GIF Inside Story: Nord Stream 2 certification doubts exacerbate European gas price rally

Additional reporting by Jake Stones, Alice Casagni, Andrea Battaglia and Aura Sabadus

LONDON (ICIS)–The Dutch TTF October ‘21 contract surpassed €60/MWh on 13 September and continued its ascend in the following sessions.

Traders polled by ICIS said the contract is primed for bullishness moving forward, with implications for European power markets also suggesting price support.

The contract settled at €61.313/MWh on 13 September, a €3.463/MWh session-on-session jump. On 15 September morning the TTF front month was trading at a high of €75/MWh, according to ICIS data.

Several factors point to the contract’s continued support, according to traders.

One of them is the potential delay in the start of commercial flows via Russia’s Nord Stream 2 pipeline. The construction of the second and last line of the pipeline was completed on 10 September. However, the certification process and further EU approval may take up to eight months.

The 55 billion cubic metres (bcm) per year pipeline is composed of two parallel lines of equal capacity. Russian producer Gazprom, which owns the pipeline, said it may carry 5.6bcm this year , or roughly 10% of the pipeline’s capacity.

The Russia-Germany offshore pipeline needs to be certified compliant with EU rules such as unbundling. German regulator BNetzA has until 8 January 2022 to make a draft decision and submit it to the European Commission.

The commission has two months to examine BNetzA’s draft decision, but this can be extended by another two months. The commission has not been supportive of Nord Stream 2 and so is likely to examine the decision with particular caution and scrutiny. Once the commission has communicated its opinion, BNetzA has two months to make a final decision taking utmost account of the commission’s opinion. This means a final decision on the certification could potentially take up to early July 2022.

Operating a gas pipeline without certification by BNetzA may be sanctioned by a non-compliance procedure, BNetzA told ICIS.

BNetzA’s decision also requires Germany’s federal energy ministry’s approval. The ministry has three months upon receiving all required documents to assess whether granting the certification would jeopardise Germany and the EU’s security of energy supply. Nord Stream 2 must comply with EU rules such as unbundling, third-party access and tariff transparency.

According to VTB Capital analysts, if Nord Stream 2 is considered an independent gas operator by the European Commission, it would be allowed to use the pipeline at 100% capacity. “Otherwise, according to the Third Energy Package, the utilisation rate would be limited to 50%, or 27.5bcm of nameplate capacity per annum, depriving the company of the potential benefits of reduced transportation costs after 2024 (when the existing ship-or-pay contract with Ukraine expires),” the analyst said.

Third party access

The unbundling requirement may make the certification process trickier in Nord Stream 2’s case as the pipeline is fully owned by the only company in Russia that is legally allowed to flow gas through it.

Russia’s state-controlled producer and Nord Stream 2 owner Gazprom, by law, has a monopoly on Russian export pipelines.

In September, Russia’s state-owned oil producer Rosneft once again asked to be allowed to export gas via Nord Stream 2, Russian deputy Prime Minister Alexander Novak confirmed to ICIS. Novak also said that Russian ministries were looking into Rosneft’s request, and that once they adopt a position on it, the question will be discussed in the government.

If Rosneft was allowed to use some Nord Stream 2 capacity, this could help the pipeline comply with the EU rule on third-party access as Rosneft would become a third-party user of the pipe.

Rosneft has gas assets including reserves estimated at 994bcm in the Yamal-Nenets region. “The Rospan asset is generally considered Rosneft’s largest gas-bearing asset in the Yamal region. Rosneft is ramping up production from this asset, which could produce around 14bcm in 2021 and eventually ramp up to 20bcm/year,” an industry source told ICIS.

Katja Yafimava, researcher at the Oxford Institute for Energy Studies, argued however that Rosneft’s request would not make much difference as the company does not appear to have those kinds of volumes available to put into Nord Stream 2 this winter.

This is not the first time Rosneft asked to be allowed to export pipeline gas from Russia.

Morten Frisch, senior partner of Morten Frisch Consulting, does not exclude that Novak’s comments on this latest request could be part of Russian president Vladimir Putin and Gazprom CEO Alexei Miller’s strategy in relation to Nord Stream 2’s certification application currently being processed by the BNetzA.

However Frisch pointed out that in relation to the US and its sanctions, the use of Nord Stream 2 by Rosneft could potentially be a double-edged sword for Nord Stream 2 AG – the pipe’s operator which is fully owned by Gazprom – and Gazprom. This is because Rosneft is under separate US sanctions for having traded crude oil and petroleum products with Venezuela in breach of US sanctions on this latter country, Frisch added.

Apart from the EU legal certification, the project still needs a technical certification confirming the infrastructure is safe to use.

Initially, Norwegian certification company DNV GL was contracted to observe construction activities and deliver a certificate upon satisfactory completion of the pipeline. However, US sanctions forced DNV GL to withdraw from the project in January 2021 and since then no replacement company has been announced.

The fact that pre-commissioning activities have started on the first line of Nord Stream 2 – completed in June – and will also start on the second line soon suggests that a replacement to DNV GL may have been found.

The Nord Stream 2 operator told ICIS the construction and operation of the pipeline will continue to be in full compliance with national permits and relevant legislation as well as technical standards but declined to provide any further details.

LNG and storage

Although BNetzA’s announcement on 13 September was widely cited among European gas price drivers it may not be the sole factor behind the latest TTF price jump.

“With a market so short, as soon as people hear something more certain about Nord Stream 2 delays they just start buying,” a trader said.

However, others placed less weight on the Nord Stream 2 developments.

Multiyear-low European stocks, low LNG supplies to the continent and overall high volatility are other bullish factors that have already been supporting prices in European markets in the past few weeks and keep doing so.

High Asian spot LNG prices were another key driver to front-month gains over 2021 so far.

On 13 September the ICIS East Asia Index (EAX) climbed to $20.30/MMBtu, largely driven by gains to European gas contracts and bullish weather fundamentals. Comparatively, the ICIS TTF equivalent settled on 10 September at $20.07/MMBtu.

One trader indicated that prices to both regions may easily continue to climb as a result of each other.

“Levels at this price are so detached from any physical fundamental, so it is just a vicious circle. Asian prices drive European prices which drive Asian prices, it is never going to end for as long as both regions need LNG,” they said.

Following the 13 September settlement, the ICIS TTF front month was assessed at $21.241/MMBtu.

Over the gas summer so far, high Asian prices have drawn substantial volumes of LNG from European shores, leaving continental storages well-below average levels ahead of the gas winter.

European sites in mid-September hold 66.2bcm, down 5bcm on 2018 levels – the previous multi-year low – and 24.2bcm below the same point last year.

Low LNG moving into October could be particularly bullish as winter demand starts to set in.

European daily demand during September has averaged 828 million cubic metres (mcm)/day between 2014-2020.

However, October demand according to the 2014-2020 average jumps to 1078mcm/day.

As of mid-September just 31 laden LNG cargoes are expected to berth in the UK, Netherlands, France, Spain and Italy over September, down more than 35% on the same month last year.

The combination of higher demand and low supply is leaving most traders confident that prices could remain bullish.

A trader active on the Italian gas market told ICIS that gas prices seem unlikely to decline any time soon, given expectations of a “nightmare winter” which could further boost prices.

“If it gets cold, it will be a mess,” the trader said.

Another trader said there was space for prices to climb, noting “I’m normally bearish in most cases but I can’t see how it’s going to come off without a major bit of news (or general commodity slump).”

One trader said Europe was well-priced for Qatari LNG to arrive, which could pressure gas contracts.

Winter outlook

One trader at a utility said that prices are not likely to drop any time soon.

“Actually I can see everyone buy on Winter ’21 because they are all short on stocks.”

When it comes to Russian gas supplies, several experts agree that Gazprom is unlikely to start commercial flows on Nord Stream 2 prior to obtaining a certification from BNetza, particularly as the pipeline’s investors include two German utilities, one French, one Anglo-Dutch and one Austrian.

Yafimava said Gazprom will not start flowing gas via Nord Stream 2 before the certification process is complete until and unless BNetzA gives it an indication that it can do so while certification is pending.

“Gazprom is not short of money and can meet its existing contractual obligations vis-à-vis European buyers without breaking the law and forcing its gas via Nord Stream 2 if it is not welcome,” she said.

Additional supply

Another trader also said that increasing Russian supply could set things back.

The Ukrainian gas transmission system operator GTSO has offered 9.8mcm/day of firm capacity for October at the Sudzha interconnection point and 5.2mcm/day at the Sokhranivka IP on the border with Russia.

GTSO has been offering 15mcm/day of firm monthly capacity at the Sudzha border throughout the year.

GTSO decided to split it among the two border points.

The capacity, which has been offered on the Hungarian RBP platform will be auctioned on 20 September but some traders interviewed by ICIS were sceptical that Russia’s Gazprom may book it.

Last month, GTSO offered 15mcm/day for September but Gazprom had booked only 650,000 cubic metres/day.

Gazprom has a long-term ship-or-pay agreement with Ukraine’s Naftogaz to ship 40bcm/year via Ukraine until 2024.