Russia's Gazprom sent record natural gas volumes to Europe in January, making full use of its brief extra access to its OPAL pipeline in Germany to send more gas via Nord Stream 1 to meet higher demand from cold weather.
But warmer weather and a legal injunction blocking future extra OPAL access until further notice saw Nord Stream 1 flows drop in February, while flows through Ukraine remained steady.
S&P Global Platts editors Siobhan Hall and Lucie Roux and analyst Anise Ganbold discuss the impact of demand, Russian route choices and lawyers on the European gas market this winter, and what to look out for next.
Read our related special report: US LNG vs pipeline gas: European market share war?
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SH: Hello, and welcome to this Brussels to Beijing policy podcast from S&P Global Platts. I’m Siobhan Hall, Platts’ expert on European Union energy policy based in Brussels, and I’m joined from London by senior European gas specialist Lucie Roux and Platts Analytics analyst Anise Ganbold.
Now the European Commission surprised many last October by finally allowing Russia’s Gazprom more access to the OPAL gas pipeline in Germany. The decision seemed to end years of dispute in Gazprom’s favor.
But not for long – Gazprom only had time to buy extra capacity for January before swift legal action by Poland saw the EU court in Luxembourg suspend the decision until further notice.
So Lucie, how did Gazprom’s extra access to OPAL during January affect Russian gas flows to Europe?
LR: Well, we saw Gazprom send as much gas as it could through its northern route, which is the 55 billion cubic meter per year Nord Stream 1 pipeline, that goes direct from Russia to Germany. And then it used the extra OPAL capacity to send extra gas to Germany itself and to the Czech, Slovak and Austrian markets.
AG: Yes, flows through OPAL in January averaged 78 million cubic meters per day – that was up 60% on December. And flows through Nord Stream 1 reached record highs in early January of 157 million cubic meters per day on average – it was basically maxed out.
LR: Yes, and what’s interesting is that Russian flows to northwest Europe – for example France and the Netherlands – were already at record levels in December, and stayed steady in January. So Russia used the extra OPAL access to send record flows to Eastern Europe.
SH: Right, now Gazprom had been supplying these Eastern European markets mainly through Ukraine, hadn’t it? So did it turn down flows through Ukraine in January?
AG: No, it still sent gas through Ukraine, but this was steady at about 140 million cubic meters per day on average. It met the extra demand in these markets through OPAL and Nord Stream 1, rather than turning up flows through Ukraine.
SH: Right, so this suggests that when it has a free choice, Gazprom prefers to use the northern route rather than Ukraine. So what happened in February, when it no longer had a choice? Did it turn up flows via Ukraine then?
AG: No, it kept flows steady at the January levels. What we saw was a 14% drop in total Russian flows to Europe from a high of 416 million cubic meters per day on January 30th to around 356 million cubic meters per day by mid-February.
LR: And most of the drop – more than half -- was from lower flows through Nord Stream 1.
SH: So, had the market conditions changed? Was there less demand for Russian gas in February?
AG: Yes, demand in Europe’s biggest markets dropped in February on warmer weather. It’s about 16% lower than January so far. And that January demand was higher than usual – it was around 20% higher than in the last three years.
SH: OK so Gazprom was able to send more gas through the northern route to meet higher than usual demand in January. Now what about the impact on prices? Lucie, does it make a difference which route Gazprom uses to send the gas to Europe?
LR: Well, traders think so. For example, the price spread between Germany’s northern gas hub Gaspool and southern gas hub NCG widened in January to about 80 euro cents.
But the spread narrowed back to about 60 euro cents in February, as Russia sent less gas via the northern route to Gaspool. Gaspool day-ahead usually trades at a discount to NCG, which is also supplied via Ukraine.
AG: We estimate it costs at least €4/MWh to send gas via Ukraine, and €2/MWh via Nord Stream 1. But the northern route is currently limited to 55 Bcm/year – and less without the extra OPAL access – while around double that can be shipped through Ukraine.
SH: Right, so the northern route is at least half the price for Gazprom. What’s the demand outlook for March, and the rest of the year?
AG: We expect to see strong demand for Russian gas continuing in March as storage levels fall further, and for this to continue in the second quarter in order to refill European storage ahead of next winter.
LR: Russian gas is still the cheapest option for most European companies. We know that there is a global glut of LNG, and more is likely to come to Europe, but it seems likely to complement rather than displace Russian gas supplies.
SH: Ok, and just to be clear here – there is nothing stopping Russia sending more gas via Ukraine if it wants to, is there? So the block on the extra OPAL access is not a risk to Europe’s gas supply security, is it?
LR: No, but it does create some uncertainty for traders – and for Gazprom, obviously. The European Commission agreed that the extra OPAL capacity – up to 12.8 billion cubic meters per year – would be sold on the Prisma capacity platform. That’s how the extra capacity for January was sold.
AG: But that capacity was sold before the EU court suspended the commission’s decision, and there’s a block on any further Prisma auctions until the court makes a further ruling.
LR: Yes, so the court could decide to keep the suspension until the full legal complaint has been ruled on – which could take 18 months or more. Or it could lift the suspension in the next weeks or months – there’s no legal deadline for this.
SH: So the extra capacity could come back to the market at any time, or it might remain out of bounds until late 2018 or longer?
LR: Yes. Some traders think the court will eventually uphold the commission’s decision, and allow the extra access to OPAL, but, like I said, we don’t know when this might happen. In the meantime, Poland is pushing for the court to annul it.
AG: Yes, Poland is worried that if Russia can send more gas through Nord Stream and OPAL, it will send less gas via Ukraine and Poland – and so Poland would lose out on transit revenues.
LR: And if Russia goes ahead with its second Nord Stream pipeline, which is planned onstream by the end of 2019, then it could send even less gas via Ukraine.
AG: So if the court upholds Poland’s complaints about OPAL, that could mean similar legal problems for getting Nord Stream 2 gas onshore.
SH: Right, so the court ruling on OPAL could impact how future Russian gas reaches Europe – very interesting! We’ll be keeping a close eye on that. That’s all for today. Thank you for listening, and tune in next month for more Platts perspectives on policy.