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    Editorial: Bringing It On [NGW Magazine]


After last year’s record exports, Gazprom is expecting to sell more gas to Europe this year than ever before. (This article is featured in NGW Magazine Vol. 3, Issue 20)

by: NGW

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Top Stories, Premium, NGW Magazine Articles, Volume 3, Issue 20, Security of Supply, Exploration & Production, Import/Export, Liquefied Natural Gas (LNG)

Editorial: Bringing It On [NGW Magazine]

After last year’s record exports, Gazprom is expecting to sell more gas to Europe this year than ever before.

Some of its shine might be lost to compatriot Novatek and its partners in the Yamal LNG project in Russia’s far north. And other gas is also making its presence felt in northwest Europe, with Egyptian LNG reappearing and US LNG showing up. Three cargoes are due in the UK late this month, for example.

But with some spare production capacity at Gazprom’s giant fields in the Yamal Peninsula, capped more by European Union reluctance to accept more than a certain amount of gas from Russia than by geology, Russia is likely to have a bumper year for gas.

From the Kremlin’s perspective, Europe is behaving very consistently with its own hopes: a few decades ago, Gazprom had planned to boost exports to Europe through a series of offshore pipelines carrying gas from Yamal, one of which is realised – Nord Stream 1 – and another is on the way. One of those pipelines was even going to take Yamal gas directly to the UK offshore. The existing Yamal LNG project and the subsequent Arctic LNG projects take that idea and expand it to include other gasfields and indeed other markets, with Asia and Europe roughly equidistant.

Nevertheless, as European gas output eases and peak capacity does not keep pace, there should be room for both Gazprom and Novatek. And at this late stage in the year, Gazprom’s expectations of exports of just over 200bn m³ – mostly underpinned by long-term contracts – are likely to be met, regardless of the stream of LNG deliveries.

Novatek has already eaten into Gazprom’s sales in the domestic Russian market, accounting for about a fifth. Now, as its two trains at Yamal are in full swing to be joined shortly by a third, Russian gas will de facto be competing with Russian gas, delivered by different mechanisms.

As Novatek is the majority owner of Yamal LNG and is itself partly owned by Leonid Mikhelson, a long-standing ally of Vladimir Putin, this would until recently have been a minor distinction. It is still Russian gas with Kremlin links, after all. But now the LNG has been watered down, so to speak, by other companies in the venture, notably the French major Total. With the acquisition of Engie’s LNG business, Total is a major LNG player in its own right, further blurring the country of origin of the LNG it trades.

Mikhelson however has not openly embraced the chance to eat into Gazprom’s market: when NGW asked him in September whether it was by accident or design that Yamal’s cargoes to Europe so far had been to Spain and Portugal, avoiding Gazprom’s sphere of influence, his answer was that the price available there – as well as a desire to not step on Gazprom’s toes – had guided him. He gave each factor equal attribution.

Further adding to the need for more Russian gas, Gazprom might be pushed to meet all the European demand this winter by pipeline alone, even though its injections into storage this summer will ease some of the constraints. CEO Alexei Miller told his prime minister Dmitry Medvedev in October that the company had been operating in winter mode during the summer. If that stays the case, Ukraine too might make more money from transit than it had reasonable expectations of, just a few years ago when Gazprom’s exports through all routes were below 170bn m³.

And in any case, LNG is a price-taker in Europe, so the more gas Russia sells, the better for both it and consumers in the European Union: it will add to the volume of gas delivered to its shores and so can only lower the price at the hubs. There are simply too many players selling too much LNG for the price to be influenced by the behaviour of a few companies. Europe will therefore benefit more than usual from Russian supplies; while Russia too will gain from higher revenues from high-priced sales of peak gas.

This picture could change next year though, based on what is happening now. The year on year increase in send-out from northwest Europe is high and shows perhaps a change in behaviour as companies now appear to need a bigger incentive to take LNG to Asia than they did in 2017. Three tankers were due to arrive at the UK on October 31, for example.

Analysts at Energy Aspects say that if the cost of transporting LNG from Europe to Asia is more than $3/mn Btu, the LNG stays in Europe. For January and February next year that difference is just $2.75/mn Btu, making it uneconomic to transport it there.

What of the future though? Presently the world is still divided into hubs: the biggest, Henry Hub, and other US markets, are the cheapest as that country produces more than it consumes; the Dutch title transfer facility (TTF) now is taken as the European price, which is higher; and the Japan Korea Marker – which is for LNG, in the absence of a pipeline market in that part of the world – is the highest of all; and as most of the contracts are oil-linked, oil continues to have an influence on European hubs.

Given the size of the European market, its liquidity and the competitive nature, the TTF is in a strong position to be the benchmark against which LNG is traded. The forward curve though is still very short; and with a lot of US gas-priced LNG coming on to the market in a few years, there are also claims for a US Gulf free on board benchmark, after the model of Brent crude.