Page 7 - FSUOGM Week 39 2021

FSUOGM COMMENTARY FSUOGM

Gazprom signed off on a new transit deal at the
last minute that commits the Russian gas giant
to send 40 bcm via Ukraine’s Druzhba pipeline
until 2024.

Bounce-back in 2021
The bounce-back started in the spring of this
year as the market switched rapidly from over-
abundance to tightness. In Europe, a long cold
spring extended the heating season, while the
re-opening of business activity boosted eco-
nomic growth. European gas demand rose
robustly, by almost 25% y/y in the second quar-
ter alone.
At the same time, indigenous European gas
production declined more than 10% y/y in the
first six months of this year, with Norway, the UK
and the Netherlands all producing less gas than
in the previous year. By the summer the supply
shortfall, although all the swing supply in LNG problem became so obvious gas prices started
has been drawn off by Asia, where the prices are setting new records on almost a daily basis.
even higher than in Europe. Stored gas was drawn down but to add to the
What everyone is afraid of is if there is pressure Gazprom closed its Nord Stream 1 gas
another cold winter like last year’s, fuel supplies pipeline for annual maintenance in August, dis-
will be very tight and prices will remain at record rupting supplies, which were further disrupted
highs. after a fire at Gazprom’s Urengoy Condensate
Treatment Plant in August closed part of the line.
Gas glut in 2020 pushed prices and pro- “The record-high prices in Europe are driven
duction down by increased demand (due to the wider eco-
In 2020 gas prices crashed as both Russia and nomic recovery and weather-related factors),
Ukraine built up as much stored gas as they competition with Asia for LNG, and a limited
could ahead of a potential energy crisis that supply response from Gazprom, Europe’s larg-
could have been caused if their transit deal had est supplier, providing about a third of Europe’s
not been renewed at the end of 1999. gas. Prices have also risen due to market fears of
“In 2020 the gas glut in Europe emerged even a gas deficit during the winter heating season due
before the full extent of the COVID-19 threat to low European storage utilisation compared to
became obvious. The global gas market had been previous years,” said Vitaly Yermakov, senior
oversupplied for some time due to the emergence research fellow the Oxford Institute for Energy
of new LNG supply during 2018-2019 from pro- Studies (OIES) in a paper entitled “Big Bounce:
jects, which took investment decisions in the Russian gas amid market tightness.”
mid-2010s. These supply additions entered the As bne IntelliNews reported, Gazprom has
market at a time when global demand failed to been exporting record amounts of gas to Euro-
meet growth expectations,” says Yermakov. pean clients, but has not taken up all of the capac-
At the end of December 2019, an end-of-year ity on offer from the Gas Transmission System
record of 91.5 bcm – 20 bcm higher than at the Operator of Ukraine (GTSOU). With the con-
end of 2018 – was in storage. As the coronacri- troversial Nord Stream 2 gas pipeline completed
sis began to unfurl the oversupply problem was but still missing the essential operating permits
only made worse, which led to record amounts from Germany, that has led many to accuse Gaz-
of gas in storage by the spring of 2020. Gas prices prom of artificially manipulating the supplies for
tanked. both commercial gain and political reasons.
Faced with low prices and low demand in Yermakov argues that Russian gas production
2020 Russia cut back its overall production that is maxed out and it is unable to supply more gas
year to 693 bcm, down by 46 bcm, or 6.2%, on to Europe even if it wanted to.
the year before. Gazprom took the brunt of the “For Russian gas, 2021 has developed into
blow and absorbed almost all of the reduction, a pivotal year, as the gas market pendulum has
taking its production down to 455 bcm (a fall of swung back from relative gas abundance and
47 bcm year on year, or 9.3%) while the other extremely low prices in 2020 to market tightness
gas producers in Russia keep increasing their and very high gas prices so far in 2021. The past
production steadily. At the same time, Russia two years, therefore, have represented two slopes
reduced its gas purchases from Central Asia. in a ‘V-shape’ trend for the gas market at large
Facing shrinking and uncertain demand dur- and for Russian gas in particular,” Yermakov said.
ing 2020, Gazprom laid the foundations for the
current supply crunch by also drastically reduc- LNG supplies disappear, Gazprom to the
ing the pumping of gas into its domestic under- rescue
ground gas storage facilities by 20 bcm, down Normally burgeoning LNG supplies could make
38% y/y to 33 bcm. up the shortfall, but prices for LNG in Asia have
As it turned out, Russia’s national supplier been even higher than those in Europe, sucking

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