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Highlights


System nearing capacity during high-demand winter periods

Falling European gas output to lead to tighter market

Ukraine transit likely to be some 26 Bcm/year post-2019

An increase in Europe's natural gas import requirements in the next two years could test the transit network for Russian gas, potentially even leading to Gazprom being unable to meet European demand and a spike in gas prices during high-consumption periods, analysts at the Oxford Institute for Energy Studies (OIES) have warned.

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The colder-than-average weather in Europe in February and March saw increased European demand for Russian gas, with the monthly utilization rate rising to 86% in March, the OIES said in a paper published Wednesday.

Gazprom supplies to the Far Abroad (Europe plus Turkey, but not the countries of the former Soviet Union) hit an all-time daily record of 713 million cu m on March 2.

"The system is approaching full utilization during winter months," the OIES said.



"Any further increase in Russian gas deliveries to Europe -- northwest Europe in particular -- in 2018/2019 could see a greater number of days on which the system is full should Europe experience another cold winter in the context of a continued decline in European gas production," it said.

"If the rise in European import demand is substantial enough, this bottleneck could be sufficient to cause a 'shortage' of Russian gas relative to demand, and price surges on the European spot gas market."

The only route that was not fully utilized during the cold weather was the Ukraine route via Velke Kapusany, while the other routes -- Nord Stream, Blue Stream to Turkey and the Yamal-Europe pipeline via Belarus and Poland -- were maxed out.

According to the OIES, flows via Velke Kapusany on the highest demand day of the winter -- March 2 -- were at 63% of capacity.

"The relatively low volume of flows via Velke Kapusany in relation to capacity means that Ukraine is the only transit route with spare capacity in times of peak winter demand," it said.


FUTURE UKRAINE TRANSIT


Gazprom is building the 31.5 Bcm/year TurkStream pipeline to Turkey and the 55 Bcm/year Nord Stream 2 pipeline to Germany as a way to firm up its gas transit requirements.

But with domestic European gas production falling, and therefore import requirements rising, the Ukraine route will still be needed even with the two new pipeline projects.

Gazprom CEO Alexei Miller last month said the company anticipated transit volumes of 10-15 Bcm via Ukraine from 2020 once TurkStream and Nord Stream 2 are fully operational.

The OIES sees Ukraine transit volumes somewhat higher at 26 Bcm/year from 2020 in order to meet both "peak" and "off-peak" demand -- namely high consumption winter periods and summer storage requirements.

That is still well below the 94 Bcm of Russian gas that transited Ukraine in 2017, according to UkrTransGaz data.

"The continuation of gas transit via Ukraine in volumes greater than 26 Bcm/year will depend on the European Commission and European gas importers, and their insistence that gas transit via Ukraine continues," the OIES said.

"Otherwise, gas transit via Ukraine will be reduced to delivering limited volumes for European storage re-fills in the 'off-peak' summer months, and acting as a provider of 'peak flexibility' in the winter months."

It said this prospect would complicate any negotiations between Gazprom and Ukraine's Naftogaz over a new contract to govern the transit of Russian gas via Ukraine once the existing contract expires at the end of December 2019.

"While Gazprom may be willing to commit to only limited annual transit volumes, the Ukrainian counterparty may question the commercial viability of maintaining a large gas transmission system with multiple exit points for the delivery of relatively small annual volumes."

--Stuart Elliott, stuart.elliott@spglobal.com
--Edited by Maurice Geller, newsdesk@spglobal.com