Europe on edge while NS1 is down

Should Nord Stream 1 not come back online, Europe’s fiscal and energy policies set up to deal with restrictions in gas flows will face their first major test. Going through demand destruction and limitations on gas sales during the summer months may be a blessing in disguise, however, as a cut in supply this autumn or winter would hit at the worst time possible. Even so, Europe needs supplies now to build up its stocks before the heating season. The outage at Sleipner yesterday has been fixed by this morning and reinforces that while Europe may be able to survive without Russian gas, they are vulnerable to other supply cuts.

The key source of Russian supplies to Europe, the Nord Stream 1 (NS1), has delivered zero flows into Europe since 11 July due to planned annual maintenance of the pipeline (see image). NS1 has also been delivering reduced flows, at around 67 million m³/d, for the past few weeks due to compressor issues. The market is beginning to question if the pipeline will resume on the set date of 21 July following maintenance. The resumption will depend on Canadian turbines from Siemens making it to Russia. Recent news from the Canadian government about the turbines securing permit to return to Russia puts the ongoing programme a step closer to completion. News that NS1 volumes will increase once the turbines are returned added downward pressure to prices. Even tough gas flows through NS1 have halted due to maintenance, gas flows from the Ukrainian transit have held steady at around 36 million m³/d.

Since the news of the halt in flows, Dutch TTF prices hit a high of US$48.8/million Btu on 11 July. Ample uncertainty surrounding Russian supplies remain amid persistent fears of the continent running out of gas during the heating season. Market participants continue to closely monitor the restart of the pipeline and the supply flows through the route. Norwegian flows are currently at 242 million m³/d as of 12 July, roughly 90 million m³/d lower than a week ago. Reduced flows from Norway are a result of annual planned maintenance, which normally takes place during summer, and some outages, such as the Nyhamna gas facility connected to the Sleipner field on 11 July. With reduced Russian supplies, Europe is heavily dependent on Norwegian gas exports, crucial for Europe’s energy security.

Current EU storage is now 59.09% full. If the turbines from Canada are delivered to Russia, and the NS1 runs at its full capacity of around 167 million m³/d after 21 July, it will provide a downside risk to prices. With NS1 back at 100% capacity, Europe is set to reach the target of filling 80% of capacity by 1 November. If the system continues to deliver reduced exports, at 67 million m³/d through the rest of the year, Europe is on track to reach storage levels of 72% by the end of October instead of the targeted 80%. If NS1 were to stop exports completely after the maintenance on 21 July, EU storage levels would reach only around 65% before winter, creating a real risk that the continent could run out of gas during the heating season, adding further upside to the currently elevated market.

Given the uncertainty of Russian flows over the coming weeks and months, gas consumption reduction targets need to be in place. The EU commission has warned its member nations and industry to be ready in case of a complete cut-off of the already limited Russian supplies. Countries that heavily rely on Russia for gas imports, such as Germany and Italy, have already made plans that incentivise a reduction in gas consumption and increase gas storage to be ready for the coming winter.

For Germany to reduce gas consumption and store as much as possible, the nation will require demand destruction, especially as gas is the primary source of heating in German homes. Germany – already in the second phase of its gas emergency plan – needs to prioritise storage with an aim to get to 90% of capacity by the end of the injection season. Demand destruction will happen in the use of gas for generation, which will be replaced by coal-based generation, as well as the industry sector, where the government will incentivise a gas saving plan to reduce consumption. A ‘gas auction model’ aimed at encouraging industries to save gas is going to be launched later this summer. This plan will reward companies that reduce gas consumption at their factories and plants, by introducing surplus gas auctions where costumers get paid for their unconsumed surplus.

Late last week, the EU parliament voted to approve that gas and nuclear could be included in the EU Taxonomy, likely in force at the start of 2023. Yet, this ‘green label’ for gas comes with a lot of conditions and caveats. The most important of them is that a sustainable gas power plant must fall within the very strict limits of carbon-dioxide emissions intensity, which currently are not achievable even by the most efficient gas plants.?Additional measures to lower emissions are required. The two most viable options include blending green hydrogen with gas?or the carbon capture, utilisation and storage (CCUS) of associated emissions.

In Australia, the Prelude FLNG plant is undergoing trouble and Rystad expects to see reduced capacity from the facility due to industrial action. Together with the outage at Freeport LNG in the US, which is not expected to be back before the end of this year, this provides an additional upside risk to global supply concerns.

In Asia there is a potential risk of further lockdowns in China, lowering natural gas demand. The region was originally expected to ramp up consumption given the need to consume more, and the need to fill storage for the coming winter.

 

 

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World Pipelines’ July 2022 issue

The July issue of World Pipelines includes a South America regional report, as well as technical articles on pigging, pipeline steels and equipment. The cover story, from GeoCorr, explains the results from a push for ‘smarter’ caliper technology by industry-leading transmission companies that propelled the steps to better data.

Read the article online at: https://www.worldpipelines.com/special-reports/13072022/europe-on-edge-while-ns1-is-down/