Page 5 - FSUOGM Week 33

FSUOGM COMMENTARY FSUOGM

Demand suppression around 35% of the market last year, and China
Europe acted as a sink market for surplus LNG serves as the obvious alternative.
over the winter of 2019-20, but since then stor- Despite being the first country hit by
age capacity has filled. COVID-19 not only hit COVID-19, China’s early adoption of lock-
demand, but did so at a time when it was already downs allowed it to limit the spread of the
weak as a result of mild winter temperatures. virus much more quickly than many other
Now hopes of a looming recovery are being nations. This has allowed economic activity
tempered by warnings that such a revival could to regain some momentum, which in turn is
be slower to materialise than expected. In the fuelling gas demand.
short term, recovery hopes also hinge in part on The economy expanded by 3.2% in the sec-
the next winter being a cold one, which is by no ond quarter, after contracting 6.8% in the first
means guaranteed. quarter. This bounce-back has encouraged S&P
In late July, Austria-based OMV said that Global Platts Analytics to forecast that Chinese
European storage was about 80% full as of the gas demand will grow by 7.7% y/y this year to
end of June – a record high for that time of year. 337 bcm, with LNG anticipated to grow by 9%
While some improvement in demand was seen y/y, and pipeline imports by 7.6%. Not everyone
towards the end of the second quarter, it was still shares this level of enthusiasm, however, with
nowhere near 2019 levels. some unnamed Chinese LNG traders telling the
The Oxford Institute of Energy Studies research service that demand remaining flat this
(OIES), meanwhile, noted that gas injection year was “good enough”.
rates into European storage facilities in June, at While the short-term picture is uncertain,
7.8 bcm, were actually down both y/y from 13.4 the long-term prospects of the Chinese gas mar-
bcm and compared with the five-year average of ket are better for Russia than those in Europe.
10.9 bcm for 2015-2020. This was attributed to While the Asian giant is intent on expanding
factors including storage operators injecting less its gas pipeline network, the reality is that the
gas as tanks approach capacity, as well as lower grid remains underdeveloped. This has led to a
LNG imports to the continent over the summer. swathe of LNG import terminals springing up
The outlook for the remainder of 2020 along the coastline to feed to country’s urban
remains highly uncertain, however. As well hotspots. Russia’s Power of Siberia pipeline –
as the weather, other factors coming into which started up in December 2019 – is deliver-
play include individual countries’ policies to ing gas to the country’ north-east, which is little
help drive economic recovery, and how effec- exposed to LNG imports.
tively they are able to deal with COVID-19, With Chinese demand expected to pick up
including whether they can avoid new waves in the long run as the country transitions from
of lockdowns. coal to gas in industrial and residential power
OIES forecasts that globally, gas demand and heating solutions, the case for greater Rus-
will decline by 3.5% y/y, or 140 bcm, in 2020, sian imports grows. This outlook, coupled with
before rebounding by 3.7% in 2021. The insti- increasing competition in Europe, is guiding
tute notes that this is still over 3% lower than its Gazprom’s export strategy, with the company
pre-COVID-19 forecast. announcing in May that it had begun prelimi-
Against the backdrop of such muted demand, nary work on the 50 bcm per year PoS-2 pipe-
Europe has a more diverse supply mix than ever line. If built, this would be a significant capacity
before. For suppliers, this adds pressure to ensure expansion on PoS-1’s 38 bcm.
their gas is sufficiently competitive with other Gazprom has been working on a pivot east
flows to Europe. for years, with PoS-1 the fruits of those labours.
Rising competition in the European market Negotiations on that pipeline took well over a
is prompting Gazprom to pivot east, having decade, however, and concerns abound that
announced a few months ago that it had begun Beijing and Moscow’s past difficulties in finding
design work on the Power of Siberia-2 (PoS-2) a middle ground on gas pricing could resurface
gas pipeline. and hinder talks on PoS-2.
The COVID-19 crisis, plummeting demand
Longer-term prospects in Europe and rising competition in these west-
The Russian gas giant is eager to expand its export ern markets may force Russian negotiators to be
options beyond Europe, where it accounted for more amenable to China’s price demands.™

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