A gas collapse or new reality?

The TEKFACE Internet portal published the detailed comments by Aleksey Belogoryev, Deputy Principal Director on Energy Studies at the Institute for Energy and Finance, on the reasons for the sharp rise in gas prices in Europe and the possible consequences of the "price collapse" for developing renewable energy sources and hydrogen energy in Europe.

What do you see as the main reasons for the sharp rise in gas prices in Europe in September this year? Are they related to Gazprom's policy or is it the result of objective market processes?

- The main question, in my opinion, is whether the price dynamics at European hubs is independent (then complex reasoning about the balance of supply and demand in the European market is appropriate) or whether European prices are just a reflection of Asian prices. Leading experts have different opinions on this matter.

On the one hand, the situation on the European market is really tense: demand has grown significantly higher than expected (according to preliminary estimates, even without Turkey, we can talk about an increase of 30 billion m3 by 2020 and almost 10 billion by 2019), own production in the EU and Great Britain is falling faster than we would like, the supply of pipeline gas outside the EU (primarily from Russia) is growing, but does not keep up with demand, LNG supplies are higher than 2018, but lower than in 2019-2020 (although, it would seem, the price attractiveness of the European market has significantly increased since then), reserves in UGS facilities remain below five-year average values, etc.

But, on the other hand, the fact is that, since spring, the JKM and TTF indices not only show similar rates, but also differ little in absolute values. They go, one might say, head to head. It is difficult to suspect this is an accident. In my opinion, the trend of 2019-2020 continues, when the so-called Asian premium on the spot market has actually disappeared (under long-term contracts, given the dominant oil peg, it naturally persists, although now it is not a “premium”, but a “penalty”) ...

Is such a strong increase in the price of gas on the European market in September this year a "one-off episode", or can similar price hikes be expected in the future?

- Hardly anyone will argue that the main center of international (interregional) gas pricing is in Northeast Asia (China, Japan, Republic of Korea), since it is here that the balance of the world LNG market is determined. There is also a more or less general consensus that imbalances in the LNG market have become (for the first time in history) the main reason for the extreme price decline in 2019-2020. There is reason to believe that in 2021 the same factor triggered a reverse price movement.

Spot prices, most likely, have not yet reached their peak values. Prices in the 4th quarter, according to all basic assumptions, should be higher than in the 3rd quarter. Therefore, the general expectation is that the average quarterly prices will increase significantly and may even exceed $ 28 per million BTU (in the third quarter, the JKM index reached $ 17). In January-March 2022, on the contrary, there is reason to expect a sharp decline in prices, especially if the current preliminary estimates that the winter in the northern hemisphere will be cold again does not come true. And in general, by the second half of 2022, the average quarterly prices in Europe and Asia should fall below $ 10 per million BTU (I would not rule out a possible decline to $ 6).

How, in your opinion, will this jump in gas prices affect the timing of the commissioning of Nord Stream 2? Will it become an incentive for increasing Russian gas exports to Europe?

- The price dynamics undoubtedly increased the common interest of Germany and the EU countries in general (excluding Poland and the Baltic states) in NS2, at least at the level of gas companies and major consumers. But I doubt that it will help speed up the certification of the gas pipeline or make it easier. Everybody more or less understands that the volume of possible deliveries via NS2 in the first months of operation is not so large to turn back the price dynamics. The gas pipeline will begin to play an important role already in the next heating season.

In order to increase the export of Russian pipeline gas to the EU, Nord Stream 2 is really needed, since it allows using the additional potential of production on the Yamal Peninsula and transportation along the corridor from Bovanenkovo ​​to the Baltic coast.

Why didn't the flow of LNG from the United States and other supplying countries flood the European gas market at the peak of gas prices in Europe?

- LNG is actually going to Europe: volumes are indeed less than in 2020, but still significant (even at summer lows, they did not fall below 4.5 billion m3 per month). To increase them, there is not enough free volumes of LNG on the market. Spot prices in Europe remain either slightly lower or equal to those in Asia. But the main thing is not this, but the fact that the logistics of most LNG suppliers (including US plants) are traditionally set for priority supplies to Asia, where 71% of the global demand for liquefied gas is concentrated and where premium pricing continues (although in fact it does not work now) ... From the point of view of the distribution of free ("spot") volumes, Europe is the last consumer for the world LNG market: it is left with what turns out to be unclaimed in other markets.

How will this "price collapse" affect Europe's plans for the development of renewable energy and hydrogen energy?

- It seems to me that the consequences of the 2021 crisis will be contradictory. On the one hand, of course, high prices for oil, gas and coal increase the economic attractiveness of renewable energy sources and any other energy alternatives. Although, strictly speaking, for investment planning, it is not so much the amplitude of price fluctuations that is important (this is, rather, just the area of ​​risks), as persistently high prices, as was the case with oil in 2011-2013.

Unfortunately, 2021 is likely to have dire consequences for the prospects for so-called blue and turquoise hydrogen. Their opponents (and there are especially many of them in the EU) received an excellent trump card for lobbying that there is no alternative to "green" hydrogen, not only for environmental reasons, but also for economic reasons.

On the other side, this crisis, although it hurt consumers, may paradoxically lead to an improvement in the reputation of gas as part of the "energy transition". It has clearly shown a higher demand for gas as a "transitional" fuel than anticipated by European regulators. The anti-gas dust of the EU regulators may be slightly weakened. Producers, in turn, received a clear signal about the need to increase investments, and gas transmission companies - that it may be too early to redesign gas networks for hydrogen.

The fact that the crisis came to Europe from the LNG market is good for pipeline suppliers, who look like a more reliable alternative (despite the accusations against Gazprom, in my opinion, quite superficial). For the same reason, perhaps we will see for some time a turn of consumers towards maintaining long-term gas contracts.