Nord Stream leaks and Naftogaz sanctions threat weigh on market [GGP]
Current energy crisis forces intensified this week with gas market concerns centering around the news of subsea damage that has caused leaks on both the Nord Stream 1 and Nord Stream 2 pipelines.
Gas prices appear like a leaf in the wind, with little indication on how far they will be carried and in what direction.
Early this week, European gas prices fell to almost $50 per million British thermal units (MMBtu) on the back of high storage levels at more than 87% full, but quickly rose on news of the damage to both Nord Stream pipelines.
We cannot expect prices to drop any time soon – at least not until we see some form of improvement in supply.
Liquefied natural gas (LNG) carrier rates have been on the rise as buyers rush to secure LNG volumes early this year given the uncertainty in global gas supplies and the Northern Hemisphere winter outlook.
Concerns of Nord Stream pipelines leakages and mooted Naftogaz sanctions on transited volumes
While the investigation into the cause of the pipeline damage is ongoing, a near-guaranteed supply cutoff will inevitably affect Europe’s gas supply this winter – but even more concerning is the impact on gas storage inventories ahead of next winter.
Supply cutoffs of this magnitude cannot be shaken off –even a short-term political swing in a pro-Russia direction would not be able to piece back together the severely dismantled gas system in Europe.
With news of the pipeline system damage, Nord Stream 1 nominations that had emerged last week – and that were then renominated to zero – were clearly an error and no flows were reported.
The possibility and timing of repairing both pipelines is unclear and depends on the severity and type of damage to the system.
The leakage could also have significant impacts from the environmental perspective and European energy infrastructure securities. Danish authorities have asked ships to steer clear of a five-nautical-mile radius off the island of Bornholm.
The Baltic Pipe is in the same vicinity, raising questions over whether this leakage will result in any delay to the planned start-up of that pipeline, which is slated for early October 2022.
Earlier this month, the Russian Federal Security Service (FSB) claimed they had prevented an attack on the TurkStream pipeline facility.
Meanwhile, some drones were observed around Norwegian oil and gas platforms, leading Norway's Petroleum Safety Authority (PSA) on 26 September to inform oil companies to be more cautious over unidentified drones flying near facilities, warning of the risk of accidents or attacks.
Norway is currently supplying around 30% of the European Union (EU)’s gas demand, making it the most important single source of gas supply.
Gazprom said on 28 September it rejects all claims made by Naftogaz in arbitration proceedings brought by the Ukrainian operator against it over the transit of Russian gas to Europe, which in practice will mean a ban restricting Gazprom from fulfilling its obligations to the sanctioned entities.
This may result in a potential halt of transited volumes via Ukraine, which is currently flowing gas at about 40 million cubic meters per day (MMcmd).
The timing of these incidents could hardly be worse as Norwegian operator Equinor has just entered a deal with Polish gas player PGNiG to supply 2.4 billion cubic meters (Bcm) of gas to Poland for 10 years, starting in January 2023. The volumes, to be supplied via Baltic Pipe, will meet 15% of Poland's annual gas demand.
The Baltic Pipe will enable transportation of about 10 Bcm of gas, of which PGNiG has reserved around 8 Bcm.
Norwegian flows have been hovering closer to 285 MMcmd this week, which is not helping the European supply situation.
In recent months, flows had been closer to 330 MMcmd, but continued power outages in Norway have forced average flows to remain below 300 MMcmd for the month.
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