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Rystad Energy: NS2 suspension to further tighten global gas markets and boost LNG demand

Published by , Senior Editor
World Pipelines,

Here is Rystad Energy’s extraordinary note on the Nord Stream 2 pipeline from Head of Gas Markets Research Sindre Knutsson:

Germany’s announcement that it has suspended the certification process of the contentious Nord Stream 2 (NS2) pipeline has thrown a geopolitical spanner in the works.

The recently completed pipeline, which runs under the Baltic Sea from Russia to Germany, has sat front and centre in the broader geopolitical conflict brewing in Europe.

The decision comes in response to Russia ordering troops into Ukraine’s Donetsk and Luhansk regions, a move considered by Europe and the bloc’s North Atlantic Treaty Organisation (NATO) allies as a significant escalation in the Russia-Ukraine dispute, which could have negative ramifications for the wider European region.

For gas market players, halting NS2’s certification increases the likelihood that Russia could reduce or stop gas flows into Europe, a risk gas markets have struggled to price in since the Russia-Ukraine conflict intensified at the end of 2021.

We expect near-term Title Transfer Facility (TTF) prices to tack on a ‘risk premium’ for more uncertainty in Russian flows.

However, further upside may be limited given the market already doubted NS2 would be certified by the end of this year.

However, further out in 2022 and into 2023, we see a risk that European balances could experience a deficit, leaving the region reliant on LNG, which would impact global flows.

Nord Stream 2 certification suspended

The NS2 pipeline was at the centre of geopolitical tensions in the region in 2021, with several indications that the West has used the pipeline’s approval as a bargaining chip to rein in the risk of Russian military action in Ukraine.

With the advancement of Russian troops to Ukraine this week, the West has seen that risk materialise and promptly pulled the plug.

The decision is unlikely to have been taken easily, given that Germany depended on Russia for about 57% of gas needs in 2021.

Until now, NS2 has also been seen as an essential new conduit for gas volumes to offset a decline in Germany’s nuclear and coal-fired generation plants which were due to close by the end of 2022 and 2030, respectively, lifting gas demand from 90 billion m3 in 2021 to around 105 billion m3 by 2030.

This increase in gas volumes may now be in doubt due to the pipeline pause.

The German economy ministry has previously stated that NS2 posed no threat to energy supply security, but the suspension is a diplomatic victory for its most vocal opponents – the US and Ukraine – who maintain it will strengthen Russia’s energy dominance in Europe.

European gas balances upended

The suspension of NS2’s certification means the pipeline will not now start flowing gas in the second half of 2022 as anticipated, and we now expect incremental gas exports from Russia will remain negligible for the remainder of this year, upending European gas balances.

Europe’s gas market is already structurally tight post-2021, with storage levels languishing at a five-year low and TTF prices five times higher than a year ago.

It is realistic to expect gas volumes transiting through Ukraine to be halted in the event of an escalation.

In addition, any market participants still holding onto hopes that NS2 will be approved this year will likely see another 10 billion m3 of Russian exports evaporate.

Firm supplies through Ukraine and NS2 are needed to balance the European gas market and rebuild depleted storage levels during 2022.

The suspension of NS2 wipes out all hope of this and will likely create a prolonged supply deficit and high prices in the European gas market.

Before the approval process was suspended, we expected to see around 10 billion m3 of Russian gas flowing through NS2 in 2022, rising to 40 billion m3 in 2023, around 7% of the European gas market supply.

The longer the certification process is suspended, the greater the risk that we will not see these volumes come to market in 2023.

This will cause the current deficit in Europe and high prices to last into 2023 and potentially longer depending on how the Ukraine-Russia crisis unfolds.

In addition, any escalation in conflict may result in lesser Russian gas volumes transiting Ukraine.

Currently, there is 40 billion m3 of transit capacity booked through Ukraine, but some or all of this could be halted entirely, representing the most significant immediate upside risk to European gas prices in 2022.

Russian gas exports to Europe have been erratic since October 2021 and fell steeply in January, with volumes through Ukraine dropping 50% year-on-year, giving rise to increased uncertainty around how much to expect for the remainder of 2022.

To cover any gap from a shortfall in either NS2 or Ukraine transit volumes, Europe will likely have to rely on imports from the liquefied natural gas (LNG) market.

This is because exports from Africa are declining, and Europe has limited possibilities to lift domestic production.

It means Europe will have to compete with global buyers for additional LNG cargoes, which will drive up prices significantly.

Withdrawal rates from European gas storage have slowed, with storage volumes sitting at around 37.6 billion m3, close to the five-year minimum.

With Europe forecast to see mild late winter temperatures, gas demand for heating in the coming months will be lower than expected, enabling storage levels to step back into the five-year range.

Immediate impact on gas prices likely to be muted

Given NS2 was initially projected to start up in the second half of 2022 and the near-term demand outlook is muted, the immediate impact on gas prices may be limited, albeit with the likelihood of a ‘risk premium’ being added.

Accordingly, demand-side factors remain unchanged, meaning we expect to see upward price corrections around the end of 2022 and into 2023, which may move to closer reflect 2022 averages compared to the steep backwardation currently shown on the forward curve.

At first glance, the suspension of NS2’s certification looks more like a setback than outright cancellation.

Chancellor Scholz’s economy ministry will now re-consider the pipeline in light of the new fundamentals.

However, it is worth noting that the current German government’s stance on NS2 and the country’s dependence on Russian gas is more hawkish than under the previous administration led by Angela Merkel, suggesting the uphill climb for approval has only become steeper.



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