Europe made a mistake in calculations and made Gazprom shark of market

Written by The Frontier Post

Alexander Sobko

Gas prices in Europe are still hovering around the thousand dollars per thousand cubic meters. Quotations are at about the same level, judging by the futures contracts, the market lays down for the entire first quarter, that is, for almost the entire heating season in Europe. But usually “distant” futures contracts also reflect primarily the current understanding of the situation by market participants. And in most cases, when the current situation changes, these prices are adjusted in the same direction as the prices of the nearest supplies.
And making forecasts on the gas market is almost more difficult than on the oil one. First, the unpredictable weather factor hinders accuracy. Second, if we talk about the European market (although global prices are now strongly linked through LNG), much will depend on Gazprom’s tactics.
In recent months, the Russian gas giant has consistently reduced the total booking of transit capacities on two “foreign” routes: Ukrainian and Polish. If at the beginning of the year about 250 million cubic meters per day were reserved for these directions, then only the Ukrainian route remained in December (the minimum volume under the contract is 109 million per day). In October and November, Gazprom sharply reduced the volume of monthly reservations and, accordingly, pumping through the Polish route to the Yamal-Europe gas pipeline. Only a third of the total capacity was ordered. And for December, he refused this offer altogether.
Let us remind you that formally, in accordance with the requirements of the European energy market, auctions are held for booking gas transmission capacity, but due to geographical features there is only one buyer. And he either buys out the capacity, say, at a monthly auction, or he doesn’t. But in this case, he always has the opportunity to return within the framework of the daily auction.
Therefore, although hot headlines such as “Gazprom” turned out to be booking gas transmission capacities for such and such a month “attract attention, this does not guarantee the refusal of supplies along the route, if necessary. Moreover, already in November, Gazprom was ordering supplies on a daily basis. in the Polish direction in small volumes.
Here, however, there is one more factor. Daily auction prices are usually higher than monthly bookings. This is clearly seen in the Ukrainian direction. Let us recall that the base rate of the tariff for transportation through the territory of Ukraine is $ 32 per thousand cubic meters. But for additional (in excess of the “obligatory” forty billion a year) tariffs are increased. When booking for a quarter – with a coefficient of 1.1, for a month – 1.2. And per day – with a coefficient of 1.45.
That is, the cost of transit of additional volumes within Ukraine, ordered per day, is 11 dollars higher compared to the quarterly booking. And at a relatively low price level, say, two hundred dollars per thousand cubic meters, even an additional 10-15 dollars is of great importance. After all, out of these two hundred, you will also have to pay the export duty, and the tax on the extraction of minerals, and transportation costs along other routes, and depreciation, and operating costs, and so on. And also try to make money.
But when prices are at values much higher, these 10-15 dollars have practically no effect on anything. And on the Polish route, moreover, the transportation itself is much cheaper than across Ukraine. That is, the difference in the cost of booking “for a month” and “for a day” will be even lower. At the same time, the lack of monthly reservations creates additional tension in the market and supports prices.
The connection between export restrictions to the EU and the launch of Nord Stream 2 was often discussed, but maybe it’s time to look at the situation from a different angle? The Russian company is now rather behaving like a market player: it simply fulfills its contractual obligations, enjoys good market conditions and optimizes the volume of supplies in such a way as to get the maximum profit.
Move on. In the previous article, we discussed that Gazprom at the end of October significantly reduced transit through Ukraine, nevertheless, the Ukrainian GTS is functioning quietly.
After that, for one day, November 1, daily supplies fell even lower: only 56 million per day (the equivalent of 20 billion cubic meters per year!). As if testing the GTS’s capabilities to operate at small transit volumes, Gazprom soon returned the volume to the “standard” 109 million cubic meters.
And on November 12, Alexey Miller announced that Gazprom’s obligations on gas transit through Ukraine in 2021 would be exceeded. This statement could be interpreted as plans to dramatically increase the volume of transit through Ukraine, although in fact it still does not exceed the level of the minimum contractual volumes.
Nevertheless, the head of Gazprom was not mistaken when he spoke of overfulfillment of obligations. After all, the calculation of the minimum volume of pumping takes place on a daily basis, the “download-or-pay” payment is also calculated exactly. Accordingly, Gazprom will pay Ukraine the minimum amount. But there were days when Gazprom exceeded the minimum wage, for example, at the beginning of autumn it supplied not 109, but 123 million cubic meters per day. And since the “shortfall” on some days cannot be compensated for by the “bust” on others, the contractual obligations in any case will be overfulfilled. Even if now the transit volumes are again below the norm.
Let’s summarize. There was no “zero” monthly booking for the Polish direction yet. The attention of observers in December will be riveted on the daily auctions for Yamal-Europe, otherwise the total level of supplies for December will be very low. Throughout Ukraine, the volume of transit is now carried out in the “swing-or-pay” volume.
In conclusion, a little about what is happening in the global markets in the context of long-term balances of supply and demand. Indeed, as a first approximation, the growth of long-term supply is associated with new liquefaction plants.
As a reminder, an investment decision was made in February for the construction of Qatari factories. But this is more of a formality, since it was completely expected: Qatari LNG with a low cost, and therefore little depends on the price environment. And at the end of November, another investment solution appeared: the construction of the second Pluto LNG line in Australia, although it is only eight million tons (about 11 billion cubic meters) of gas per year.
But in the segment of American LNG, where expectations and potential volumes are the highest, there are still no investment solutions.
Although there is a lot of activity: companies are entering into new long-term contracts (including with China ), working on tasks to reduce the carbon footprint of LNG plants. But there is no new construction. Rising gas prices are also likely to interfere.
And, of course, the uncomfortable questions of the American senator do not add optimism for making new decisions on the construction of liquefaction plants. In fact, against the backdrop of high domestic gas prices (they are significantly lower than global ones, but almost twice as high as usual for the United States ), voices have been heard not for the first time that it would be nice to restrict LNG exports in order to maintain low intra-American prices.

About the author

The Frontier Post