ICIS Analyst View: What the US White House comments mean for European gas

Tom Marzec-manser

26-Jan-2022

LONDON (ICIS)–US White House officials on Tuesday finally confirmed the extent of their contingency planning with regards to keeping Europe supplied with natural gas should the situation between Ukraine and Russia escalate.

As expected, discussions with Qatar and other major LNG producers are in the mix.

A scenario was outlined where gas flows were cut only via Ukraine, as was a significantly more extreme view where all gas exports to Europe from Russia were to cease for a time.

While the latter will no doubt catch the attention of wider society, a third, more-likely scenario needs to be considered – there is no change at all in the flow of gas from Russia to Europe.

In fact, there is a very real possibility in the coming days that Russian gas flows to Europe will increase, as buyer-led nominations rise for February deliveries.

The gas market certainly continues to price the ICIS TTF with flows from Russia continuing.

Some risk premium has been added in recent days and weeks, but not nearly enough to suggest an extreme development.

 

SCENARIOS

A cut in flows via Ukraine is not likely to have a huge impact on the wider-European gas market, with the exception of Moldova.

While bottlenecks would limit a full like-for-like switch, it is possible Russia’s Gazprom could move any potential flows from Ukrainian transit to the Yamal-Europe pipeline via Poland.

As for the White House’s more extreme scenario, this would hang on a severe escalation, which diplomats are working hard to prevent.

But here too the officials gave some clues as to the level of their planning, with incremental supply increases and diversions globally.

North Africa was highlighted, suggesting the US believes more gas could be delivered from Algeria.

Sonatrach’s gas exports are currently down relative to much of the second half of 2021, given Moroccan transit flows have ceased.

Perhaps Washington has spoken with Algiers and Rabat.

Central Asia was also earmarked. This could suggest greater flows from Turkmenistan to China, softening Beijing’s need for LNG, which in turn could lead to more LNG to Europe.

Another possibility is a slight increase in production in Azerbaijan which would be particularly needed for supply to Turkey.

Major diversions of LNG from Qatar or Australia would need the buy-in of the major buyers in Japan, South Korea and Taiwan.

How willing these governments and utilities would be to burn yet more coal at the expense of gas remains to be seen, however.

As with the Turkmenistan option, China reducing LNG imports under contract from Qatar or Australia would appear less likely than the other three major Asian buyers.

With the Power of Siberia 2 pipeline potentially close to reaching a final investment decision, it may not suit Beijing to pro-actively come to Europe’s aid.

DOMESTIC SUPPLY

Closer to home, Europe could improve gas supply by increasing production at the Groningen field – which has already been mooted by the Dutch – as well as further increasing or extending Norwegian caps on output.

Europe also has around 9 billion cubic metres of strategic stocks that could be drawn upon.

Norway’s LNG asset at Hammerfest is officially only under outage for another two months and perhaps here too repairs and safety checks could be expedited.

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