CORRECTED: Q2 ’20 GAS SUPPLY OUTLOOK: Nord Stream 2, Ukrainian transit and regional impact

CORRECTION: The reference to the second quarter of 2019 has been changed to the second quarter of 2020 in the 13th paragraph of this story.

LONDON (ICIS)–In the second quarter of 2020, LNG should play an increasingly important role in EU gas supply, regardless of the outcome of Ukrainian transit talks and the Nord Stream 2 start date.

If Russia and Ukraine do not agree to flow Russian gas to the EU via Ukraine beyond 31 December, the EU will initially be able to rely on storage.
European storage levels stood at a seven-year high of over 96% on 16 October, transmission system operator data showed.

Stocks will likely last around 90 days on average, according to Jack Sharples, research fellow at the Oxford Institute for Energy Studies. This means storage could supply Europe until the end of winter if a deal failed to materialise, but LNG would grow in importance especially in the case of a late-winter cold snap.

LNG became the second-largest source of EU gas imports in April 2019 after Russian pipeline gas and has competed for this position with Norway throughout the year.

And with new LNG trains totalling 28bcm expected to come online before the second quarter of 2020, according to LNG Edge, the market will soon see even more slack.

The amount of influence LNG has on EU supply and hub prices depends on whether the launch of Russia’s 55bcm Nord Stream 2 pipeline is delayed and the Ukrainian transit stopped.

SCENARIO 1: Nord Stream 2 delayed, Ukrainian transit continues

In this scenario LNG supply volume will not surpass Russian supply, as Russian supplies will not fall, Sharples told ICIS.

London Energy Consulting director David Cox agreed that LNG will probably not surpass Russian pipeline imports in the second quarter of 2020, whether or not the Ukrainian transit continues, with Russia also able to send large volumes through the existing Nord Stream and Yamal pipelines. But LNG volumes into Europe will increase if the price is cheaper than contract and spot pipeline supplies, Cox added.

A higher share of LNG in EU gas imports would not necessarily increase European gas prices as there is plenty of LNG around looking for a market, Cox said. So prices should stay low

SCENARIO 2: Nord Stream 2 delayed, Ukrainian transit stops

Russian pipeline imports would be limited to around 88bcm/year, the combined capacity of the existing Nord Stream and Yamal pipelines.

Flows on these pipes cannot increase significantly as both have been running over capacity in 2018 and so far in 2019.

If LNG is brought to Europe to replace Russian flows, usually delivered via Ukraine, EU hub prices are sure to rise, Sharples said.

The EU would face a shortfall of around 19bcm in the second quarter of 2020 relative to the same period this year, but the rise in EU hub prices would likely cause demand to fall back towards levels seen in the second quarter of 2018, meaning the actual increase in LNG imports would be more modest, Sharples said.

“The fall of EU demand from 102.7bcm in Q2 ’19 to a level similar to that of 85.3bcm in Q2 ’18 would imply a decline in demand around 17.5bcm.

If the EU production declines by 2bcm year-on-year as it did between Q2 ’18 and Q2 ’19 the actual shortfall would be around 5bcm in Q2 ’20,” Sharples added.

Before the complete run-down of storage stocks, if by the end of January there is no new transit agreement in sight and it seems the situation could continue into the second quarter, LNG supplies are sure to grow, Sharples noted.

“The lost volumes normally delivered via Ukraine would be replaced by a combination of storage withdrawals, pipeline imports from Norway and LNG cargoes. In this case, EU imports of LNG would likely be higher than EU imports of Russian gas,” Sharples said.

SCENARIO 3: Nord Stream 2 starts, Ukrainian transit continues

This would be bearish for European hubs due to abundant supply on the global LNG market with new LNG trains totalling 28bcm expected to come online before the second quarter of 2020, and increased Russian capacity.

With both Nord Stream 2 and the Ukrainian routes running, Gazprom is likely to prefer to use Nord Stream and Nord Stream 2 as it is cheaper, Cox said.

“Gazprom will not sign a new long-term transit deal with Ukraine and will eventually isolate it completely. Gazprom will use transit intermittently to top up sales as needed and also to keep the EU sweet,” Cox told ICIS.

See more on what is at stake in the Ukrainian transit talks here .

SCENARIO 4: Nord Stream 2 starts, Ukraine transit stops

Even if Nord Stream 2 starts as scheduled by the end of this year, it would be unlikely to run at full nameplate capacity from day one. Therefore Gazprom would likely try to agree on a short-term solution such as an extension of the current transit deal with Ukraine, especially if Ukraine has not completed the unbundling of Ukrtransgaz by the end of the year. This would allow Gazprom to send enough volumes to meet its contractual commitments with EU customers, and could potentially put a cap on demand for LNG.

Given that transit fees represent over 2% of Ukraine’s GDP, it is in the commercial interest of the country to find a compromise with Gazprom and keep some Russian volumes transiting beyond 31 December.

REGIONAL IMPACT

Several countries in centraleastern Europe could be significantly affected by disruptions in the Ukrainian transit of Russian gas and a delay in Nord Stream 2’s start date.

In Poland and Hungary, a gas-to-coal switch in electricity generation could offset the lost volumes in the power sector, Sharples said.

However, if the Ukrainian transit crisis persists beyond the end of January, in Hungary, where there is no real alternative to Russian pipeline gas via Ukraine, consumption could be reduced to a bare minimum in order to make its stocks last longer than 90 days, Sharples added. As of 17 October, Hungarian storage hold over 5bcm, a 35% increase from 2018.

Once stocks are depleted in Q1 ’20, gas could arrive in Slovakia from the Czech Republic and in Austria from Germany, if attracted by higher prices on the Austrian and Slovakian VTPs compared to NCG and the Czech VTP, Sharples expected.

Italy would substantially increase its LNG imports, Sharples added.

There would be a ripple effect on European hubs with prices spiking most sharply in Slovakia, then Austria, and then the Czech Republic and Italy and finally NCG and Gaspool, according to Sharples.

Read more about the ICIS winter outlook for centraleastern Europe here .

Additional reporting by Julie Fisher