SIOBHAN HALL: 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 European gas analyst Simon Wood, and from Moscow by energy news editor Rosemary Griffin.
Today we're talking about how natural gas from Russia will reach Europe after 2019, when Gazprom's transit contract with Ukraine's Naftogaz expires. Gazprom's Nord Stream 2 pipeline to Germany, and its Turkstream pipeline to Turkey, will dramatically cut flows via Ukraine. But Gazprom will still need to send at least some volumes through Ukraine after 2019 to meet existing obligations to European customers.
So Rosemary, what's the latest on Russia and Ukraine agreeing transit terms for 2020 and beyond?
ROSEMARY GRIFFIN: Well Siobhan, Russian energy minister Alexander Novak said this month that Russia sees European demand for Russian gas growing by 10 to 15 percent in the next five to 10 years. And Russia is considering delivering this extra demand through Ukraine, but he wouldn't give any precise figures on volumes.
SIOBHAN HALL: Ok, well, that sounds like Russia saying to the European Union, you commit to buying your extra gas demand from us, and we'll commit to sending it through Ukraine. So Simon, how do you see European demand for Russian gas supplies developing?
SIMON WOOD: European demand for gas in general, and particularly for Russian gas, has been robust on the back of two high demand winters and strong power sector demand, whilst Asia has been absorbing any growth in global LNG supplies and Europe's indigenous production is in decline. Therefore, in our view, imports of Russian gas are set to be on an upward trend in the coming years.
ROSEMARY GRIFFIN: How solid do you think this 10 to 15 percent forecast by Novak is, Simon? Can you put a volume figure on the extra demand?
SIMON WOOD: Yes, I can put a rough figure on it. Based on our analysis in our recently published Platts Analytics Long Term European Gas Outlook to 2040, we think the extra demand for Russian gas by 2025 could be in the range of 20 billion cubic meters per year compared to the average of the last four years to Central and Western Europe, so that's an increase of 15 to 20 percent. But it won't necessarily be continuous growth. As I said, northwest Europe just had two very high demand years, so next year could be lower. But the trend is definitely upwards.
SIOBHAN HALL: Yes, last year was a seven-year high for overall EU gas demand – it reached 491 billion cubic meters. And Gazprom has estimated its sales to Europe and Turkey may reach 205 billion cubic meters in 2018. So Rosemary, is there enough Russian gas production to meet this extra European demand easily?
ROSEMARY GRIFFIN: Yes, Russian officials have repeatedly said they are ready to meet higher European demand. There is also the chance that other gas producers in Russia, particularly Rosneft, will successfully challenge Gazprom's monopoly on pipeline exports. Rosneft has big gas production plans and a provisional deal with BP for gas trading to Europe if the Russian government allows access to the export pipelines. Rosneft is pushing hard for this, but there's no guarantee if or when it will happen.
SIMON WOOD: We assume there will be lots of Russian gas available to meet European demand going forward. Indeed we see the biggest bottlenecks as being export capacity to the areas where we see the greatest demand growth for Russian gas, specifically to northwest Europe.
SIOBHAN HALL: Ah right, well that brings us to another big debate – whether Nord Stream 2 will be built and by when.
SIMON WOOD: Well, our current view is that Nord Stream 2 will be built, but it won't be online by the end of 2019. We're expecting it to be closer to October 2020. It's a big project on a very tight schedule, and there are still some permits to come in – it could easily slip. In our Long Term European Gas Outlook, even with Nord Stream 2 online we still see some volumes transiting via Ukraine. These could be around 5 to 15 billion cubic meters per year in the 2020s but climbing again in the 2030s. Given Russia is a potential swing supplier, the Ukrainian route could be more important in some years.
ROSEMARY GRIFFIN: Are the European companies investing in Nord Stream 2 worried about the threat of US sanctions at all? We just saw US President Donald Trump criticize Germany and other EU countries for supporting it, and we know he has these discretionary powers to impose sanctions on companies involved in it.
SIOBHAN HALL: No, they don't seem to be. I spoke directly to one of the European CEOs involved, and they said that as long as there are no sanctions imposed, they are continuing as normal. How have Russian oil companies coped with the European and US financial sanctions imposed after Russia annexed Crimea?
ROSEMARY GRIFFIN: Generally pretty well. Sanctions were introduced at around the same time as the oil price crashed, which really had a huge impact on the viability of many ambitious projects. That being said, we know that Novatek successfully switched its financing model for Yamal LNG to attract Chinese investment and that project is running ahead of schedule.
SIOBHAN HALL: Ah so US sanctions just pushed Russian companies to Asia! Yes, I don't think financing is a problem for Nord Stream 2 particularly – the Russian government could always pay for it. But it will still be interesting to see who else does finance it.
SIMON WOOD: It's easy to see why companies like Engie, Shell and Uniper support Nord Stream 2 – we see Russian lifting costs to northwest Europe via Nord Stream at about $3 to 4/MMbtu. This gives it a clear competitive advantage over US LNG, in northwest Europe anyway, where we see a tighter US gas balance, liquefaction and transportation costs placing the cost of US LNG imports in the $6-$7/MMbtu range.
ROSEMARY GRIFFIN: But will that change as oil prices recover? We've seen oil fluctuate but remain above $72/barrel for the last three months. A lot of Russian gas is sold on long-term oil-indexed contracts, so that will feed into the price to the final customer.
SIMON WOOD: That's true, but even if some Russian gas contracts get pulled up by a higher oil price, the majority of Russian gas is now sold at a hub indexed or at least benchmarked level in northwest Europe. In our Long Term Outlook we also see US Henry Hub prices strengthening over time as well, so Russian gas would likely still remain cheaper for northwest Europe – which is where most of the gas demand is.
SIOBHAN HALL: Ok, so let's bring it back to post-2019 transit talks – Rosemary, how does it look from Moscow? Do you think we'll be seeing an agreement between Russia and Ukraine anytime soon?
ROSEMARY GRIFFIN: Well, Novak was very clear that all the current disputes have to be resolved before Russia will commit to a new transit contract from 2020. And the current disputes are really entrenched – Gazprom and Naftogaz went to arbitration but it hasn't resolved anything yet, they are still locked in a legal battle.
SIOBHAN HALL: So, it looks like we're set up for another 18 months of "will they/won't they" drama! Will Russia bring Nord Stream 2 online by end-2019? Will Russia and Ukraine agree a new transit deal before 2020? Will Russian gas stay cheap relative to US LNG? We'll be following all of this closely here at Platts.
Thank you for listening, and join us next time for more Platts perspectives on policy.