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INTERVIEW: IEA paints gloomy picture for short-term European gas demand

Highlights

Market hit by impact of COVID-19, weather

Power sector demand limited by renewables

Less room for maneuver in European storage

London — The International Energy Agency sees a series of factors converging to keep a lid on the potential for European gas demand in the short term, the agency's head of gas analysis said Wednesday.

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Jean-Baptiste Dubreuil, in an exclusive interview with S&P Global Platts, said the power sector would be the only driver for European demand growth in the coming months, but that even this sector faced rising competition from renewables.

The spread of the COVID-19 virus has led to a decrease in industrial activity in Europe at a time when gas prices were already at their lowest in a decade because of an oversupplied global market and record inflows of LNG, while the end of the heating season across the continent will see even more demand destruction.

"As the heating season ends and industrial and commercial activity is currently constrained, power generation would be the only sector for potential demand increase in the short term," Dubreuil said.

"But the potential is limited as the share of thermal generation keeps decreasing with the development of renewables while a large proportion of European coal-to-gas switching has already occurred over recent years," he said.

Europe has also seen one of the mildest winters on record, dampening gas demand in the heating sector, and Dubreuil was cautious about blaming the current landscape for European gas demand solely on the impact of the coronavirus.

"Total consumption data reported by grid operators in Italy, Spain, France and Belgium show a year-on-year drop ranging from 6% to 20% since the enforcement of lockdowns, but here again part of this would be explained by temperature-driven factors," he said.

Traditionally a source of demand over the summer months in Europe is the storage sector, but after stocks were built up to record highs last winter due to concerns over the Russia-Ukraine transit, storages remain well filled.

"Storage provides less room for maneuver than in previous years as the inventory levels at end of winter are higher than the average," Dubreuil said.

Supply side

Given the ample global supply and potential demand slowdown, Dubreuil said all producers and exporters were likely to be looking at options to "optimize their commercial position and create some short-term operational flexibility," Dubreuil said.

Eyes will be on Russia and Norway to see if there is any change in behavior that could see flows into Europe curtailed.

With prompt prices in Europe having traded below Eur8/MWh ($2.50/MMBtu) in recent days, there is speculation that the price achieved for gas in Europe is barely high enough to cover short-run marginal costs.

Norway's Equinor last summer held back significant production at its swing Troll and Oseberg fields in the hope of higher prices later.

"On the supply side, providing flexibility to balance the European market includes a wide range of drivers," Dubreuil said.

These include contractual flexibility (intra-annual and beyond the current year) and operational flexibility such as maintenance and production optimization, he said.

Regarding Russia in particular, the pattern of its exports to Europe in the coming months will depend in part on customer demand.

"Independent from Russia's strategy as a producer and exporter in the longer term, its flows to Europe for the short- to medium-term will remain mainly driven by its long-term contract commitments, and therefore will fluctuate according to the buyers' nominations in the framework of their contracts' flexibility clauses," Dubreuil said.

Gazprom has said it wants to maintain its exports to the European and Turkish markets at around 200 Bcm/year through the 2020s, and does have other tools at its disposal to retain market share.

The main one is its Electronic Sales Platform (ESP), where Gazprom can place volumes not taken under long-term contracts.

"The development of sales on the ESP -- and direct spot sales on hubs -- shows Russia's increasing role as a shorter-term supplier to Europe and its competitiveness for short-term buyers," Dubreuil said.

LNG impact

LNG has also continued to come to Europe in large volumes since the start of 2020, further strengthened as China saw LNG import demand destruction due to the coronavirus.

However, again, Dubreuil said the mild winter could also account for some of the decrease.

"The end of this very mild heating season introduces temperature-driven impacts on heating demand, which adds further complexity in assessing the impact of COVID-19 on consumption," he said.

While the virus impacted year-on-year Chinese gas demand growth in January and led to a decline in February, industrial activity has been seen picking up in March.

"Early estimates for March tend to show a return to growth as [Chinese] industry progressively returns to full activity," Dubreuil said.

He added that Asian markets outside of China have not shown signs of demand destruction when looking at the year-on-year growth of their LNG imports in January and February.

LNG imports have been flat in Japan, grew in South Korea, and "surged" in several fast-growing markets such as India and Bangladesh.

"However, most of these emerging Asian markets seem to be at early stages of COVID-19 development and with first lockdown measures taken recently," he said.

Cheap LNG, though, could continue to be a pull for Asian LNG importers, especially for price-sensitive buyers in fast-growing markets.

"Yet fast market expansion also depends on a wide range of domestic factors such as access to regasification capacity, potential pipeline network bottlenecks, downstream market organization, and potential competition with locally produced sources," Dubreuil said.

While short-term market dynamics do not look favorable, Dubreuil said the impact of COVID-19 will not "fundamentally" change the role of gas -- and renewable gases -- in the longer term.

"The development of hydrogen, biogas etc. follows medium- to longer-term market and policy objectives," he said.

"It is again too early to say that COVID-19 will have some short-term impact on the investment schedule for these projects but, should it be the case, it does not change the longer-term rationale that underpins such projects."