TAP flows yet to make waves in Italian gas market

London — The latest addition to Italy's numerous sources of gas supply, the Trans Adriatic Pipeline (TAP), has yet to make a big impact on the country's gas mix, according to data from S&P Global Platts Analytics.

Gas from Azerbaijan flowed all the way to Italy via TAP for the first time on Dec. 31, the final piece in the much-heralded $40 billion Southern Gas Corridor project.

According to Platts Analytics data, flows at Melendugno -- the entry point for TAP in southern Italy -- averaged 10 million cu m/d in January, or just 3.4% of the total gas supply mix in Italy during the month, including storage withdrawals.

Imports from Russia and Algeria made up the biggest share of volumes last month, accounting for 50% combined, followed by significant withdrawals from storage, LNG regasification, domestic production and imports from northwest Europe and Libya.

During January, no spot supply was sent via TAP and the average 10 million cu m/d represented only volumes purchased under long-term agreements.

According to EU rules, 5% of the TAP transport capacity is reserved for spot bookings but auctions held on the Prisma platform over the past few months have seen no interest from market players.

TAP has the capacity to flow up to 8 Bcm/year into Italy, or around 22 million cu m/d, but Platts Analytics does not expect flows to ramp up to capacity until the fourth quarter of 2021.

"With TAP flows currently coming in at just less than 50% of capacity they remain insignificant relative to the two largest suppliers, Russia and Algeria, particularly during high demand winter periods when other supplies are flexed upwards," Platts Analytics' managing analyst James Huckstepp said Feb. 4.

"However, the TAP impact will be more significant in lower demand periods and as flows ramp up toward capacity," he said.

Impact on PSV prices

The start of new supplies via TAP has been seen by some as a factor in the discount the PSV day-ahead contract held to the Dutch TTF equivalent at times in the second half of January, but data suggest it is too early to say if TAP is having a major impact on PSV prices.

The reason behind the discount may have to be found elsewhere.

A regular PSV-TTF discount was a notable trend in the European gas market during 2020 and was triggered mostly by the coronavirus pandemic and subsequent drop in oil prices.

The oil price fall early on in the year filtered through to oil-indexed long-term import contracts later on, bringing Algerian contracts for Italian buyers back into the money.

This unexpected surge in Algerian imports put pressure on Italian prices.

According to data from Platts Analytics, Italy imported a total of 3.8 Bcm of gas from Algeria in Q3 and Q4, an 80% increase year on year.

Increased flows continued into January as Italy imported 42% more Algerian volumes than the same month last year, a trend expected to continue through Q1.

No impact on spikes

However, despite general bearishness last month, the PSV day-ahead contract spiked to a big premium versus TTF on several occasions in the first half of January.

This happened amid a sudden drop in Algerian imports between Jan. 3-7 and increased gas demand triggered by lower than usual temperatures alongside demand from France for power cross-border imports -- the first time Italy has supplied power to its neighbor during winter.

TAP's steady 10 million cu m/d supply was unable to react to the spikes, while the PSV/TTF spread widened far enough to bring supplies from northwest Europe vai Passo Gries -- Italy's most expensive spot supply route -- into the money.

"The startup of TAP was not enough to avoid a large run-up in PSV day-ahead prices and premiums to TTF in early January, driven by strong demand, tight LNG, and unreliable Algerian flows," Huckstepp said.

January also saw a 64% increase in gas imports via Austria -- the entry point for Russian gas into Italy.

Storage withdrawals

While imports from Africa and Russia surged, Italy also had to continue to pump gas out of its storage facilities despite unfavorable spreads.

Italian traders enjoy very little flexibility in the levels of injection and withdrawals they can perform and despite unfavorable time spreads, have to withdraw gas volumes at the highest possible rate to empty the facilities on time for the start of the injection season and avoid paying extra booking fees.

"With the level of gas put in stock this year, you have to withdraw at maximum levels to be able to empty your stocks by end-March," an Italian trader said.

As a result, the Italian gas system was often seen as oversupplied.