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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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European Gas Market Braces For Price Slump

At the end of last year, Gazprom’s chief executive Alexei Miller said he expected Gazprom’s natural gas deliveries to Europe and Turkey to book another record-breaking year in a row, reaching 201 billion cubic meters. Now, the gas market in Europe is anticipating a price drop for the first time as Gazprom expects to keep exports to Europe at the same level this year and next, Bloomberg’s Vanessa Dezem reports.

Gas prices have been steady in Europe over the past four years but after a mild winter—for now—Gazprom’s export plans and full storage facilities could combine to put increased pressure on prices, which will increase further in the summer when Wood Mackenzie expects a rise in LNG deliveries to Europe as well: Morgan Stanley forecasts LNG imports into Europe would rise by 14 percent to 56 billion cubic meters this year.

According to Dezem, the increase in LNG deliveries will be in large part determined by the extensive LNG import and transportation infrastructure on the continent, which makes it a destination of choice for spare LNG cargoes from various delivery points. But some of the LNG expected to flow into Europe will likely also come from Russia: Novatek is currently ramping up production at its third liquefaction train at the Yamal LNG facility.

But U.S. LNG is also set to flow into Europe in larger amounts. Late last year Cheniere Energy sealed a long-term deal for LNG deliveries with Poland. The company also launched its second LNG project, in Corpus Christi, Texas, and added another liquefaction train to its first plant, in Sabine Pass. Add to this the two megaprojects that began production offshore Australia in 2018 and you get a lot of LNG capacity coming online, adding pressure on gas prices. Related: OPEC Oil Exports To The U.S. Fall To Five-Year Low

However, this pressure may come to pass relatively quickly. According to a Bloomberg survey among seven analysts, the average price for the benchmark Dutch next-month gas contract would be 22 euro (US$25) per MWh. That’s only slightly lower than the average for 2018, which stood at 22.28 euro (US$25.37) per MWh. But that’s in the short term. Over the longer term prices will likely stabilize higher and part of the reason will be Russian pipeline constraints.

Though it may sound surprising at first, here is the explanation supplied by Wood Mac senior research analyst for gas and LNG, Hadrien Collineau, as quoted by Hydrocarbon Engineering: “Russia currently has 257 billion m3/yr of export capacity to Europe. 128 billion m3/yr of that is Ukraine transit capacity. Nord Stream 2 and TurkStream add 87 billion m3/yr of capacity but these links will make use of existing European infrastructure, which then limits the volume of gas that can transit Ukraine to 20 billion m3/yr. Consequently, overall Russian export capacity to Europe will only increase to 235 billion m3/yr.”

In the meantime, demand for natural gas in Europe will be on a steady upward curve as local production declines due to natural depletion and coal plants are being retired, to be replaced with gas-fired capacity or renewables. Enter more LNG, seeing as the EU will hardly be particularly enthusiastic about more pipelines from Russia. So while in the near term gas prices in Europe may experience some pressure that will weigh them lower—especially if the winter continues to be mild—there is no reason to worry about the longer term. Steady demand growth would ensure healthy price levels even after Nord Stream 2 comes online.

By Irina Slav for Oilprice.com

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