ICIS ANALYST VIEW: Gas prices will fall, but maybe not next year

LONDON (ICIS)–The spot gas price in Europe dropped 45% from late August to late September, with the ICIS TTF month-ahead falling from almost $94/MMBtu on 26 August to just over $51/MMBtu on 23 September.

The sharp decline has led some to hope that the worst of the energy crisis may be over. LNG tankers have diverted course to Europe to replace Russian pipeline flows, onshore storage sites have made good progress at filling up towards targets and companies are scrambling to start up new supply projects.

However, prices remain at damagingly high levels for households and industry and are unlikely to return to the more ‘normal’ levels of early 2021 for some years to come. And while it is to be hoped that a mild, windy winter will see prices continue to drift lower over coming months, it remains quite possible that the market will be even tighter in 2023 than it was in 2022.

RUSSIAN FLOWS

The biggest driver of the increase in prices has been the decline over the past year in Russian pipeline gas to Europe. There was a downturn in the second half of 2021, followed by growing concerns after the start of the war in Ukraine in early 2022, and then over the last month a complete cessation of flows through the Nord Stream 1 pipeline through the Baltic Sea to Germany.

Despite that ongoing decline, Europe still received a lot of Russian gas over the past year, which helped to supply it over Winter 2021/22 and helped to refill storage over Summer 2022. From September 2021 to August 2022 ICIS data shows that Russian pipeline gas supplied Europe and the UK with around 99 billion cubic metres (bcm) out of a total 461bcm of supply, some 21% of the total.

Russian flows could be substantially lower than that across Winter 2022/23 and into Summer 2023. This could soon drain the stored gas that Europe has built up, potentially leaving storage largely empty at the start of next summer and leaving a real struggle to fill it back up for Winter 2023/24.

Modelling by ICIS’ team of cross-commodity analysts shows that Europe needs to cut its gas demand by some 15% to maintain security of supply even in a scenario of average winter temperatures and some limited Russian volumes continuing.

A colder-than-normal winter, a failure to make targeted energy savings, or further reductions to Russian supplies raises concerns not just for the coming winter, but for the one after too.

10% SHIFT IN LNG

Europe, including the UK, took in an extra 10% of global LNG supplies during January-August 2022 compared with the same period of 2021, increasing its market share to 28% from 18% the year before, according to ICIS LNG Edge ship-tracking.

Over the year as a whole that extra 10% of the global LNG market could amount to additional supplies into Europe of 40 million tonnes, equal to some 55bcm of pipeline gas.

However, while that is a massive shift, it has come at huge expense, driving spot prices higher, and taking much needed supply away from other importers, such as India, Bangladesh and Pakistan, and China, who have been cutting back on production of fertilisers and increasing their consumption of dirtier fuels like coal.

And while 55bcm of extra supply might be enough to compensate for the decrease in Russian flows over the past 12 months to 99bcm from the 145-150bcm/year level seen in Calendar Years 2020 and 2021, it would not be enough to compensate for further declines.

Changes in the LNG market have largely been a redistribution of existing flows. It takes several years to build new liquefaction facilities, and while the market is responding with final investment decisions in new projects and renewed attention to upstream production, there is limited new gas due to reach the market in 2023.

Italian ENI is expected to start up its 3.4 million tonnes per annum Coral South project offshore Mozambique before the end of 2022, with all its output being sold to BP. For the following year, BP as operator could start up both the 2.5mtpa Tortue project offshore Senegal and Mauritania and the 3.8mtpa Tangguh train 3 project in Indonesia.

Major new US projects have gained approval in recent months, but they, and Qatar’s giant North Field East and North Field South projects that will raise Qatar’s output from 77mtpa to 126mtpa, will not be producing cargoes until the second half of the decade.

It’s commonly said in commodity markets that “the best cure for high prices is high prices.” Markets are cyclical in nature, and extreme price spikes spur a great deal of innovation and investment in new supply, which should bring gas prices down over time. Measures are also being taken to cut consumption and boost alternative energy sources.

But new supply requires complicated commercial negotiations, massive construction projects and new fleets of ships. While spot gas prices will fall over time, a return to more “normal” levels may not come soon.

KEY FACTORS

Apart from Russian flows, key factors to watch over coming weeks and months will be whether the 15mtpa US Freeport LNG plant restarts on time in November after shutting due to a fire in June, the availability of nuclear power generation in France after recent maintenance issues and, as always, the weather, with the difference in demand between a mild winter or an unusually cold one being the biggest remaining variable of all.