2013 Outlook Commodities Review: European Gas and LNG

2013 Outlook
Commodities Review

European Gas and LNG
Thierry Bros

Key points

■ On 8 October, the second 27.5 bcm/y Nord Stream line was launched, bringing the facility’s total capacity to 55 bcm/y (the first line was opened in November 2011). The pipeline is designed to bring greater stability to the supply of Russian gas to Europe by reducing dependence on transit countries, with which Russia has repeatedly faced serious issues over gas prices.

■ On 23 October, Gazprom officially launched production at its Bovanenkovo field on Russia’s Yamal Peninsula in northwest Siberia. Gazprom’s CEO Alexei Miller said during the launch that the field’s output will hit 46 bcm in 2013. He added that output will increase to 115 bcm/y from 2017, and to 140 bcm/y in the longer term. Gas from Bovanenkovo is to be transported via the Bovanenkovo-Ukhta pipeline running across West Siberia. Some of this gas will then be transported via the Ukhta-Torzhok pipeline to central Russia. From there, a significant volume of Bovanenkovo gas will run via Gryazovets-Vyborg to Russia’s Baltic coast, where the pipeline links up to Nord Stream (55 bcm/y capacity). To give an idea of the size of this project, it is worth remembering that Gazprom’s export volumes to Europe (incl. to Turkey) were 141 bcm in 2009, 139 bcm in 2010 and 150 bcm in 2011. With gas demand down in Europe (-2.4% in 2012e vs 2011), we expect Gazprom to export around 143 bcm in 2012e (to Europe and Turkey). This additional net supply (some of this gas will make up for old, depleting Russian fields) that should hit Europe at a time of tepid demand reinforces our view that producers will have to adapt pricing to allow gas to compete again vs coal in power generation.

■ Danish oil & gas and power producer DONG Energy reported a Q3 EBITDA operating loss. CEO Henrik Poulsen said the results were hit, in particular, by a European gas market marred by oversupply and low margins. He said this was partly to do with low carbon and coal prices, which had made coal-fired power stations more competitive than his company’s gas-fired power stations. This is another example of cheap coal ‚vampirising‛ expensive gas for power generation in Europe.

■ After a retroactive payment of $2.5bn in Q1, Gazprom’s Q2 results were again impacted by the negative effect of $1.7bn in retroactive payments the company had to make to clients as a result of gas price adjustments. According to Gazprom, the adjustments ‚relate to volumes of gas delivered in 2010 and 2011, for which a discount was agreed in 2012". Gazprom renegotiated supply contracts with a number of European customers in 2012 after complaints from customers that they were paying too much for the gas under long-term, oil price-linked contracts, which were above spot gas market levels. In the coming quarters, Gazprom may continue to make retroactive payments to its European customers, as Russian gas is still too expensive for Europe. As we mentioned in our 11 June European Gas Special - European gas supply: on the verge of being mostly spot-indexed, producers will have to (painfully) adapt pricing.

■ Polish group, PGNiG reached an agreement with Gazprom on 6 November to amend the pricing terms of its gas imports, bringing to a close arbitration proceedings (in February, PGNiG filed a suit against Gazprom at the Arbitration Court in Stockholm in an effort to index more than half of its contracted volumes to spot prices). The agreed price takes into account the current market prices of gas and oil products. At the same time, the basic principles of the gas trade have been preserved intact, such as long-term contracts, the take-or-pay principle and oilpegged prices. The spot component, taking into consideration the state of play of the Polish market, will not be included directly in the contract. According to PGNiG, a reduction of over 10% in the price has been agreed. This is in line with our call detailed in our 10 Oct. European Gas Special - Arbitrations are turning in favour of resellers: bearish for future gas prices.