2020 is set to be a crucial year for the European gas market as the industry deals with storage and pricing issues in an increasingly oversupplied market at the same time as the European Green Deal casts doubt over the long-term future for gas in Europe's energy mix. Murray Douglas, director, European Gas at Wood Mackenzie, looks at the key issues facing the sector.
Legacy suppliers learn value of flexibility
'In 2019, supplier response to low gas prices varied across markets,' he says.
'Norway and Algeria are two important examples of how supplier flexibility has been critical in adapting to changing market dynamics and balancing the global LNG market.'
Norwegian production was low in the second half of 2019 - and not just because of unplanned maintenance at several pipelines and fields, including Aasta Hansteen and Ormen Lange. Low output was also a result of Equinor reducing production from Troll and Oseberg – its key flexible fields – in a low-priced environment.
Douglas says: 'We expect Norway to continue pursuing its value over volume strategy by withholding sales gas from the market during times of low prices. Most of this reduction will take place at Equinor's Troll field, although other players like Total and Shell may also decide to follow the reduction should prices fall further.
'As the oversupply intensifies through 2020, we expect Norway to withhold 4 billion m3 from flexible fields.'
In Algeria, LNG provided an outlet for supply, as buyers nominated down on oil-indexed pipeline contracts. Piped flows to Italy and Spain collapsed almost 40% for the year-to-date versus 2018, while LNG exports were up 20%. Pipeline contracts that were due to expire have all been renewed and will start over the next year.
'Piped exports from Algeria will remain flat into 2020, averaging 21 billion m3 to Spain and Italy. However, the risks are weighted to the downside as the pipeline contract extensions will provide more volume flexibility to buyers and Algeria's own domestic demand continues to build year-on-year.'
European gas storage – struggling to get down
With plentiful supplies of cheap pipeline gas and LNG still available, the use of storage in the first quarter of 2020 will turn out to be below average. This is reflected in Wood Mackenzie's view that there will be 45 billion m3 still in storage at the end of March, versus the five-year average of 40 billion cm.
'The outlook is developed assuming average weather for the coming winter – a situation which rarely occurs. Assuming uninterrupted Ukrainian transit, the impact of weather will have an amplified effect on the market.
'In the event of a cold winter, storage could get down to 30 billion m3 by the end of winter. But a mild winter could lead to gas levels in store remaining as high as 54 billion m3 at the end of March – a key concern for those looking to market gas into Europe.'
Storage levels at the end of March will have a significant bearing on the summer 2020 gas market as storage demand makes up a significant proportion of European summer demand.
He adds: 'If European injection requirements are significantly lower than average, we get into some real challenges on Europe's ability to continue absorbing the level of LNG supply growth.
'The implications for the wider global gas market are significant – expect increased interest in European storage not just from European players but from those much further afield.'
Oversupply to deliver even lower prices (and infrastructure bottlenecks)
European gas prices have been on a downward trajectory since October 2018, with TTF hitting an all-time monthly low of US$3.1 per million British thermal units (mmbtu) in September 2019.
And with Ukrainian gas transit secured following the signing of a new agreement with Russia, this means the prospects for price recovery in 2020 are non-existent.
As the European LNG marketplace becomes increasingly congested, some infrastructure constraints will surface and place further downward pressure on hub prices. This will become particularly acute in the UK during summer where regas utilisation will be capped at 75%, assuming Norwegian pipeline deliveries follow historical trends.
The UK's lack of long-range storage; low summer demand (UK coal has already been displaced); and the available exit capacity into continental Europe and Ireland will place physical constraints on LNG send-out.
Norwegian pipeline deliveries to the UK will come under serious pressure and we will see significant volatility in NBP-TTF differentials through the summer.
A European Green Deal
The EU's has pledged to become climate-neutral by 2050. The drive to decarbonise continues to gain momentum and policy remains the key enabler.
The European Investment Bank's recent announcement shows the scale of the ambition – it will stop lending to unabated fossil fuel projects from 2021.
But Europe wants to go beyond simply maintaining its leadership position in carbon emissions reduction, it wants to commit to accelerate the change.
The new President of the European Commission, Ursula von der Leyen, has begun her tenure by raising the bar on climate-related policy through a European Green Deal.
At the heart of the package lies a bold proposal for a legally binding commitment to climate-neutrality by 2050 for the EU.
Douglas says: 'In order to bring this target into range, the Commission will outline a pathway to decrease the EU's emissions in 2030 by at least 50% and towards 55% below 1990 levels (the current target is for 40%).
'Regardless of whether such a shift is achievable by 2030, it underlines the scale of the ambition. Indeed, President von der Leyen has described the European Green Deal as 'Europe's man on the moon moment'.
'A Carbon Border Adjustment Mechanism – to capture carbon costs associated with imports – features in the European Green Deal and could have a significant impact for gas and LNG exporters.
'With growing societal pressure to tackle climate change, EU policy makers are now more explicit that gas must be decarbonised along the full value chain. Gas must demonstrate it can narrow the gap with low-carbon energy through action to cut carbon and methane emissions.'
Douglas concludes: 'Price remains king. However, we will see a significant ramp-up in buyers and investors focused on the green credentials of companies operating along the gas supply chain.
'How companies are positioned on carbon intensity and, especially, how they are measuring and tackling methane emissions will become a more central feature for gas supply in 2020.'
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