The gas market is the perfect storm. What is happening to prices and Nord Stream 2

Author

Kirill Danilchenko

A perfect storm continues in the natural gas market—the gas price on the TTF spot under the day-ahead contract exceeded $670 at the beginning of September (this is a new all-time high). It must be understood that this is a speculative figure and the cost of long-term contracts should differ significantly and downward.

But now the price is pushed up by several factors at once.

The rage of the element: Ida in the USA

The massive Hurricane Ida struck the southern United States. Together with the collapsed power supply in the 400,000th New Orleans, 280 oil and gas platforms in the Gulf of Mexico were halted—90% of the capacity was paralyzed. The natural disaster was so powerful that it disabled the WD-143 transit platform that was used as a staging base with a helipad.

Several large liquefied natural gas plants in the region need to be repaired after a hurricane. This will take 2 to 4 weeks. This means a significant drop in US LNG exports to EU markets. Together with the depletion of fields in the Netherlands, the deficit impacts the market strongly. Time will tell whether the United States will be able to quickly resume production or transfer part of LNG from Asia by tankers, taking advantage of the price increase.

Natural gas deficit

In addition, it is worth noting the actions of Gazprom: they are playing a game of reducing losses due to high spot prices and rather low prices for long-term contracts, artificially reducing pumping. At the same time both through the Ukrainian pipe and through the Polish one, as well as through the "Turkish Stream". The gap between the speculative price of European traders ($670 per cubic meter) and the previously concluded contracts ($240) is palpable, so the Russians are doing their best to create a deficit to skim the cream off this situation when contracts are renegotiated.

Gazprom has already unveiled a forecast that with the recovery after covid restrictions and high gas consumption from storage facilities due to the harsh winter of 2020, demand in the EU countries will reach 200 billion cubic meters. And the export will probably be only 184 billion cubic meters. The reasons (that were not officially announced) are an accident at a plant in Novy Urengoy (New Urengoy from Russian) and several accidents at gas pipelines.

Therefore, although the increase for the year reached 6 billion cubic meters, it is still far from demand saturation. At the same time, Gazprom does not reserve additional capacities either through Poland, or through Bulgaria, or through Ukraine. And despite the signing of a new contract with Budapest, this did not result in real cubic meters.

SP 2 golden weld

The Russians finished laying the Nord Stream 2 second line this morning. Joining and welding of the pipe’s both parts will be carried out until approximately September 13—the so-called "golden weld". After that, the filling of the pipeline with technical gas will begin. This is not a rapid procedure and that takes many weeks.

A parallel litigation is in process—the Swiss subsidiary of Gazprom, Nord Stream 2 AG, is seeking legal recognition as an independent operator. This, in turn, will allow the company to be taken out of the framework of the European Union Third Energy Package and to use 100% of the pipeline. In general, it is not clear whether the Russians will be able to make up for the deficit on the market with the help of Nord Stream 2 in the coming months, because the regulator's decision alone may take time until January.

And it is still unclear how the withdrawal of the Norwegian Det Norske Veritas will affect the project and its certification. And that means many weeks of uncertainty that also pushes the price up. Moscow is playing a game of raising rates.

Ukraine is still filling its underground gas storage facilities quite well—as of September 3, we have 18.16 billion cubic meters, or slightly more than half of the capacity of our UGS facilities.

With the injection of 30 million cubic meters daily, it is already obvious that we will enter winter at our best compared to 2016, 2017, and 2018, but about a third less than last year, when we were preparing to struggle for a new contract. But here the question remains about the future of Ukrainian transit.

Geopolitics

Regarding the fact that Germany and the US have reached a consensus on Nord Stream 2, Berlin continues to insist that the EU needs to diversify its supplies. For the more gas pipelines, LNG operators, and routes there are, the better for the price and the less chance that any of the players will use the valve as economic leverage on political issues.

How, nevertheless, this coincides with the fact that Moscow is creating an artificial deficit in the market right now, German officials have been keeping quiet for the time being. The United States, on the other hand, is concerned about the withdrawal of troops from Afghanistan, the strengthening of China in the Pacific theater, and the deficit of the trade balance with Beijing—no one will start a full-scale war of sanctions with its main ally in the Old World.

For Ukraine, of course, there is an acute issue of guarantees and compensations in case of the transit loss. All these projects concerning the European hydrogen gas pipeline and connecting Kyiv to them are undoubtedly interesting.

For example, there is a 380-kilometer wire carrying a mixture of methane and hydrogen between Belgium and France. There are plans to build a huge hub in Rotterdam. But it's a matter of timing between 2040 and 2050. Moreover, it is not entirely clear how in a quarter of a century Kyiv can keep an inexpensive electricity tariff—most nuclear power plants have already exceeded their design deadlines, and even their modernization costs tens of billions of dollars.

At one time, we have already received all kinds of guarantees of support in the case of the Chernobyl station closure. They resulted in the help with Shelter 2 and the opening of a factory for assembling light bulbs in Slavutych. It is great that the US sees Nord Stream 2 as a threat to European security, but it seems that it is hardly in evidence for the EU countries themselves. And even the media avoid calling the actions of the Russian Federation speculative or blackmail.

This means that the gas market will continue to be in fever, and Moscow's attempts to use gas for political purposes will continue. The words about the "green transformation" fund and the use of the Ukrainian GTS for hydrogen projects after a quarter of a century remain just words.