GAS AMBITIONS

The world gas market has also become a victim of the COVID-19 pandemic. Lockdown restrictions in most countries hit the market, which has already been weakened due to the warm winter. International Energy Agency (IEA) expects the largest drop in demand for natural gas in the history of the gas market in 2020. “The annual decline in consumption will be the largest since the establishment of the natural gas market in the second half of the 20th century. Global gas demand in 2020 may fall by 150 billion cubic meters (bcm), or by 4%,” the IEA report says.

According to IEA, a decrease in demand will occur in most regions of the world, especially in the developed markets of Europe, North America, Asia and Eurasia, which account for 75% of global gas consumption. Experts estimate that half of the drop in gas demand will take place in the electricity sector.

At the same time, in 2021, global demand for gas will recover and exceed the pre-crisis level. Until 2025, the consumption will grow annually by an average of 1.5%. The main driver of growth will be industry, which will cover up to 40% of additional demand. Industrial gas consumption will grow by an average of 2.5% annually.

Meanwhile, competition for leadership in the global gas market continues. Liquefied natural gas (LNG) increasingly exceeds the pipeline supplies. The main gas intrigue of today is how and when Russia completes the Nord Stream-2 gas pipeline under the conditions of American sanctions. According to Russian experts, if the pipeline is completed in the coming months and starts deliveries to the EU, this will fundamentally strengthen Russia's position in the area, striking a huge a blow at US dominance in the gas sector.

Survival under sanctions

According to the IEA, the US is still the world leader in gas production. Meanwhile, until 2025, US gas production will grow more slowly than in Russia, increasing annually by 1.2%. However, during 2019-2025, Russia will become the second largest source of supply growth in the market, the first being the US.

“Thanks to export projects, gas production will grow by 1.7% annually, further strengthening Russia's position among the largest gas exporters in the world,” the agency reported.

Apparently, the reluctance to give up leadership in the global gas market is pushing the US to sanction Russian gas projects Nord Stream-2 and Turkish Stream.

The Nord Stream-2 gas pipeline with a throughput capacity of 55 bcm annually will directly connect the Russian resource base and European consumers through the bottom of the Baltic Sea. A number of states, in particular Ukraine, Lithuania, Latvia, Poland and the US, opposed the construction of the pipeline.

In December 2019, the US administration imposed sanctions against the project. That’s why the contractor of Nord Stream-2, Swiss Allseas, stopped the pipe-laying works fearing restrictions. To date, 93% of the Nord Stream-2 is complete.

In June 2020, the US authorities developed a draft of new sanctions to further complicate the pipeline construction.

According to Russian Minister of Energy Alexander Novak, to complete the Nord Stream-2 gas pipeline, it is required to lay the final batch of pipes (160 km). Currently, it is scheduled to launch the pipeline in late 2020 or early 2021.

Meanwhile, the Kremlin considers the sanctions against Nord Stream-2 protectionist, calling the American gas ‘uncompetitive’.

In his interview with the German media outlet Handelsblatt, Mr. Novak noted that the Western sanctions no longer affect the Russian energy sector. In his opinion, the West is increasingly trying to use the sanctions against Moscow as a kind of baton to achieve its own protectionist goals.

“The Nord Stream-2 gas pipeline can already be considered complete in terms of investment and economic activity. We use all possible technical means exclusively for the physical completion of construction work. The rest of the pipeline is ready,” Mr. Novak said.

The Baltic response to Russia

While Russia attempts to continue the construction of the Nord Stream-2, Poland is in full swing to implement the Baltic Pipe project, which is considered the main competitor of Nord Stream-2.

President of Poland, Andrzej Duda, believes that the Baltic Pipe will make Poland completely independent of Russian natural gas. “We will be free soon as soon as we build the Baltic Pipe, which will allow us to have a choice of getting gas from Russia or other suppliers. Then we will be completely independent,” Duda said.

In fact, to reduce dependence on Russian gas, Poland significantly increased the LNG supply from the US and Qatar by building an LNG terminal on the Baltic Sea coast in Swinoujscie, intensifying field development in the North Sea region, and is constantly investing in the construction of gas lines connecting Poland with the neighbouring countries.

It is expected that the Baltic Pipe is launched on October 1, 2022 to transport the gas from the Norwegian shelf to Denmark, and then to Poland. The cost of the entire project is 1.6 billion euros. One third of the construction budget will come from European funds. The Baltic Pipe is designed to transport 10 bcm of gas annually.

As to the importance of the project for the EU, the expert of the European Centre at the University of Warsaw, Beata Warda, emphasized that the Baltic Pipe will allow Poland to become a gas transit hub for Central Europe and establish as many ties with the Baltic countries and the south as possible.

SGC to finish soon

Meanwhile, another project aimed at diversifying gas supplies to Europe – the Southern Gas Corridor (SGC) – is nearing completion. The project will ensure the export of 10 bcm of natural gas annually. Currently, three of the four components of SGC have been successfully launched – Stage 2 of the Shah Deniz field development, the expansion of the South Caucasus Pipeline and the Trans-Anatolian Gas Pipeline (TANAP).

On June 30, 2020, TANAP celebrated the second anniversary of the start of commercial deliveries from Azerbaijan to Turkey.

General Director of the TANAP consortium, Saltuk Duzyol, said that by June 30, 2020, the total volume of commercial deliveries will reach 6 bcm. The volume of annual deliveries through the pipeline from July 2020 will be the same.

According to Duzyol, TANAP has been working with 100% efficiency since the start of business activities without no interruptions. “Economic and social crises in the world do not cause disruptions in our trading activities, as the volumes and tariffs of deliveries have been determined in advance as part of the 15-year agreements on gas transit. Therefore, an annual stable income from supplies is guaranteed,” S. Duzyol said.

By the way, thanks to the TANAP gas pipeline, Azerbaijan has strengthened its position in the Turkish gas market. According to official data from the Turkish energy regulator (EPDK), in March 2020, Azerbaijan was the leader in gas supplies to Turkey, sharing almost a quarter of the market. Other shareholders in the Turkish gas market include Qatar (2nd), Iran (3rd), Algeria (4th) and Russia (5th).

“Competition in the Turkish market intensified as soon as Azerbaijan began the deliveries through the TANAP gas pipeline, which is supplies 6 bcm of gas to Turkey annually,” Alexander Razuvayev, head of the information and analytical centre Alpari.

Now TANAP expects the export of Azerbaijani gas to Europe and has already begun the first gas supplies for testing through the Trans-Adriatic Gas Pipeline (TAP).

“We supplied 21.4 million cubic meters (mcm) of gas for TAP testing. In the coming months, we will increase the supply of test gas, depending on demand from TAP. We aim to start supplying commercial gas to Europe as soon as possible after the completion of the tests and commissioning of the TAP,” S. Duzyol said.

Test injection of gas to TAP began on November 25, 2019. The first gas began to flow into the 2-kilometer section of the pipeline in Greece. In May 2020, the gas was injected into the pipeline’s section in Albania. It is expected to start injection of gas to the Italian section of TAP pretty soon. Moreover, the laying of the offshore section of the 105 km pipeline connecting Italy with Albania ended this month. In general, the construction of the TAP gas pipeline was completed by more than 96%. It is noteworthy that construction works on the Italian site did not stop even in the midst of the coronavirus epidemic, but was carried out in compliance with all sanitary and hygienic requirements. Considering that there were no delays during the construction work, there is no doubt that the supply of Azerbaijani gas to Europe will begin within the determined time frame, that is – at the end of 2020.

Gas union

While gas suppliers continue to compete on the global gas market by increasing both the production of natural and LNG gas, the prices are not satisfactory.

Gas overproduction amid falling demand pushes spot prices to historic lows. This spring, due to excess supply on the market and lower gas demand in Europe because of the coronavirus pandemic, spot prices reached the lowest level in many years – $40 per 1,000 cubic meters. However, experts do not exclude that prices can reach negative values if the volume of supplies remains high as the storages are full.

“Gas prices for next day delivery may go negative as soon as gas storages become full, Qatar provides high volumes of LNG and demand sharply drops due to the pandemic,” a gas expert and a visiting professor at SciencesPo Paris, Thierry Bros, said.

Under these conditions, a possible way out could be the development of a single mechanism for regulating prices on the world gas market by analogy with the oil cartel.

The Russian Ministry of Energy called the situation on the world gas market “more chaotic and complicated” than on the oil market because of the lack of a regulator such as OPEC.

“The situation on the gas market... is very difficult due to the drop in demand and the pandemic. The gas market, like the oil sector, has become very volatile. When prices fall sharply, investments are reduced, and when supply is reduced, prices stabilise. I hope the worst days are over. Although the situation here is much more complicated, since there are no regulatory bodies like OPEC in the gas sector and it is more difficult to coordinate the actions of different parties. Therefore, the gas market is more chaotic and some companies will go bankrupt,” Mr. Novak notes.

The Russian Deputy Minister of Energy, Anatoly Yanovsky, believes that after the success of the OPEC+ format in the oil market, the Gas Exporting Countries Forum (GECF) could play a similar function on the gas market. “We consider the need for collective, mutually beneficial and coordinated actions by energy market participants to get out of this difficult situation unrivaled. Another aspect of collective action may be the growing role of international energy organisations. If OPEC+’s actions on the oil market are recognised as successful, it is possible that GECF play a consolidating anti-crisis role in the gas sector too,” Mr. Yanovsky said.

Founded in 2001 and uniting 12 major producers of natural gas, GECF, unfortunately, has not yet become a body representing the interests of the industry in full. Nor is it a coordinating body. Nevertheless, the head of GECF, Yuri Sentyurin, believes that due to the COVID-19 pandemic and the significant drop in demand for both oil and gas, “maybe now is the best time for the gas and oil industries to implement the knowledge and solutions of the oil industry.”

The organisation’s experts believe that a long period of increasing gas supplies due to low prices provides consumer countries with compelling economic and environmental reasons for strategic restructuring of their natural gas energy policies.

Indeed, perhaps it is time for new solutions, and the largest gas producers should reconsider their ambitions and unite in order to jointly protect the gas market from crisis. Repeating the success of OPEC+ may not work out right away, but as the saying goes – the first step is the hardest.