Page 11 - GLNG Week 17

GLNG EUROPE GLNG
Europe shows
early signs of gas
market recovery
PERFORMANCE
EUROPEAN gas demand has seen unprece- dented losses in recent weeks, and the market will remain subdued for some time as various countries extend lockdowns. Besides the impact of coronavirus (COVID-19) measures, suppliers are also contending with high levels of storage and mild weather.
However, some countries are starting to lift restrictions, resulting in the market showing the first signs of recovery.
“The full impact of coronavirus on gas demand will depend on the length and depth of lockdowns and restrictions,” Wood Mackenzie analyst Murray Douglas says, estimating that if current restrictions continue for three months, 17.6bn cubic metres of gas demand will be lost in Europe’s top seven markets: Germany, UK, Italy, France, Spain, Netherlands and Belgium.
This compares with a pre-coronavirus guid- ance for full-year demand in these markets of 371 bcm. Together they account for 70% of total European consumption.
Italy was the first European country to bring in coronavirus containment measures, imposing a country-wide lockdown on March 10. It then shut down non-essential services on March 12 and non-essential industry on March 23.
Italy is anticipated to see the biggest demand losses in Europe – a total of 4.4 bcm under three months of lockdown. But while Italy has main- tained its nationwide lockdown until May 3, some small retailers and re-opening and some manufacturing has resumed.
“Our analysis already shows a clear rebound in gas and electric demand over the last week – though still well below pre-coronavirus levels,” Douglas continues. “Of course, the lasting effects of a weaker Italian economy will still have to be factoredinevenbeyondtheliftingoflockdown.”
Demand is down across Europe to varying degrees.
“In Germany, Europe’s largest gas market, industrial demand initially proved relatively resilient. However, this has lost momentum since country-wide social distancing restrictions andlockdownsinsomestateswereintroduced,” Douglas says.
Demand will drop in Germany by 3.5 bcm if current lockdown measures remain in place for three months, while in the UK, Europe’s sec- ond-biggest gas market, Wood Mackenzie pro- jects a 2.6 bcm loss. UK electricity consumption has fallen 14% since the measures were put in place on March 23.
“As coal is uncompetitive in this market, lower electricity demand poses a disproportion- ate risk to gas,” Douglas notes.
The pandemic’s spread has so far not had a significant impact on European gas produc- tion, with producers having made only minimal adjustments.
“Supply changes have been driven by other factors, including legacy decline and mild weather,” Douglas says. “Operators are focused on limiting the impact of the virus on produc- tion by delaying non-critical maintenance and adapting workforce patterns so that they can continue producing.”
This said, European hub prices remain low, with the May contract at the Netherlands’ TTF platform currently trading at under €6 ($6.5) per MWh, down from around €11.5 at the start of the year. Some operators will therefore struggle to cover even their short-run marginal costs, according to Wood Mackenzie.
“By the end of March, Europe had a record 57 bcm gas in storage, further weakening an already oversupplied summer market,” Douglas contin- ues. “Attention is turning to Ukraine’s gas storage facilities as a potential solution. Additionally, we are likely to see increased pressure on LNG sup- pliers to the European market – most notably from the US.”
Ukraine is eager to entice traders to its vast storage facilities, having offered a series of road- showsthisyeartoshowcasethem.Thecountry has the capacity to store around 31 bcm of gas, representing the largest storage base in Europe. But only around 16.45 bcm of it was utilised as of April 29.
Ukraine’s state-owned Naftogaz is mainly trying to entice traders working in Central and Eastern European countries. The gas they store could be sold later, when prices are higher.™
By the end of March, Europe had a record 57 bcm gas in storage.
Some countries are starting to lift restrictions, resulting in the market showing the first signs of recovery.
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