Following the price run-up after Russia’s invasion of Ukraine in February 2022, and the sharp reversal early 2023, natural gas futures have been mostly flat
Prices are back at their long-term average - gas is, and remains, abundant, provided the fuel can be accessed, transported and delivered to the end users
Because of the fuel's ready availability around the world, the major importers - Europe and Asia - had been relying mainly on pipelines in Europe - and mainly on LNG (liquified natural gas) shipments in Asia - to maximize the benefit of Europe's proximity to Russian (and for some time Dutch) gas fields and to resolve geographical constraints in Asia
In other words, the energy crisis provoked by the Russian invasion of Ukraine upends familiar transportation routes in Europe (by pipeline) and little else
Before Russia's war started, LNG gas deliveries had already been a policy choice of Poland and the Baltic States seeking independence from Russian pipes
Confronted with Russia's aggression, Europe followed suite in short order by pivoting to LNG shipments on a massive scale
This is why there is no crisis of energy availability but critical issues of timing (will all of Europe be served ?) and of cost (once LNG transport and new infrastructure are factored in)
Erring on the side of caution, this report estimates that the shortfall in gas imports could be as high as 10-15%, assuming stabilized demand following the 2022 price shock
Alternative sources of energy will undoubtedly contribute to rebalance the natural gas market, with French nuclear energy fully on line (after the 2022 mishaps) and significant build-up of renewable energy, especially wind....
However, uncertainty will continue to weigh on LNG available shipping, in competition with fluctuating (and still uncertain) Asian demand
As Europe races to get all planned LNG regasification facilities ready for the winter, gas prices can be expected to stay high for the long haul
The competitive advantage of industrial users will suffer, to say nothing about European households...
All natural gas flows are measured on a yearly based in 'bcm' - billion cubic metres
Investor focus
Because gas remains abundant, even after discontinuing Russian gas deliveries, focus will be on infrastructure for gas transportation and delivery to end-user markets
Infrastructure specialists
- LNG liquefaction and regasification stations
- gas storage
- pipelines infrastructure and natural gas turbine providers
- ship builders
LNG shipping companies
They are all likely winners, as we hope to show with focused investment themes
- US natural gas midstream firms (pipeline networks)
- Energy - Natural Gas Turbines, a critical link
- Energy - Shipping Natural Gas and Oil
- and more....
Traveling back in time (to 2021)
Based on 2021 data provided by the latest bp Annual Statistical Review of World Energy, the global reference edited by British Petroleum
- Germany (16%),
- the UK (13.5%),
- Italy (12.7%),
- Turkey (10%)
- and France (7.5%) – with the UK the sole gas producer of approx. 50% of domestic needs
Russian exports to Europe were still at a high point at the time...
Approx. 80% of the broadly defined European continent’s net imports (360 bcm) were sourced from Russia itself and from the other countries in Russia's orbit - belonging to the Commonwealth of Independent States (CIS) and including major gas exporters Uzbekistan and Turkmenistan
Energy dependency has been upended by the conflict in Ukraine
In 2022, exports by pipeline to Europe collapsed by two-thirds from 167 bcm to 60 bcm
The numbers so far in 2023 are down again to 17.6 bcm (January-August 2023) – according to Russian state bank VEB estimates – which could imply exports by pipeline of only 25/27 bcm for the full year
Russian LNG (liquid natural gas) exports shipped to Europe went the other way, growing from 16 bcm in 2021 to an estimated 22/23 bcm in 2023, but they are unlikely to grow any further due to shipping transport constraints and sanctions
Gazprom at the wrong end of the stick
Gazprom, which had a monopoly on Russian pipeline exports, cut gas production by 20% in 2022 – according to RT (December 2022)
The 137 bcm reduction in Gazprom 2021 production of 685 bcm (excluding LNG shipments) would be consistent with lost sales to Europe of 107 bcm in 2022 and further cuts to gaz exports in 2023, domestic deliveries making up the balance
Five months 2023 data confirm the trend – from 62 bcm in 2021 to 42 bcm in 2022 and only 10 bcm in the current year through May, which appears to be in line with a full year projection of 25 bcm exports to Europe by pipeline
While Russian export data tend to vary between sources, the general direction is clear - pipeline flows are way down and LNG shipments remain strong but limited in volume
Exports to China are constrained by the capacity of the single available pipeline "Power of Siberia" – estimated at 22 bcm in 2023 and 38 bcm by 2025 - and LNG shipments may look promising over the medium term (if and when infrastructure is ready and the Arctic sea route accessible...)
Gazprom’s pipeline export to Europe options are limited by the only pipelines remaining in operation, one through Ukraine and one through Turkey (via TurkStream)
- Transit through Ukraine, still in operation, is estimated at just 15 bcm for 2023, a fraction of the average 90 bcm transiting between 2008 and 2019 through 2 pipelines
- The main current European destinations for Russian gas are
- Austria - 5bcm and 50% of the country’s imports,
- Slovakia - 2 bcm and 30% of imports dropping to zero since January 1 2023 at the end of its contract,
- Modova - 2.2 bcm and 100% of its imports,
- Italy - 3 to 4 bcm but only 5% of its imports
Hungary, with only 1 bcm by way of Ukraine, relies mainly on the TurkStream pipeline for 3.5 bcm
- TurkStream – the alternative route to deliver natural gas on the European market – has a capacity of 7.5 bcm per year but only delivered 60% of that amount during the 12 months to June 2023
- However, delivery to Hungary increased to near full capacity in Q3-2023 as Hungary increased injections in domestic storage and in temporary storage in Ukraine (under customs warehouse regime)
European imports by pipeline in 2022 still reached 62 bcm, but will fall in a range from 22.5 bcm (with help of TurkStream) to 25/27 bcm projected by VEB and others, for 2023
Any additional flow through Ukraine, as pipeline capacity would allow, is a fantasy in the war-torn region
However, wth the strong growth of LNG imports from Russia, up close to 50% over 2021, gas flows originating in Russia are expected to balance pipelines (22.5 to 27 bcm) and liquified gas (22 to 23 bcm)
Total gas deliveries by Russia dropping to 48 bcm represent approx. 16% of adjusted net European import need of 291 bcm (accounting for the 19% drop in demand between August 2022 and Januari 2023)
A shortfall by any name
European natural gas production - especially Norway's exports of 110 bcm (52% of total European gas production) - can be ignored because net imports have already accounted for the 'native' European molecules (incl. Norway's sales)
Under those assumptions, Europe will have to find access to an estimated 243 bcm, and maybe more if gas consumption picks up again
Confidence on the gas market is palatable as all storage facilities are full
But the possibility of anything going wrong has to be evaluate, one import market at a time
Pricing power
Algeria - with a production of approx. 100 bcm (50% of which is consumed domestically) - is a major player to close the net European import gap - with Transmed, a pipeline to Italy (capacity 35 bcm per year, actual flow of 22 bcm in 2022) and another pipeline to Spain, subject to diplomatic bust-ups between the two countries (delivering only 9 bcm in 2022)
Including LNG shipments from Algeria, at 13 bcm (2022) from 17 bcm the previous year, total exports to Europe delivered close to the country's entire available production - 45 bcm - and a 45/50 bcm range is likely in 2023
All is a matter of price ...
US LNG imports by Europe - from 22 bcm in 2021 - increased 114% to 56 bcm in 2022 - representing approx. 66% of total US LNG exports
- The outage since June '22 of Freeport, the second largest US LNG export facility, for more than eight months - and partial restart of commercial operations since February 2023 - will increase US export capacity, and potentially address higher demand from Europe's TotalEnergies
and BP - Asian and European buyers each have been contracting about half the production of the port facility
- At full capacity, Freeport would avail domestic and export markets of 20 bcm per year - implying a loss of volume of 10 bcm in 2022, a capacity to be recovered in 2023
Qatari and Australian shipments, by far the largest LNG exporters next to the US, have been major sources of European LNG imports which reached 86.2 bcm ex-US in 2022
Production capacity available for export are the highest in Qatar (110 bcm as of 2021 and rising) and in Australia (81 bcm as of 2023 and falling) - even with competing demand from Asian countries, LNG shipments of 95 bcm to Europe seem realistic
All again is a matter of price, as Qatar's Energy Minister warned unambiguously in June 2023, with shipments to Europe as of June down to 18% of Qatar's LNG exports
With gas import diversification an overriding priority, Germany committed in November '22 to import 2 million tons a year for 15 years from Qatar, and TotalEnergies secured just recently (October '23) the largest European supply contract for France at 3.5 tons for 27 years, also with Qatar
Putting it all together, 45/50 bcm (Algeria) + 92 bcm (Qatar & Australia) + 60 bcm (US) bring in 200 bcm if the assumptions hold
Unescapable conclusions
LNG imports have been the energy deal breaker and the agent of a major shift in Europe (130 bcm imported in 2022, up 60%) and on the natural gas market globally
- LNG imports will increase to 165 bcm under our assumptions - a realistic projection
All key exporting countries are pushing hard to expand their LNG infrastructure, including Russia targeting the Asian markets - a trend that will be long lasting
However, the fact remains...
Projections for 2023-2024 in Europe are not conclusive - conservative estimates detailed in this report imply a short-fall of approx. 40 to 50 bcm (and maybe more, depending on competing demand of Asian markets diverting Qatari shipments)
There is a case to be made to secure alternative rebalancing factors
- better availability of nuclear power as the French electricity production is brought back to normal after the 2022 outages,
- growing renewable energy production, especially wind, which contributed the equivalent of a 14 bcm natural gas saving in 2022 - and potentially an additional 9 bcm in 2023, according to CREA, Center for Research on Energy and Clean Air
- and - not least - efforts to keep demand under pressure
Higher prices on the European market do not reflect the shortfall yet - but can be expected into Q4-2023 and Q1-2024 to rebalance supply and demand by attracting LNG spot-priced shipments, as competing demand in Asia heats up
The assumptions for 2023 may turn out to be exceedingly prudent - with a potential supply deficit of 10-15% - but better err on the side of caution ...
The market is tight and will remain so for years, in a race between growing demand for energy and supply sources (LNG, nuclear and renewables...)