Natural gas flows from Russia to Europe are down sharply on the back of the Russian Ukrainian pricing dispute.
Should we be concerned? For the time being, analysts say no. European nat gas and power prices yesterday staged a small rally, but in historical terms prices in both commodities remain low. If the flow suspension continues, however, the news will ultimately be bullish for naphtha and heatoil says Olivier Jakob at Petromatrix– which many power stations (among the biggest natural gas users ) can switch to instead of natgas.
What’s not helping, however, is the corresponding arctic freeze gripping much of Europe. Temperatures in London look set to stay sub-zero until at least January 11th, while on the continent there appears to be no imminent respite from the bitter cold.
Generally, in the case of power shortages the UK usually depends on surplus supplies from France. And yet, as Argus media reports, the French generators are already running at full whack.
London, 5 January (Argus) — French peak-hour power consumption is likely to reach a record high this week, according to French grid operator RTE. RTE forecasts power demand to rise to 91GW at around 19:00 CET tomorrow and on 7 January as temperatures are set to drop to 6-7°C below seasonal averages. The current record was registered on 17 December 2007 at 89GW, RTE said.
The grid operator added that a 1°C drop in temperatures during the cold winter months causes a 2,100MW rise in power consumption.
These high demand forecasts drove up prices in the French over-the-counter (OTC) market today. Tomorrow’s peak-load contract traded as high as €112/MWh during today’s session, and the 7 January equivalent contract changed hands at €117/MWh, as much as €24.50/MWh above the previous day-ahead peak assessment.
EdF, which today completes its £12.5bn takeover of British Energy, is coincidentally also facing unplanned outages at British Energy’s nuclear units totalling up to 2,400MW, off line since 2 January, according to Argus. Power prices hence are imminently more vulnerable to a rally than nat gas prices, which as can be seen below were slightly more muted vs power yesterday (comparing the month-head charts).
And here’s the longer term view from the Utilyx daily report:
Of course, given today’s more substantial drop in Russian flows to Europe (down to some 74m cubic meters, compared with about 300m normally according to Gazprom) nat gas prices have unsurprisingly responded by gaining up to 18 per cent to 70 pence a therm. But, considering the weather, this price is still reasonable.
Overall, if the crisis continues things are likely to be worse for Germany, which receives more than 40 per cent of its gas from Russia and is also suffering from a serious cold spell. As yet, though, supply cuts have not been detected there. Those who are reporting shortfalls include Bulgaria, Turkey, Poland, Greece, Hungary, Slovenia and Macedonia. While anything can change, many expect the conflict could be resolved as early as Friday when the Russian national holiday finishes.
Meanwhile, the saga should also be viewed in the wider context of European price moves. The massive drop in both power and natural gas prices into December is exceptionally unseasonal. Traditionally gas and power prices tend to be higher in winter and lower in summer, but because of natural gas long-term contract linking to oil prices they have followed crude downwards.
It’s this ‘linkage’ that is causing much of the argument between Ukraine and Russia. Nat gas agreements are struck on a bilateral and long-term basis, adjusted over the year according to changes in the price of an oil basket. Russia — which also claims Ukraine has siphoned off much of the gas that it transports via Ukraine to European customers — believes the former soviet state has been radically underpaying for its gas as a result. Having struck a deal this time last year it has largely avoided paying much of the premium added to nat gas spot prices by oil’s record rally. But, as Argus explains, Ukraine’s state gas company Naftogaz believes its new price should reflect the drop in crude prices:
On 3 January, Naftogaz chairman Oleg Dubyna argued that the $418/’000 offer “is an unprecedented economic pressure” and instead offered to either carry on at 2008 prices — $179.5/’000m³ and $1.70/’000m³/100km of transit — based on the recent drop in oil prices and European gas markets, or step up to $201/’000m³ and $2/’000m³/100km of transit. But Dubyna, harkening back to a 2005 arrangement, has also offered to accept gas in payment for the transit of Russian gas across Ukraine, which would put Gazprom in the position of owing Naftogaz supply for the volumes currently crossing Ukraine. Based on the 296.2mn m³/d Naftogaz says is being put through its system for export by Gazprom, the Russian firm would be obliged to add another 63mn m³/d for Ukrainian consumption, according to Dubyna.
While the crisis could escalate, it’s unlikely that Western European countries will “run out” of gas any time soon. There are good storage volumes and many power stations as explained above can switch to heatoil mode if necessary. Nat gas can also be brought in by LNG tankers.
What the dispute does do, however, is serve as a useful reminder as to why projects like Nordstream (the underwater pipeline from Russia to Germany) and Skanled (the gas pipeline to ship North Sea gas to Scandinavia) – both of which have run into delays – must be finished as planned.