Gas quotations on the European exchange platforms reached long-term maxima.

Almost every day summer brought news about the next price record and disturbing messages about a low stock rate in the underground EU gas storages. As a result they exceeded 500 dollars for 1 thousand CBM. Some European politicians, the Ukrainian officials and the Russian analysts already managed to accuse Gazprom of high prices. Like, it shows unprecedented insidiousness, Jesuit cunning — constrains supply of natural gas to hold the prices as high as it is possible and to force the European Union to accept Nord Stream — 2. The idea is not deprived of some grace, it is possible to tell that it is good from all points of view, except is quite misleading.

The European Union not the first ten years reforms the fuel and energy complex. Also the market of gas underwent deep transformation. About 15 years were required to the European officials to minimize a role of an oil binding in gas contracts, to strengthen influence on average level of the prices of exchange platforms, to divide suppliers of natural gas and the company, the rendering services in transportation. But a wrong thought was a cornerstone of all these changes: The EU is a market of a buyer.
The European Union was perceived and is perceived by local politicians as one of the most attractive gas markets in the world. And in principle it would be difficult to argue with this opinion if the following conclusion was not drawn from it: suppliers will battle with pleasure for the European market, beating down the price if only to offer local consumers their natural gas. Therefore, it is necessary to create rules which will allow making fight of suppliers to more mass and favorable European buyer.
Does a producer of gas build a pipe to deliver the resource on the European market? Let him reserve not less than 50% of power of this pipe for other suppliers. Does the oil binding dominate in contracts? It is insufficiently marketable as increase in number of suppliers will not really affect dexterously the changes in price therefore let the prices are defined on spot platforms! Do the pipeline deliveries dominate in the market? Terminals are required for reception of the liquefied natural gas (LNG) that numerous suppliers had technical capability to hand over their LNG in the European network.
And, of course, all this will reduce influence of Russia on the gas market of Europe. Let Russia already half a century acts here as a reliable and responsible supplier, but you never know.
The most interesting in all this that at the beginning of an active phase of liberalization of the European market of gas the concept «the EU is a market of the buyer» worked. But it was in 2008-2010. Then the world economic crisis which struck on energy costs inflamed. Along with it the USA started increasing own production of natural gas, having destroyed all forecasts according to which the United States in the 2010s had to become a large consumer of LNG. Under their market, in particular, plants in Qatar were under construction. And here plants are constructed, and the target market is not interested in production any more. Qatar gas went to Europe.
From the point of view of the EU the situation looked as follows: gas prices fall, and new volumes of LNG which strike to them additional blow suddenly come. It means, the concept works, so Europe is really the market of the buyer for which suppliers fight!
It is that case when desirable was given for valid, and it was necessary to look at the situation in a section of the world market, but not own expectations.
With approach of the 2010s begins sharp raise of demand for gas in China. And in 2011 accident on the NPP Fukushima-1 led to a stop of nuclear power plants in Japan and to emergence of a new market window for natural gas. That is consumption in ATR begins increasing promptly. And with it also the prices raised. Qatar and other suppliers carried three quarters of all LNG in the world to Asia.
As a result it appeared that European «the market of the buyer» concedes by the size to the markets of China and Japan, and suppliers are not ready to fight for it, stuffing each other elbows. But nobody began refusing reforms. Let they worked not as reflected and in the field of pipeline transport stirred implementation of new projects at all, especially as 2019 came and the dream of «the market of the buyer» recovered again.

Crisis before crisis

The global markets of hydrocarbon raw materials are stormy for seven years. It is possible to tell that one of the reasons of it is happening transformation of the world fuel and energy complex. But it occurs not as rectilinearly as it is accepted to speak about it the last years. There is no front overflowing from non-renewable power sources to renewable with irreversible electrification of all spheres of life, including transport.
The movements in the energy markets are connected with various factors. Often, to understand specifics of the events in the energy markets in 2020, it is necessary to consider factors which were shown in a year or two before. For example, in the second half of 2018 China entered protecting duties on the liquefied natural gas made in the United States. If in 2017 Chinese market accepted 2.9 billion cubic meters of the American LNG (14.6% of the total volume of deliveries), in 2018 – 2.56 billion cubic meters (8.35%). And in 2019 the volume of deliveries fell to insignificant 0.19 billion cubic meters.
These data are extremely important for understanding of the events occurring in the European market both in 2019 and in 2020. Actually the USA in 2019 appeared in the position of Qatar of a sample of 2008-2010: export deliveries grew (from 30.65 billion cubic meters in 2018 to 51.5 billion cubic meters in 2019) and the target market on which many suppliers counted, was closed. As well as Qatar gas in ten years before, American natural gas went to submit Europe. The benefits there were favorable conditions in the European Union.
The European Union, having been frightened that signing of a new gas contract of Gazprom with the Ukrainian party will break, prepared for deficiency at the beginning of 2020. Storages were actively filled. As a result by the beginning of a heating season the record amount of natural gas 96.3 billion cubic meters were saved up. In previous years accumulation averaged 86.2 billion cubic meters.
The prices were an additional factor influencing dynamics of filling of the underground gas storages (UGS). This factor was underestimated earlier, but the events of 2020 emphasized its importance. The prices were very low. Buying up gas and sending it for storage, many companies hoped for good additional money during the heating period.
Actually, Europe was very lucky in 2019. There was surplus of offer in the market, besides the prices on Asian platforms began to come nearer to the prices of the European. It created additional incentive for suppliers to deliver LNG to Europe. Following the results of 2019 Europe (taking into account Turkey) set an absolute record on purchases of the liquefied natural gas – 119.8 billion cubic meters (according to BP). There was Qatar on the first place (32.2 billion cubic meters), on the second — Russia (20.5 billion cubic meters), on the third — the USA (18.3 billion cubic meters). Here it is worth making a reservation that, according to Shell, the Russian suppliers outstripped American only in 2020. But a gap in volume of deliveries in the LNG market so insignificant on the scale of pipeline deliveries that it can be neglected at general assessment of the situation.
Once again we will emphasize that demand in Europe was provided with the liquefied natural gas thanks to a successful combination of factors: to a temporary surplus of the offer on a global scale, to the reduced price gap with Asia and to protecting duties on the American gas in China. The events led to decrease in the spot prices at the European exchanges and to considerable deterioration of economy of deliveries for all producers. But as from the price point of view other markets did not give visible advantages, it was necessary to accept the situation and simply hope for the best. Actually it was a crisis in the gas market. Also it began long before a pandemic.
And then the first quarter of 2020 came which aggravated already difficult situation.

Globalizator of gas market

At the end of 2019 the transit contract between Gazprom and the Ukrainian party represented by the operator GTS of Ukraine and also Naftogaz was successfully signed. We believe at one reasonable person language will not turn to call this document unnecessary and harmful. However consequences of signing were not only positive.
Transit through the territory of Ukraine remained, Europe managed to avoid deficiency of gas during the winter period. But lack of crisis by many analysts was dialectically represented as one of the main reasons of a collapse in prices in the European market. It is possible to agree with this opinion. But it needs to be added.
The main means of globalization of the market of natural gas, sewing stronger the numerous regional markets every year, became LNG. And still the greatest hopes in connection with satisfaction of increase in demand for natural gas are laid on this segment. For example, in Shell LNG Outlook 2021 separately makes a reservation that LNG will become the most fast-growing source of natural gas in the near future.
According to the report of the International group of importers of the liquefied natural gas (GIIGNL), from 2015 to 2019 the world trade of LNG increased on 45%. Record growth of capacities and that is much more important, the record growth of deliveries accounted for 2018 and 2019. About 90% of gain provided only three countries: Australia, USA and Russia.
Yes, some investment decisions which led to these records, were disputable that confirmed later the events of 2020. But in this case it is not basic for us and that fact that increase in LNG production in 2018-2019 fell on the period of the second round of oil crisis within which demand for energy carriers grew more slowly than expectations. From here also there was a surplus which reached peak in the first half of 2020.

China, transit and warm winter

Actually in the first quarter of last year there came the ideal storm in the European gas market. And the transit contract between Moscow and Kiev became only one, besides not the most significant, its component. If not a factor of the pandemic, then an ideal storm could end already in the second quarter.
Why the factor of the transit contract should not be overestimated? For that simple reason that flow of the becoming cheaper LNG in the middle of 2019 was a good occasion in itself to make additional stocks. After all usually gas costs less in the summer than in the winter. It was quite logically (though it is wrong) to assume then that by beginning of 2020 natural gas in Europe will rise in price and it can be sold more favorably. Though fears of deficiency also created additional demand, but growth of supply of LNG to the European market in 2019 approximately on 30-35 billion cubic meters exceeded the additional volumes which went to UGS.
Contrary to hopes gas continued to become cheaper in winter too- from 150 dollars for 1 thousand CBM in January to 100 dollars in February. And the prices on Asian platforms remained similar.
And suddenly in February extremely positive signal sounded. In the middle of the month the Ministry of Finance of the People’s Republic of China published the list from 696 names of the American goods on which protecting duties since March 2, 2020 will not extend. The list concerned energy carriers (oil, oil products, gas and coal) as well. It is not clear, why the president acting at that time was not re-elected after such a success.
Supply of the American gas to China was not made since March, 2019 at all, zero. And it is such a gift here, which could become also a gift for the European market, having removed from it a part of excess offer.
But shortly before completion of trade war of China and the USA the blow to the market put COVID-19. More precisely, at first it struck across the People’s Republic of China and that in reply developed rigid anti-epidemiological actions. They led to decline in demand for energy carriers. And where LNG should be floated if China does not accept it? To Europe: the European market felt additional pressure. And the weather which was in the EU aggravated it.
Here it is impossible to tell that only high temperature is guilty. The problem was in a wind too. In February, 2020 in Germany 20.56 terawatt/hours of electric power (45.1% of total volume), and in February of 2021 – 11.32 terawatt/hours (27.2%) was made on wind farms. If not abnormal activity of wind generation, it would be opened a market niche for additional volumes of gas.
And after all it was necessary to sell also the surplus which is saved up for a deficiency case. It was sold extremely reluctantly. The heating season graduated from the European Union on March 30 with record stocks in UGS – 58.4 billion cubic meters.
Generally, by the time when the pandemic reached Europe, the gas market appeared in deep crisis, covered with an ideal storm.

Downloading not at any cost

From the point of view of the buyer the situation looked not so dramatically, after all gas became cheaper. And the European consumers actively got natural gas all first half of the year. Up to the middle of July the most active stage of downloading in UGS proceeded. And the prices managed to fall off lower than 40 dollars meanwhile.
The restrictive measures taken by EU countries nevertheless struck on demand enough that auction of unprecedented generosity in the gas market ceased to please buyers and started frightening them. Europeans even had to refuse considerable part of supply of LNG from the United States.
Nevertheless large residual stocks, active purchases in the first half of the year and low demand led to that by the beginning of a heating season the European UGS was filled close to the record volumes, besides these volumes were extremely close to the theoretically possible. Actually, the situation was developed according to the same scenario, as in the previous year: cheap gas with pleasure went for storage waiting for higher prices. Only this time natural gas really started rising in price by fall and reached indicators which the market had not seen for several last years in winter.
If to look at the situation in general, import of LNG from Europe in 2020 was reduced slightly – on 5%. According to GIIGNL, it made 81.6 million tons (112.6 billion cubic meters) and according to Shell it made 84 million tons (115.9 billion cubic meters). Most strongly in annual expression purchase was reduced by France (on 3.45 billion cubic meters — on 16.1%) and Belgium (on 2.62 billion cubic meters — on 36.9%).
And here Turkey, on the contrary, finished 2020 with growth on 14.4% (on 1.9 billion cubic meters). But it is connected with activity of this country in the first half of the year when it tried with maximum benefit for itself to use the period of abnormally low prices.
Spain (21.25 billion cubic meters), Great Britain (18.5 billion cubic meters) and France (18.1 billion cubic meters) became the largest importers of LNG in Europe following the results of last year.
This market kept high value for the United States. Yes, there was a failure in the middle of the year but as a result 41% of all LNG (about 27.6 billion cubic meters were sent to Europe from the USA, according to Shell). But nevertheless Asia became the major market both for the States and for other exporters again.

Return of Asia

In 2020, according to GIIGNL, capacities of the LNG terminals reached 1307.1 billion cubic meters a year. The volume of the world import increased on 0.4% only (1.93 billion cubic meters) and reached 491.5 billion cubic meters. On average demand failed in the second and the third quarters.
For comparison: according to Rystad Energy, production of natural gas in the world in 2020 was reduced on 3.5% (to 3.918 billion cubic meters).
The offer following the results of a year grew. The United States — about 15-16 billion cubic meters (to 61.8-67.7 billion cubic meters) became the leader of a gain. Such a speed is connected generally with those capacities which were entered in 2019, but there were also new capacities started in 2020. Australia also increased deliveries (on 3.3 billion cubic meters — to 107.4 billion cubic meters) that brought it to the first place among the producers. Russia also increased production — on 1.2 billion cubic meters according to the Ministry of Energy of the Russian Federation – on 41.7 billion cubic meters. Our country takes the fourth place among the world suppliers. A number of producers had to reduce export.
71% of all world supply of LNG went to Asia. For comparison in 2018 the region occupied three quarters of the world market and in 2109 — 69%. That is restoration of the lost positions was outlined. According to GIIGNL import in the region following the results of last year increased on 3.4% (to 351.14 billion cubic meters).
The countries of the region worried last year differently. For example, Japan reduced import on 3.2-4%. Data on South Korea are inconsistent. So, Shell believes that the country reduced purchases on 2% and GIIGNL — that increased on 1 billion cubic meters. Anyway, a considerable part of reduction of demand at a number of the countries of the Asian region fell on the second quarter of last year when Europe and China increased purchases.
India considerably increased import on 11% (to 50 billion cubic meters approximately).
But the greatest impact on restoration of the Asian market was made by China. It quickly enough and successfully coped with pandemic consequences, having shown following the results of a year growth on 11.7% — almost on 10 billion cubic meters. It managed to keep the position as the second-large importer, having occupied more than 17.4% of the world market (92.5-95.1 billion cubic meters). And that is important in the context of influence on the market of Europe, since March, 2020 the People’s Republic of China really started importing liquefied natural gas from the United States.
However before the fourth quarter it was talked of rather small volumes. However, 3.6 billion cubic meters was delivered to China from October to December according to Management of power information of the USA, it is impossible to call outstanding size too. At the same time, having bought in the States following the results of 2020 6 billion cubic meters, the People’s Republic of China was included into the three of the largest buyers of the American LNG (after, here is a surprise, South Korea and Japan). Funny, but deliveries from the United States will be enough for China to satisfy exactly a third of demand for the liquefied natural gas as motor fuel from the heavy-load transport.
The role of Asia which again amplified in comparison with 2019 in the market of the liquefied natural gas, redistribution of streams in favor of China, Japan and other consumers of the region, and also increase in prices which began in the second half of 2020 also pulled for itself the prices in Europe.

Fluctuations of a pendulum

Current year became for gas market of Europe a kind of specular reflection of last year. Then the winter was warm and in 2021 it was cold. Then demand fell and now grows. Then the prices fell and now they increase. Even in summer.
The pendulum of the forming world market shook in other party. The European market depends on more powerful and attractive market of Asia more and more. If in former years of the quotation in the EU could keep steadily at the levels of 1.5-2 times below than in Asia-Pacific countries now the market will quickly bring the European prices into accord with the Asian with high probability. Otherwise there will be a situation which we observe this summer: deliveries of Gazprom are close to record indicators (99.9 billion cubic meters on the first half of the year), and the prices flies higher than 400 dollars for 1 thousand CBM and everybody complains that storages are filled insufficiently quickly. But not to make a claim to suppliers of LNG!
But, on the one hand, some companies obviously are afraid to fill UGS at current prices as in winter quotation can be lower (as in 2019). On the other hand, appeal of Europe to LNG against a growing demand in Asia decreases. It is possible to increase appeal only at the expense of increase in prices. Meanwhile supply of the liquefied natural gas to Europe in May of current year was 17% lower than in April (and 19% less than in May 2020).
Of course, the events now do not mean that the prices cannot fall. Moreover, the existing forecasts assume input of a large number of new capacities for LNG production in 2021-2025 that again creates risk of a surplus of the offer. And for the previous two years we saw to what it brings in conditions of the globalized market of gas.
And our country, by the existing estimates, can increase LNG production to 193 billion cubic meters by 2035.
Fortunately, the forecast for increase in demand in China are more than favorable. And 2020 not only brought tests to world economy but also proved ability of the People’s Republic of China to grow even in the most difficult conditions. It should encourage all suppliers. But also the European Union also intends to increase import of gas because of refusal of coal generation. For this reason, by the way, Russia now invests in East ground to have opportunity twice to increase supply of coal to Asia (to 200 million tons) as on the European direction demand for it will fall.
Cloudless future of gas is spoken well also by the parameters of the European carbon tax which flowed away in a network. At the time of writing of article it is supposed that the cross-border carbon tax of the European Union will affect import of metals, fertilizers, cement and the electric power. But will not mention hydrocarbon raw materials (oil, oil products and natural gas are not mentioned in the document).
S&P Global Platts believes that Russia will keep the role of the main supplier of gas to Europe till 2040. But supply of LNG will also grow — to 130 billion cubic meters in 2030 with the subsequent decrease to 100 billion cubic meters in 2040. In general the forecast of S&P looks for our country like compliments. For example, it is expected that in 2040 gas export will increase to 390 billion cubic meters.
Of course, risks cannot be dismissed. But in the conditions of a growing demand and without considerable surplus of supply of LNG the European buyer should get used to those price conditions to which buyers in Asia already got used.
It would be possible to agree, of course, with Russia about increase in pipeline deliveries. But after all we remember that «The European Union is the market of the buyer». Therefore any increase in dependence on a pipe! And who does not want to depend on a pipe will depend on fluctuations of a pendulum of the world market.