales increasingly towards spot gas prices mean that, next year, “Norway will be willing to accommodate market conditions, so prices will be lower”, says Di Odoardo.

Coal-to-gas

Limited coal-to-gas switching in Europe has been another bearish factor in this year’s gas market, he continues. In part, this has been driven by forward gas prices remaining more robust versus coal before collapsing closer to delivery—unlike pipeline gas, which can be instantly turned on and off, seaborne coal requires advanced planning and, once a cargo is unloaded at a power station, it cannot in practice be reloaded and will be burnt at some point.

Growth in renewable generation and a limited amount of residual coal capacity in Spain and UK are also obvious factors, says Di Odoardo. But there are also more subtle drivers, such as grid capacity limitations in countries like Italy where, despite favourable economics on paper, coal-to-gas switching proved less viable in reality.

On a slightly more bullish note, coal-to-gas switching in Asia might look more attractive next year, the analyst suggests. While thus far oil-indexed Asian LNG import contracts have not looked particularly competitive versus coal, in 2020 “if spot prices accommodate a more bearish outlook, then this could embolden some [Asian] utilities to get more exposure” to spot LNG, leading to increased switching potential, says Di Odoardo.

 

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