Nord stream 1 restart brings little relief

As more regasification infrastructure is brought online in Europe and LNG deals are signed, Russia will begin to see its position in the European gas market recede. The country therefore has an incentive to keep the gas flowing for now to maximise US$ and € revenues before Europe’s shift away from Russian gas gets underway in earnest. Europe is facing the same currency depreciation malaise as other energy-importing regions, and US$-denominated LNG will add further downward pressure on the €. Even if all maintenance is completed to schedule, the situation in the gas market is unlikely to improve greatly however, as fears persist that Russia may switch off supplies entirely.

The Nord Stream 1 pipeline physical flow was estimated to be between 60 and 67 million m³/d on 21 July with the latest renomination figures after the end of maintenance, which started on 11 July. These numbers are almost the same level as the pre-maintenance levels of around 65 million m³/d, which is 40% of the pipeline’s full capacity.

The 60% reduction was caused by an issue in mid-June related to a turbine, which was sent back to Germany on 17 July and is expected to reach its destination on 24 July. Several more days will be needed for installation once it returns to site – and even if everything goes well, flows may not return to the full capacity of 160 million m³/d. A statement by Russian President, Vladimir Putin about the uncertainty of the return of flows to normal levels has added more questions and concerns to market sentiments.

The flow of the Nord Stream 1 pipeline has been the main factor elevating TTF prices in recent weeks: they hit a high of US$54.8/million Btu on 7 July, and after the restart of flows on 21 July have calmed somewhat to US$46.5/million Btu. Flows on Nord Stream 1 are by no means certain, though prices may ease further if Gazprom surprises the market by keeping volumes stable.

The entire European energy system is going through a crisis, and even with the restart of Nord Stream 1 on 21 July, the region is in a tight position with continued risk to energy security. European countries will need to work together fast if they are to survive the winter relatively unscathed – and even if they do, the spectre of the next winter in 2023/24 is likely to keep prices elevated for months on end.

Because of the reduced gas flows from Russia, any drops in Norwegian flows have a significant impact on European gas storage levels and market prices. Norwegian gas exports constitute 23% of Europe’s gas supplies and more crucial than ever for the region’s energy security. Norwegian flows were at 335 million m³/d on 21 July, up 20 million m³/d week-on-week as some processing problems ended and yearly maintenance work was completed on several Norwegian fields. This is a healthy level within the usual range of 300 - 350 million m³/d.

The need for cooling is rising due to significant heat waves with temperatures above 40°C recorded in several countries across Europe throughout the week, and forecasts of above-normal temperatures for the coming days. This is an additional bullish factor limiting downside on gas prices. Europe’s gas underground storage is currently at 72 billion m³, a 3% increase (or 2.49 billion m³) compared to previous week. With the goal of reaching 80% of capacity by 1 November, the expected behaviour of all market participants would be to save what is already in the storage. However, German player Uniper had to withdraw gas from its storage facilities on 15 July. Germany has the largest coal-power generation fleet in Europe and is now seeking to increase utilisation. Every European country is now expected to prioritise energy security over long-term environmental targets.

With all the current factors, Europe’s situation does not look bright and the EU has started to take more serious steps towards solving the energy crisis it is facing. The EU has proposed a target for all its states to cut gas use by 15% from 1 August 2022 to 31 March 2023, compared with their average consumption in the same period of the years 2016 to 2021. The proposal could be approved by ministers to become mandatory on 26 July if a severe risk of gas shortages is declared.

Some EU countries have already disagreed with the proposal; however, Spain has rejected the proposal, saying it would prefer an open debate about possible solutions to Europe’s energy situation. The EU Commission has also announced plans for other non-binding guidelines to cut gas use. The measures being considered include auctions or tenders with industries offering gas consumption reduction in return for compensation; reducing heating in public buildings, commercial centres, offices and other public spaces; fuel switching away from gas; and temporarily easing pollution rules for power plants. France is already preparing a plan to save energy, starting with turning off public lights at night.

Alternatives to Russian gas

Another measure from the EU to reduce reliance on Russian gas is a Memorandum of Understanding signed on Monday with Azerbaijan to boost gas imports from 8.1 billion m³ in 2021 to 12 billion m³ this year and at least 20 billion m³ by 2027. In addition, Algeria is meant to deliver an extra 4 billion m³ of gas on top of the previously planned 21 billion m³ this year. With Europe buying enormous amounts of LNG, the global market is extremely tight and prices are staying high.

Asia

Top LNG importer Japan has historically relied on long-term LNG contracts, but has in the past few months faced an energy security risk and has been forced to source LNG in the spot market. This is to meet its needs because of increased cooling demand due to above-average summer temperatures, as well as the ongoing Russian supply concerns. Furthermore, a strike at the Australian Prelude FLNG that started at the end of June and was meant to end 21 July has now been extended by a further two weeks, leading to the loss of at least two additional cargoes. The fact that the dispute has continued so long despite a single cargo representing a revenue of between US$50 - 150 million continues to strain the market.

Taking all these factors into account, it is no surprise that Nippon Steel recently purchased an LNG cargo at the highest price ever paid in Japan. The Asian spot LNG price is now at around US$38.2 per million Btu. The Asia spot prices are staying high because of summer demand, coupled with concerns over whether the Nord Stream 1 pipeline in Europe will return to full flow and ease the premium the European market holds over Asia.

The high gas prices are having a strong impact on Bangladesh, where natural gas accounts for almost 75% of the country’s power generation. As the summer heat spurs energy demand, the authorities have been forced to take measures including switching off nationwide power supply daily. The situation is unlikely improve in the near future as the country cannot afford to buy LNG on the spot market at these prices.

Read the article online at: https://www.worldpipelines.com/special-reports/22072022/nord-stream-1-restart-brings-little-relief/