The major LNG market factor for 2020 and 2021 is not an LNG event, but an LNG related event – Russia’s plans to add ~8.9 bcf/d of export gas pipeline capacity starting in Dec 2019. The LNG market this week was focused on the crashing shoulder season Asian LNG prices following the warmer than normal winter in Asian natural gas markets. And wider seasonal LNG price swings are going to be the norm until there is more gas storage around the world. But there was a much more significant LNG related headline on Thursday that is a huge relief to 2020 LNG prices – the Danish Energy Agency is forcing the ~5.3 bcf/d Nord Stream 2 export pipeline to Europe to evaluate a 3rd potential route thru their seas and their review process will, as normal, including public hearings. Nord Stream 2 will export Russia gas to Germany for connections therefrom, was supposed to be in service at yr-end 2019 and this new 3rd route could delay the in service for potentially 1 year. This is a big relief to 2020 LNG prices as it pushes back ~5.3 bcf/d of new (cheaper than LNG) natural gas into Europe into 2021. Its already tough enough for 2020/2021 LNG prices with Gazprom’s Power of Siberia 3.6 bcf/d export gas pipeline to China on target to be in service on Dec 1/2019. The recent Shell LNG Outlook 2019 estimated that global net LNG imports increased by 3.6 bcf/d in 2018. We believe that would have been higher other than high LNG prices saw some switching to coal in Asia and LNG import infrastructure is still being built out. The Nord Stream 2 delay may be a relief to 2020 LNG prices, but the addition of ~8.9 bcf/d natural gas into Europe and China will keep price pressures on spot LNG prices over the next couple years. Plus, this added pipeline connected gas will add to the base natural gas supply, including during shoulder seasons, which should add increased risk to seasonal price swings.
Prior to Thurs, Nord Stream 2 Russia to Germany 5.3 bcf/d pipeline was on track for in service by year end 2019. Gazprom’s Nord stream II gas pipeline [LINK] was on schedule to be in service by yr end 2019. It is a 1,200 km export gas pipeline that runs from Russia to Germany across the Baltic Sea. The pipeline enters the Baltic Sea at Ust-Luga area of the Leningrad area and then comes back ashore at Greifwald in NE Germany. Nord Stream 2 is a ~5.3 bcf/d twin of the existing Nord Stream pipeline to bring the combined capacity to ~10.6 bcf/d.
Nord Stream and Nord Stream 2 Gas Pipelines
On Thurs, the Danish Energy Agency said they would need an environmental assessment for a new 3rd alternative Nord Stream 2 route. We were surprised that that this Nord Stream 2 story didn’t get attention. Nord Stream 2 has had its approval requests for the pipeline in Danish seas since Jan 2018 for the main route and since Aug 2018 for the requested alternative route. There was no indication that a 3rd potential route would need to be environmentally assessed until Thurs. Needless to say, the request for an environmental assessment for a new 3rd alternative route was a surprise to Gazprom considering its move to in service by yr end 2019. On Thurs, Reuters [LINK], and others similarly, reported that the “Danish Energy Agency has requested an environmental assessment of a third route option for the Nord Stream 2 gas pipeline in Danish waters, the Russian-led pipeline group said on Thursday. The project already has two pending permit applications with Danish authorities but the agency has now asked it to include a route option in the Danish exclusive economic zone to the south of Bornholm into the environmental assessment, a Nord Stream 2 spokesman said in an email.” TASS news agency reported [LINK] on Nord Stream 2 comments “”The Danish Energy Agency has not rejected either the Southern Corridor or the so-called ‘Base Case’ in the territorial waters,” the spokesperson said. “They have asked us for an additional environmental assessment,” he noted. “We have just received this request and will carefully evaluate this,” the spokesman said.”
But it sounds like the Danish Energy Agency new environmental assessment process could push back the in service by 1 year. Perhaps the reason why this didn’t get much attention is that most just didn’t think it would be a big delay. There is some logic there as the area isn’t a big area and the 3rd alternative route variation can’t be that far away ie. a lot of the work to date by the Danish Energy Agency should be applicable to a nearby 3rd alternative route. However, the subsequent TASS article [LINK] threw cold water on that view as the Danish Energy Agency doesn’t know the timeline and also highlighted that the new review will include public hearings. TASS story “Denmark cannot name timeline for its decision on Nord Stream 2” wrote “The Danish Energy Agency will decide on the Nord Stream 2 gas pipeline after environmental impact of the pipeline route in the exclusive economic zone of Denmark is assessed and public hearings are held, head of the agency’s press service Ture Falbe-Hansen told TASS.” And “There are no details regarding a timeline. When the Nord Stream 2 company provides the Danish authorities with an environment impact assessment it has to go through the normal procedure with public hearings etc. A decision from the Danish Energy Agency will depend on this process,” Falbe-Hansen added.” And perhaps most significant, ”According to the Danish newspaper Politiken, the completion of the laying of the Nord Stream 2, scheduled for the end of 2019, may be delayed for a year.”
Gazprom’s Power of Siberia 3.6 bcf/d export pipeline to China is on track for Dec 1/2019 start. Our March 17, 2019 Energy Tidbits memo noted that week’s commitment from Gazprom Chairman to Putin for this Dec 1/2019 start. Gazprom posted a shorthand record of “Alexey Miller briefs Vladimir Putin on Gazprom’s activities in 2018 and plans for 2019” [LINK]. The record is “Vladimir Putin: How is the Power of Siberia project progressing? Alexey Miller: Power of Siberia is ahead of schedule. On December 1, we will start exporting gas to China from the Chayandinskoye field, which we will bring onstream. The start of gas supplies to China will no doubt become a historic event, as we are entering such an extensive gas market. Last year, gas consumption in China grew by 17.5 per cent, and it is the most dynamic and fast-growing natural gas market in the world. And we see great prospects for Russian gas supplies there.” This is a major global natural gas supply event and one that we have been writing about since our July 4, 2017 blog “Today’s Qatar/Russia Gas Supply Announcements Add To The Challenge Facing BC LNG Post The New BC Govt” [LINK]. The Power of Siberia natural gas pipeline project will deliver ~3.6 bcf/d to China starting Dec 1, 2019.
Gazprom Power of Siberia Natural Gas Project
Gazprom’s pipelines will put pressure on LNG prices in 2020 and 2021. We should be clear that the weak LNG prices today have been driven by surplus LNG with lower demand from a warmer than normal winter in key Asian countries. And 2018 LNG demand would have been higher, but it was negatively impacted by high LNG prices that drove higher coal power generation in parts of Asia at the cost of LNG and natural gas. And LNG importing infrastructure is still at the early stages of built out in many key Asian markets. Its why we believe the rate of growth in LNG demand will continue accelerate in 2020 and going forward. However, Gazprom’s Power of Siberia and Nord Stream 2 will add ~8.9 bcf/d of natural gas pipeline export capacity. Pipeline connected gas will become the effective base supply and push LNG to be a marginal supply, especially because LNG is higher costs. And adding ~8.9 bcf/d of gas supply into Europe and China will be about equal to (or a little less than our expectations) what would have been LNG demand growth in 2020 and 2021. On Feb 25, 2019, Shell released “Shell LNG Outlook 2019” [LINK], which included the below graph that shows its estimate that global LNG net imports in 2018 were down ~10% to 27 MT (~3.6 bcf/d).
Global Net LNG Imports 2018 vs 2017
Gazprom’s pipeline connected gas supply becomes base supply, even during shoulder seasons, and will increase risk to seasonal price swings. Gazprom’s pipeline connected new gas supply effectively becomes base natural gas supply. If it is unseasonably warm in China and they need less gas, they aren’t going to stop the pipeline flows, rather they will just redirect an LNG tanker or two other markets. Adding more base gas supply means that there is increasing risk to big price swings. The big headline LNG story this week were LNG spot prices hitting 3 year lows. Bloomberg terminal wrote “Asia’s LNG benchmark, the Japan-Korea Marker, has more than halved since the start of the year to $4.375 per million British thermal units as of March 26. It’s fallen to a rare discount to European prices, as U.K. National Balancing Point futures traded at around $4.50 on Friday, down 44 percent this year in their worst quarter in a decade. U.S. gas futures are down more than 8 percent this year, heading for the worst quarterly loss in two years.” We have been warning on this risk because of the mild winter in key parts of Asia. The problem with Asia is that there isn’t any significant natural gas storage, so unneeded LNG cargos get redirected to NW Europe. Our Energy Tidbits memo have been highlighting that the best indicator for the winter LNG surplus is YoY increases in net LNG flows in to NW Europe. This is a theme we have highlighted since our Sept 20, 2017 blog “Shell: “Every LNG Cargo That Could Technically Be Produced In This World Has Been Produced And Has Found A Well Paying Customer” [LINK]. NW Europe tends to be a dumping ground for surplus LNG. We have been monitoring NW LNG storage levels and there have been big YoY net LNG inflows into NW Europe. Below is the Bloomberg graph of net LNG flows to NW Europe, which shows the current LNG inflows as of March 22, 2019 were 6.5 bcf/d, which is up 4.9 bcf/d YoY vs 1.6 bcf/d on March 22, 2018.
Net LNG Flows To NW Europe