GIF INSIDE STORY: Europe’s tight gas summer

Thomas Rodgers


LONDON (ICIS)–After two summers of plentiful supply, the European gas market finds itself in a similar position as it was in 2018.

A prolonged, cold winter has caused a large draw on European storage reserves and shippers are braced for a tight summer as competition to fill up stores heats up.

Despite entering the winter with record amounts of gas in stores, a large drain on stocks has left just 24 billion cubic metres (bcm) in European sites (excluding Ukraine) – over 10bcm lower than the 2012-20 average at the same point in the year and less than half the 2020 total.

The large injection gap makes any summer surplus extremely unlikely, with record injection rates needed if sites were to fill up come October.

European shippers in 2020 turned to Ukraine’s vast storage capacity as stores elsewhere filled up. Ukrainian storage operator Ukrtransgaz was more than happy for the foreign interest and courted customers through the customs warehouse regime which allowed non-resident companies to hold gas in Ukrainian storages without requiring customs clearance for three years.

However, even with the long-term option, European shippers have been willing to draw from Ukrainian stores and have been selling the gas to their Ukrainian customer base, according to market sources. The amount held under the warehouse regime had halved from 10bcm at the start of the 2020 winter by late April, Ukrainian system operator data showed.

Drained stores, coupled with soaring carbon prices have combined to lift European hub prices higher, with the Dutch TTF front-month up 37% from the start of April and nearly 400% higher from a year ago.

Strong carbon prices typically work to encourage fuel switching among thermal generators, as they hit margins at more carbon intensive coal plants to a greater degree than gas.

But with the market needing to prioritise sufficient gas in store for the 2021/22 heating season, gas prices have needed to outperform carbon and coal markets to discourage the fuel-switching that played key part in countering the glut just one year ago.

Sluggish supply

Through the winter and the continued cold in the early parts of the summer, key pipeline suppliers showed little inclination to ramp up production and sell into the rally.

Russian and Norwegian supply from January-April totalled 49bcm and 37bcm respectively. The former represents a 3bcm increase from 2020 while the latter has remain unchanged. Both, however, remain below the same period in previous four years.

According to Russian customs data released on 12 April, Gazprom’s total piped exports in the first quarter of 2021 rose to 56.1bcm, a 9.5bcm increase year on year.

There had been expectations that Russia’s Gazprom would ramp up supply in 2021, after the pandemic and record low prices in 2020 drove a significant downturn.

Flow data has showed that not to be the case, and at an investor’s day presentation in April comments from the company leadership suggested any supply increase was a while away.

Gazprom revised its target for European exports in 2021 to 175-183bcm from a previous estimate of 183bcm. Gazprom initially planned to supply Europe with around 200 bcm/year until 2030 but the coronavirus-linked drop in demand has since forced the company to revise its supply targets.

In order to meet the lower end of the supply range, Gazprom should be able to maintain its additional Ukraine capacity bookings of around 15 million cubic metres (mcm)/day it has been doing through most of 2021, according to ICIS Analytics forecasts. To meet the upper limit it would need to purchase closer to 50mcm/day of extra capacity from June onwards.

In the absence of pipeline flows, Gazprom has met customer demand through its own stored reserves. This additional flexibility appears limited however with stocks at sites owned by Gazprom subsidiary Astora, all in Germany, at their lowest in two years.

Sales have plummeted on Gazprom’s Electronic Sales Platform (ESP) which it has used to market volumes beyond those it sells via its long-term contracts. From January through to early April 2021 volumes sold on the ESP totalled 671mcm, with over 300mcm for delivery in 2022. Over the same period in 2020 Gazprom sold more than 9bcm on the ESP, with less than 500mcm for delivery beyond that year.

Gazprom’s seeming reluctance has been suggested to be partly a way of applying pressure to stakeholders to support its Nord Stream 2 project, which could be in place by the fourth quarter of 2021 but remains beset by US sanctions threatening its completion.

Jack Sharples, research fellow at the Oxford Institute of Energy Studies, does not think Gazprom has specifically held back on flowing volumes in 2021 but did note the firm likely had the ability to do so via the ESP.

“I would expect that Gazprom’s flows via Ukraine this summer will be primarily determined by its LTC commitments and desire to replenish its downstream storage capacity. In terms of volumes beyond that, Gazprom will likely make strategic decisions with a view to winter 2021/22, based on competing flows into the region,” he said.

Norway kept first quarter deliveries in line with 2020 but is ability to respond to high prices through the summer will be limited.

Forecasts from offshore regulator the Norwegian Petroleum Directorate suggest Norway will produce 113bcm in 2021, up less than 1bcm from 2020.

Incumbent Equinor can use its flexible fields Troll and Oseberg to increase supply within a set range but will be hamstrung by a heavy maintenance programme in 2021, after the pandemic-forced delays hit 2020 schedules.

The current supply trends combined, however, may be indicating that European buyers, and Gazprom itself, are confident that Nord Stream 2 will be launched this year and see no urgency in chasing high prices in order to refill the stocks.

“It seems to me, the main players here, such as Uniper RWE, ENI and Gazprom, are broadly comfortable that NS2 will run this year and therefore are not driving up the near curve so as to out-compete East Asia for any spare LNG,” said ICIS analyst Tom Marzec-Manser.

LNG opportunities

Whatever the reason for the limited response from Europe’s key pipeline suppliers, it risks gifting market share to LNG producers – particular in the US. However, strong supply is not guaranteed with the potential pull of higher-priced Asian markets a potential risk for European balances.

Global LNG liquefaction capacity has grown since Europe’s last tight summer in 2018, with new projects in the US Gulf the largest driver. This flexible source of supply could end up being key in filling European stores.

Climbing European spot prices has opened up the arbitrage to the US Henry Hub and made European an increasingly attractive destination for cargoes. The East Asian Index (EAX) premium over European hubs has opened up from earlier in the summer but as things stand is unlikely to encourage the longer round trip.

Sustained deliveries from key suppliers in the US and Qatar are not guaranteed through the summer, with a number of upside risks at other global market.

LNG imports in South America have climbed in 2021, with a drought hitting hydropower demand and causing buyers to turn to gas. Brazil’s LNG imports from January through April 2021 were 1.7m tonnes, more than double the total during the same time last year, according to LNG Edge.

The wave of coronavirus infections in India has yet to spur the same nationwide lockdown response as in 2020, as such the impact on energy demand is unlikely to be felt as the same way.

In East Asia, the risk of warm weather elevating cooling demand will be present as it is through most summers.

Higher for longer

Even with a warm, windy summer, the European gas market is likely to be tight through the injection season.

Gas prices will need to stay high to bring in LNG cargoes and prioritise injections over fuel switching in the power sector.

With key pipeline suppliers either choosing or unable to significantly ramp up supply, LNG send-out will be essential in bolstering stocks, leaving European hubs acutely exposed to global gas markets.


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