Russia tensions risk Nordstream 2 delay and Ukrainian transit cut

In the event of a potential military conflict in the Ukraine, Russian gas flows to Europe could be interrupted by a range of factors, according to the latest S&P Global Analytics spotlight report on year-ahead TTF (title transfer facility) prices.

Factors include US and European sanctions (which could include or exclude energy, given the importance of Russian energy imports to much of north-west Europe) and/or a cut to Ukrainian transit flows because of physical or politically motivated disruption. Loss of Russian volumes would have to be replaced by continued gas versus oil switching and demand destruction, which would result in stronger LNG deliveries to Europe.

The analysts believe the probability of Russian gas flows to Europe being fully sanctioned or blocked is ‘very low’, given how reliant both Europe and Russia are on successful energy trade. However, in the wake of rising geopolitical tensions, they foresee two likely implications of a Russian invasion of Ukraine. First, a suspension or further delay to Nordstream 2, and second, a halt to Ukrainian transit flows as a direct or indirect result of military action in Ukraine.

The Nordstream 2 pipeline is currently forecast to start up in October 2022 despite strong US opposition, contributing 68mn m³/d of gas to the north-west Europe balance in winter 2022. Suspension of the pipeline is predicted to impact only 47mn m³/d of gas, as some of the lost flows could be offset by greater use of Nordstream 1 and the 4,107 km Yamal-Europe natural gas pipeline, which is currently flowing well below capacity. Sanctions against the Nordstream 2 pipeline would also likely lead Gazprom to continue minimising non-contractual flows.

In the event of a Russian invasion, S&P Platts expects that Russian flows to north-west Europe could tighten to 34mn m³/d in summer 2022 and around 77mn m³/d in winter 2022. Marked by strong increases in both spot and forward summer 2022 and winter 2022 prices, oil prices would also likely rise.

The analysts predict strong LNG imports to Europe to offset most of the near-77mn m³/d decline in Russian volumes, underpinned by fuel switching and industrial demand destruction in Asia in response to high global prices. Increased Norwegian oil and gas production would also be anticipated, with fuel switching in the power and refining sectors and industrial demand decline next winter.

In a nutshell, in the event of a Russian invasion of Ukraine, the analysts forecast increased European competition for global LNG this summer, continued upstream oil-to-gas optimisation and suppression of some industrial consumption.

In the event of an indefinite suspension of Nordstream 2 and a halt to Ukrainian transit flows, the drop in Russian flows to north-west Europe would have to be replaced by a mixture of increased storage withdrawals and LNG imports. These would support spot prices up to €90/MWh to trigger additional Asian demand destruction and oil versus gas optimisation to balance.

Growing tensions across Russia-Ukraine ceasefire line
According to Reuters last week, Russian-backed rebels and Ukrainian forces had traded accusations that each had fired across the ceasefire line in eastern Ukraine, raising growing concern over the prospect of a wider war. While Moscow continues to deny it is planning an invasion, western countries claim that Russia’s military build-up near Ukraine is growing not shrinking.

What’s happening to the gas price?
‘The gas market continued to be extremely nervous in January, with tensions between Russia and Ukraine the main focus,’ notes Rystad Energy’s latest Power Market Fuels Report. Although volatility remained high, prices stayed similar over the month. Russian supply improved slightly, easing the pressure. But prices are still at record highs, with the forward curve suggesting high prices for all 2022 about €70/MWh. Longer term, the analysts say there is still a strong contango (ie situation where the futures price of a commodity is higher than the spot price) in the gas curve, as the market expects the supply position to improve in 2023 and 2024.

Meanwhile, the price of coal saw a large increase to $177/t, a 36% increase compared to the beginning of January, due to strong demand in Asia which pushed the European coal prices upward. A strong contango is expected in the European coal market in 2022, before long-term contracts stabilise around $100/t.

Considering current pricing for 2024 contracts and a carbon price of $100/t, natural gas is likely to be a much cheaper source of power generation than coal with average plant efficiencies, say Rystad Energy analysts. Furthermore, the contango in gas prices is much steeper than for coal.

European carbon market prices continued to stay at record levels, approaching new all-time highs, driven by continued high demand for EU Allowances as gas generation increased and coal generation only fell moderately. The futures market is now at a record high above €90 for short- and long-term contracts.

Power sector emissions are still at a record level, with three-month averages at a two-year high. Looking ahead, Rystad Energy says: ‘Emissions will depend on weather, nuclear availability and the balance between coal and gas market prices.’

Putin’s tanks trigger Brent price rise

Russia’s incursion of troops into two rebel-held regions of eastern Ukraine, Donetsk and Luhansk resulted in the price of Brent crude climbing to a record high of $99.38 /b – a seven-year high on 22 February 2022.

President Putin claimed he had sent a ‘peacekeeping mission’ after signing decrees recognising the two Ukraine regions’ independence.

Western powers reacted by imposing sanctions against Russia and threatening further action. The invasion could have massive consequences as Russia is the world’s top producer of gas and second largest oil exporter after Saudi Arabia.

Wholesale gas prices also jumped as a result of the Russian invasion, with the UK price for April delivery climbing 9% and the cost for May up 10% to 191 pence/therm… although this is less than the 400 pence/therm peak last December.

Furthermore, German Chancellor Olaf Schulz blocked certification of the Nordstream 2 pipeline, which is to supply gas directly from Russia to Germany.

Nordstream 2 pipeline faces delay 
Photo: Igor Kuznetsov