Watch out for a tighter market [Gas in Transition]

With recent 2023 publications, it is interesting to see that China has consolidated its position as third biggest gas market worldwide after the US and Russia and definitely ahead of the EU.

EU and China gas demand since 2000

Suppliers and portfolio players will view the growing Chinese gas market as more important than the declining European market (as further demand drop expected in 2024 with less gas for power generation). With the EU now at a record high dependency on foreign producers, this is going to make security of supply more challenging for the EU that relies mostly on spot markets.

EU domestic supply demand balance since 1970

Sources: EI Statistical Review, thierrybros.co

The EU has been very vocal about implementing biogas and biomethane targets (35 bcm in 2030 according to REPowerEU) but if we add biomethane to the natural gas supply-demand equation, the situation doesn’t change much. With 4 bcm of biomethane produced in 2023 in the EU, biomethane growth in 2023 vs 2022 is still 16 times less than the decline in its domestic natural gas production. In short, biomethane production doesn’t change the fact that the EU is becoming more and more import-dependant (88%).

Split of EU gas consumption by sources

Sources: EI Statistical Review, IEA, thierrybros.com

With no spare gas production capacity at the global level and 35% of LNG imported on a spot basis^[1], LNG provides de facto more storage (on water) than underground storage in the two biggest importing countries (China and the EU).

Production, demand and storage in selected countries vs LNG

Sources: EI Statistical Review, GIIGNL, thierrybros.com

Spot LNG provides the equilibrium between Asia and Europe. Hence, even in the middle of summer and with its storage nearly at a record high, Europe faces ~$10/mn Btu gas prices and high volatility in case of any supply disruption. And the situation isn’t going to improve anytime soon. China seems in no hurry to sign for the Power of Siberia 2 that could deliver an additional 50bn m³/year. The July 2022 MOU to support the doubling of exports from Azerbaijan to the EU has not progressed. So most new pipelines will not be operational this side of 2035. The US sanctions on Artic 2 LNG, the self-imposed freeze on new non-authorised US LNG projects, Egypt moving again from an LNG exporter to an importer and the delays in the liquefaction plants in construction worldwide can only lead to a tighter market.

EU LNG send-out data shows that Asia is more willing to attract LNG since the begining of 2024 and the situation could further deteriorate, even if the EU is in no need of extra LNG thanks to more Russian piped gas and further demand destruction.

EU (excl. Malta) LNG send-out

Sources: GIE, thierrybros.com

On June 12, Uniper^[2] decided to terminate its long-term Russian gas supply contracts and thus legally end the long-term gas supply relationship with Gazprom Export. The decision was made possible after an arbitration tribunal on June 7 awarded Uniper the right to terminate the contracts and awarded it more than €13bn in damages for the gas volumes not supplied since mid-2022. Although only limited gas volumes had been delivered since June 2022 and no gas volumes since the end of August 2022, the long-term gas supply contracts between the two companies were still legally in force and individual contracts would have continued to exist until the mid-2030s. The arbitration in Stockholm ruled in accordance with Swiss law and its ruling is final and legally binding. This leads to two questions:

• As each contract and arbitration process is unique, could this ruling become a precedent for other European offtakers with dormant gas contracts that are willing to pursue the same route and legally terminate their contractual relations with Gazprom?
• If Gazprom (that is now a loss-making company) refuses to pay damages, could Uniper force European offtakers that still receive pipeline gas from Russia to redirect payments with a risk in halting remaining gas supplies to the EU (as Gazprom is unlikely to deliver gas without being paid)?

With 2.2bn m³ exported in June 2024 vs 1.8bn m³ exported in June 2023, for 10 months in a row Gazprom’s exports to Europe are up y-o-y. Since the begining of the year, exports are up 27% y-o-y, when EU policymakers continue talking about reducing both domestic demand and Russian supplies^[3].

On June 24, EU adopted^[4] a 14^th package of sanctions against Russia for its continued illegal war against Ukraine, strengthening enforcement and anti-circumvention measures. As regards LNG, the package will prohibit, after a transition period of nine months, the use of EU ports for the transshipment of Russian LNG. Moreover, the package prohibits the import of Russian LNG into specific terminals which are not connected to the EU gas pipeline network. This is more to showcase support for Ukraine vs being effective as the UE imported^[5] 96.7 tonnes of LNG in 2023 (net re-export) and reexported only 1.4 tonnes. With a worldwide supply of 401.4 tonnes those 1.4 tonnes (assuming they were all Russian re-exports via transhipment) will have no impact either in the EU or globally.

Gazprom’s Europe Monthly Exports 

Sources: Entsog, thierrybros.com

We should continue to witness Russian pipe flows to move in the expected narrow range between 0.9bn m³/month and 2.4bn m³/month.

Split of Gazprom’s Europe Monthly Exports

Sources: Gazprom, GTSOU, Entsog, thierrybros.com

Due to the closure of TurkStream for annual maintenance, EU didn’t receive any gas from Turkey between June 5-8; flows returned to pre-maintenance level on June 11.

On March 31, with a record of 58% storage full, the summer injection season started. Storage level ended in June at 77%, at the high level of the historical range.

EU storage

Sources: GIE, thierrybros.com

Dr. Thierry Bros

Energy Expert & Professor

July 1, 2024