Growth in supplies
October 25, 2021
Published in corporate Gazprom Magazine Issue 10, written by Sergey Pravosudov
Elena Burmistrova, Deputy Chairman of the Gazprom Management Committee, Director General of Gazprom Export, answers questions from Gazprom Magazine
- Ms. Burmistrova, please tell us how things stand at Europe’s gas market in the current year. How much gas is Gazprom planning to sell to countries beyond the FSU in 2021 and at what average price? Are you expecting exports to grow in 2022?
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We are still acting under the assumption that Gazprom’s gas supplies to Europe and Turkey may total up to 183 billion cubic meters at the end of the year. After the first half of the year, we revised the average price forecast for 2021 upward to some USD 270 per 1,000 cubic meters. The amount of supplies in 2022 will depend primarily on the weather factor and the conditions of the LNG market.
As you know, countries of the European Union withdrew a record-high amount of gas ‒ 66 billion cubic meters – from their underground gas storage (UGS) facilities in the past winter of 2020–2021. This was due to a cold winter and a cold and overlong spring. The injection period in Europe began three weeks later than usual. As of mid-September, Europe was over 22 billion cubic meters behind the schedule for injecting gas into its UGS facilities. Experts in Europe and Asia say that Europe’s gas industry cannot bridge that gap. Europe is going to enter the autumn/winter period with a shortage of gas in its UGS facilities. This is undoubtedly stimulating demand and affecting the prices.
Price spikes
- In 2020‒2021, gas quotations at stock markets could differ more than 20-fold. Is there a need for mechanisms that could curb these spikes?
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There is no doubt that last year’s considerable decline in prices and this year’s spike in quotations were caused chiefly by external factors and not by the organizational model of the gas market per se. These factors include general fluctuations and uneven recovery of the market conditions depending on the country, as well as the shift of large amounts of LNG to the Asian market. According to Gas Infrastructure Europe, LNG receiving terminals in Europe are now working at approximately half of their capacity. Another major factor was the volatility of global LNG trade, which had to be offset by European platforms.
It should be said that in the past there used to be a reliable way to minimize price volatility in the market by using oil-indexed contracts with multi-month averaging, which eliminated some of the external fluctuations. However, the current market architecture is largely based on the quotations of liquid trading platforms. Accordingly, the share of contracts linked to spot prices and forward quotations of European trading platforms has grown substantially in our portfolio over the past years.
In order to ensure the predictability of the financial flow, we expand the use of price indexation for the forward products that are more stable. These products are intended for longer time periods, namely quarters and years.
- What are the prospects of gas supplies to Turkey?
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Turkey has been one of the largest buyers of Russian gas for many years, as was proven by the year 2020. Despite all the difficulties caused by the coronavirus pandemic, our gas supplies to this country remained at nearly the level of the year 2019. Over the first nine months of 2021, we ramped up our supplies to Turkey by 138.3 per cent against last year.
Given the existing dynamic, we expect the amount of Russian gas supplied to Turkey this year to total about 24‒25 billion cubic meters. These figures are undoubtedly indicative of the excellent competitiveness of and demand for Russian gas in the Turkish market.
In the long term, we look forward to maintaining and advancing the fruitful cooperation with our Turkish colleagues, including as part of the TurkStream project.
- Can we expect gas supplies to the Balkans and Hungary to grow in the medium term?
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Increases in the amounts of gas purchased in the Balkan region and Hungary depend on the future economic situation in these countries and the competitiveness of Russian gas in the energy markets.
In late September, we signed a new contract for gas supplies to Hungary for a 15-year term, which we plan to execute by using a new gas transmission corridor. All gas transmission capacities at the entrance to Hungary from Serbia have been ready for use from October 1, 2021, enabling us to start supplying natural gas to Hungary, as well as to Croatia, via a new route through the TurkStream gas pipeline and the national gas transmission systems of Bulgaria and Serbia.
- How much gas is Gazprom planning to sell through its electronic trading platform this year?
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Currently, gas sales via the ETP are performed primarily with forward products. As of September 2021, some 7.4 billion cubic meters of gas have been sold, with supplies scheduled for this year.
This is a trading instrument that complements our long-term contracts and is designed to respond flexibly to market changes. This is why I would rather not suggest specific benchmarks right now. It must be said, however, that the ETP, as in previous years, has proven its reliability as a flexible instrument for additional gas sales.
LNG
- How much LNG is Gazprom planning to sell this year? What are the medium- and long-term plans in this regard?
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Today, liquefied natural gas is an important element in the gas portfolio of the Gazprom Group. It allows us to maintain our presence in remote markets, enhance the flexibility of supplies to consumers, and diversify their routes.
We are actively expanding our LNG portfolio. In the past few years, we have managed to double it. We plan to sell more than 8 million tons of LNG in 2021 alone. This considerable growth in supplies has been achieved both via ramping up sales under long-term contracts and substantially increasing trading operations.
In the next few years, we intend to bring our LNG trading operations to a new level by supplementing the LNG portfolio with volumes from the LNG production complex near the Portovaya CS, which has the annual capacity of 1.5 million tons of LNG, as well as the project for natural gas processing and liquefaction near the settlement of Ust-Luga with a planned capacity of 13 million tons of LNG per year.
While most of the buyers in our contract portfolio are based in the Asia-Pacific region, we are also systematically working to develop our relationships with the traditional and new consumers and suppliers in Southeast Asia, Africa, and the Middle East.
- Please tell us about your perspective on the competition between LNG and pipeline gas in the European market. Will this competition increase in the medium and long term?
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In 2021, when prices in Asia-Pacific went up due to a relatively cold winter, a hot summer, and a recovery in gas demand after the first year of the pandemic, we witnessed the redistribution of LNG flows towards Asia-Pacific. As the regional markets are becoming increasingly connected in recent years, this has led gas prices in Europe to grow substantially.
The competition between pipeline gas and LNG is now global, and it has a wave-like pattern in the regional markets. In Europe, this competition can increase or dwindle based on the attractiveness of LNG supplies to Europe as compared to supplies to Asia-Pacific, which, in turn, depends on the so-called Asian premium – the difference between spot prices in Asia and Europe. A positive premium (as adjusted for transportation costs) results in the redistribution of LNG flows towards Asia. This is exactly what we are seeing today. For instance, total amounts of LNG supplies to Europe from two major exporters – the United States and Qatar – dropped by 8.69 billion cubic meters, or by almost 25 per cent, in the first half of 2021 against the same period of 2020.
In the longer term, we can expect a further expansion of gas liquefaction capacities in the world and greater competition on the part of LNG. The development of the global LNG industry will largely define the state of the European gas market. However, given our current portfolio and the ongoing projects in the areas of both LNG and pipeline gas, the Gazprom Group is confident in the competitiveness of its future supplies in this fast-changing market.
Estimated spread between LNG spot price indices in Asia and Europe (data for October 4, 2021)
LNG prices, USD/MBTU
JKM
NWE-MED
Spread
November 2021
28.96
26.38
+2.58
USD/MBTU
from Australia
from Qatar
from USA
from Nigeria
Spread between spot LNG prices in Asia and Europe taking into account transportation costs as of November 2021
3.93
2.81
1.64
1.73
Cost of transportation to Europe
2.06
1.22
0.81
0.74
Cost of transportation to Asia-Pacific
0.71
0.99
1.75
1.59
Source: Gazprom Export
Gas prospects
- Is global gas consumption going to grow? What are the prospects of gas in power and heat generation?
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According to industry experts, global gas consumption is poised to grow in the long term and reach its maximum in 2032. By that point, demand will grow by about 17 per cent to 4.7 trillion cubic meters from the projected 4 trillion cubic meters in 2021. Power and heat generation will account for about 38 per cent of global consumption by 2030.
Gas demand in Europe is projected to slightly drop in the current decade: from 544 billion cubic meters in 2021 to some 537 billion cubic meters by 2030. A somewhat bigger decline in demand is expected by 2040, but this estimate does not take into account the potential growth in gas consumption for the purposes of hydrogen production.
Analysts are expecting similar trends to emerge in the European power and heat generation sectors: in the long term, the share of these sectors in gas consumption will slightly decrease. At the same time, despite the drop in consumption, the consensus forecast of industry experts has the overall need for gas imports in Europe going up due to a decline in indigenous production. The growth in imports against the average figures for 2018‒2020 will reach some 35 billion cubic meters in 2030 and 15 billion cubic meters by 2040.
- Will the use of gas as a vehicle fuel increase? What is Gazprom planning to do in this area as far as foreign markets are concerned?
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In the NGV segment of the European market, the Gazprom Group is represented by Gazprom NGV Europe GmbH in Germany and the Czech Republic, as well as by NIS (part of the Gazprom Neft Group), which sells compressed natural gas in the Serbian market. As of early 2021, the Gazprom Group owned 65 CNG filling stations in the region, and the sales of gas as a vehicle fuel through the Group-owned stations totaled 13.6 million cubic meters in 2020. Despite the restrictions caused by the coronavirus, the annual sales of CNG in each of the countries where the Gazprom Group operates saw an increase in 2020, which is indicative of growing demand for gas as a vehicle fuel.
A number of European countries currently have measures in place to promote the use of natural gas as a vehicle fuel: tax incentives, exemption from road fees, support for refueling infrastructure, and the opportunity for companies selling natural gas as a vehicle fuel to also sell certificates for greenhouse gas emissions. These measures facilitate the development of this market and thus the NGV business of the Gazprom Group.
In the segment of truck and water transportation, liquefied natural gas is an essentially unbeatable solution for reducing greenhouse gas emissions. The vehicle fleets and gas sales in this segment are already growing at a substantial rate, and we are convinced of the enormous potential of LNG in transport.
Speaking of water transport, we continue pursuing projects aimed at advancing the LNG bunkering market in the Baltic region. Dmitry Mendeleev, Russia’s first LNG bunkering vessel, was launched in August 2021. The primary goal of the vessel is to refuel ships in the Baltic Sea. Also being explored is the possibility of developing LNG bunkering and the relevant infrastructure for LNG production in other regions, including the Russian Far East.
- Can renewables fully replace gas, coal, and nuclear energy in Europe?
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Although gas demand in the European Union is expected to go down in the long term owing to the announced plans for transitioning to renewables and green hydrogen, total replacement is unlikely. Moreover, gas consumption growth will be provided by the sector of low-carbon hydrogen production. We expect commercially viable technologies for producing hydrogen from natural gas via methane pyrolysis without any СО2 emissions to become available as early as in the medium term. In fact, Gazprom is actively working to create these technologies.
We also see growth prospects for gas demand with regard to the blue hydrogen production facilities that are planned to be created in Europe. Both national hydrogen strategies of a whole range of countries and industry experts and regulators confirm the need for developing the low-carbon production of hydrogen from natural gas: this hydrogen can be produced in large amounts, and it will be more competitive as compared to green hydrogen.
On top of that, Europe has plans for the gradual phasing out of coal-fired power plants. These processes are facilitated by the introduction of various carbon taxes and the growing price of СО2 emissions allowances. It should be noted that coal consumption in the power generation sector has risen since the winter of 2020–2021 due to high gas prices and increased demand for electricity, which should be attributed not to purposeful actions of some of the parties but to market factors, namely the situation in the coal, gas and electricity markets, and the allowances. All this shows that the decline of the coal era in Europe will not be as rapid as expected earlier.
There is no clear-cut opinion on the future of nuclear energy in Europe. Some EU countries intend to phase out part or all of their nuclear plants in the coming decades. Meanwhile, many countries of Central and Eastern Europe are actively considering the possibility of building new nuclear units.
- How might the introduction of a carbon tax by the EU affect the supplies of Gazprom Export?
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Traditionally, Gazprom has been an important and reliable supplier of natural gas to Europe. Natural gas is the most environmentally-friendly fossil fuel the role of which in reducing greenhouse gas emissions is recognized by the EU and the international community at large.
In this context, given the proposed regulation on a carbon border tax issued by the European Commission, we consider the EU’s decision to exclude natural gas supplies from the application of this tax to be well justified.
Even if at some point in the future this tax is introduced in the gas sector as well, Gazprom’s gas will retain its high competitiveness thanks to the consistent adoption of efficient measures for emissions reduction by the Company. Gazprom’s pipeline gas exports to Europe have minimal carbon footprint and come closest to being in conformity with Europe’s climate targets. By using a new gas pipeline, Nord Stream 2, to supply gas to Europe, we will be able to reduce our carbon footprint because this route is more environmentally-friendly than the traditional one that was established many decades ago.
China
- How much gas is Gazprom planning to deliver to China this year? What are the prospects of supplies to that market?
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Supplies to China via the eastern route are being carried out in accordance with the established terms and even slightly in excess of our daily obligations. I would like to stress that Gazprom is ready to fulfill all obligations to its Chinese partners. The throughput of the Power of Siberia gas pipeline is being gradually increased in order to ensure that exports to China reach up to 38 billion cubic meters per year. According to preliminary data, a total of 7.1 billion cubic meters of gas were delivered to China via this gas pipeline in the first nine months of 2021.
In addition, a number of promising projects for pipeline supplies of Russian gas to China are currently being elaborated. As part of one such project, which envisages supplies across Mongolia, the results of a feasibility analysis regarding the construction of a gas pipeline in Mongolian territory were approved in 2021, with the optimal route for the pipeline and its basic technological parameters determined. A feasibility study for the project is being prepared at the moment.
- Is Gazprom planning to develop the UGS system in China?
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At present, Gazprom is not taking part in infrastructure projects within China.
- Please talk about the plans for helium exports.
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Gazprom has already launched the commercial supplies of helium from the Amur GPP – one of the largest and most advanced gas processing plants in the world. Helium is being exported via the ports of the Primorye Territory. For that purpose, we built a special helium hub to which helium will be delivered in cryogenic containers by motor vehicles.
We have an entire range of long-term supply agreements signed for up to 60 million cubic meters per year in total. It will become possible to supply these amounts when the Amur GPP reaches its full design capacity in 2025. Among the main consumers are Asia-Pacific countries, first and foremost China.
Photos provided by Gazprom, NOVATEK, Wärtsilä, and Astora GmbH.