THE GAS CHAOS

Rather cold spring in Europe this year makes the EU authorities to adjust their plans for the timely delivery of natural gas to the underground storage facilities (UGS). They tried to start the process at the end of March, but due to cold weather it slowed down until a record late date - April 19. Therefore, despite slight daily increases in UGS reserves, injection rates are several times lower than usual.

Meanwhile, the volume of gas supplies to the EU is increasing both from Russia and Azerbaijan. As reported by Gazprom, the company has increased gas supplies to Europe by almost 30% since the beginning of the year, but is not going to further increase this volume. Therefore, a very favourable situation is developing for the deliveries of Azerbaijani gas.

Disrupted injection

At the end of April, less than a third of gas reserves remained in the underground storage facilities of the EU countries: 26% each in Germany and Austria, 23% in the Netherlands, 17% in France. Note that these countries are among the five largest European countries by gas reserves. In fact, the high level of current consumption prevents full restoration of reserves in storage facilities. In other words, it is obvious that the gas injection campaign in Europe's UGSs has been disrupted, and Europe will meet the winter of 2021/2022 with an unacceptably low level of gas reserves. This may affect both the security of supplies to European consumers and gas prices around the world.

By the way, gas prices continue to grow, as there is demand due to a record level of empty storage facilities. Spot price of gas in Europe reached $311 per 1,000 cubic metres, which is the highest since January 13. The reasons for the increased natural gas prices are the shortage of pipeline supplies and liquefied natural gas (LNG), as well as cold weather conditions. Summer scheduled repairs at large Norwegian fields also have an impact on gas prices.

But just a year ago, the European market, with its extensive and capacious gas storage system, accepted surplus natural gas from around the world to insure a general drop in demand due to the restrictive measures applied amid the COVID-19 pandemic.

As of April 2021, gas reserves in European underground storage facilities show a decreasing trend for the first time in the history of observations by the public base Gas Infrastructure Europe effective since 2011. On March 31, the level of reserves was 30%, while on April 30 it was 29.9%. This led to an increased demand for Russian gas, followed by record high deliveries in January.

Cold weather leaves no resources to inject into UGSs to prepare for next winter. According to Gas Infrastructure Europe, gas withdrawals from UGSs rose sharply on May 5, exceeding modest injection rates. Gazprom continues to actively pump out gas from its storage facilities in Germany and Austria.

New contract

Gas reserves in UGS facilities will have to be replenished this summer. To do this, Europe needs to secure 57.3% (23.9 billion cubic metres) of gas more than last year. The campaign to fill the storage facilities could be one of the largest since 2011, and also one of the main factors for the increased demand for fuel in the European market. Key factors in this process will definitely be LNG and Russian gas. But Azerbaijani gas also fits well into the equation.

According to Italian gas transport operator Snam, supplies of Azerbaijani gas to Italy via the Trans-Adriatic Gas Pipeline (TAP) more than doubled in 1Q2021 – from 9.5 million on average to more than 20 million cubic metres daily.

According to the State Customs Committee of Azerbaijan, in 1Q2021, the declared export of Azerbaijani gas to Italy reached 435 million cubic metres ($89.9 million), 57.9 million cubic metres ($16.2 million) to Greece, 59.7 million cubic metres ($8 million) to Bulgaria.

In general, Azerbaijan expects to supply 5 billion cubic metres of gas to the EU in 2021, but it is possible that the actual figure will be higher also due to the temporary suspension of gas exports to Turkey as part of Shah Deniz-1.

Until now, the export of Azerbaijani gas to Turkey has been carried out from the Shah Deniz field thanks to two contracts: according to BOTAŞ, the first one was designed to ensure the annual supply of 6.6 billion cubic metres of gas from Stage-1 through the South Caucasus Pipeline (SCP). The second contract is for the annual supply of 6 billion cubic metres of gas through TANAP. The first agreement was signed in March 2001 and expired on April 16, 2021. Currently, negotiations are underway between the Turkish gas company BOTAŞ and the Shah Deniz consortium to conclude a new contract for gas supplies under Stage-1.

At the same time, the interruption of deliveries did not affect the volumes of gas production from the Shah Deniz field, or the export volumes. Surpluses in April were redirected to Italy, which began to actively inject the gas into its storage facilities after a cold winter season. According to ENTSOG, the operator of TAP and the unified platform of European GTS operators, since April 17, when the long-term contract expired, supplies through the Southern Gas Corridor to Europe have increased by 77% (to 26 million cubic metres daily). More than 22 million cubic metres are supplied to Italy, which used up two-thirds of its gas reserves during the cold season (about 12 billion cubic metres).

Turkey continues to receive the planned volumes of gas from Shah Deniz via TANAP. Relationship between the two countries and the fact that Ankara has long established itself as a reliable buyer of Azerbaijani gas leave no doubt that the parties will agree on a new contract as well. In the meantime, during the ongoing negotiation process, free volumes of Azerbaijani gas can serve a good cause to replenish gas reserves in Southern Europe.

Controversial project

Timely completion of the Russian gas pipeline Nord Stream-2 could also mitigate the situation with gas reserves in Europe. However, in 2019, the US imposed sanctions on companies involved in the construction of the pipeline. As a result, the Swiss Allseas withdrew from the project and stopped the pipe laying operations. This did not suspend the construction process, since Gazprom involved Russian pipe-laying vessels to the project.

At the end of 2020, the US Senate approved a defense budget for next year, which contains new restrictions on Nord Stream 2.

The project is 95% complete, with only 121 km of the pipeline remaining, including about 28 km and 93 km in the German and Danish territorial waters, respectively. In parallel, disputes continue over the gas pipeline between Germany, Russia and the US.

Berlin and Washington have not yet settled their differences on the implementation of this project. One of the key demands of Americans is the development of a mechanism to stop the operation of the Russian pipeline in the event of reduced transit volumes through Ukraine, which is absolutely unacceptable for Berlin.

However, Washington does not intend to ease the pressure. According to the US Secretary of State Anthony Blinken, the US authorities will continue to impose sanctions against companies involved in the Nord Stream-2. He demanded the project participants to stop operations, stressing that they were at great risk. Berlin replied that the position of Germany remained unchanged.

At the same time, internal political pressure is growing in Germany itself due to the Russian pipeline, as the Greens and other parties demand the swift decarbonisation of the German economy through the reduction of oil and gas consumption in exchange for renewable energy. Non-governmental environmental organization Union for the Conservation of Nature and Biodiversity (Naturschutzbund Deutschland, NABU) filed a lawsuit against the construction of the gas pipeline on May 3, claiming that it harms the environment.

As a result, the permit issued by the German regulator BSH to the pipeline construction operator Nord Stream 2 AG to conduct operations on the Baltic Sea from the end of September till the end of May on a 16.5-km section of the pipeline in the exclusive economic zone of Germany was temporarily suspended until the end of May.

Experts expect the pipeline to be ready for operation in 2022. The German leadership supports the implementation of the project. However, it is possible that the anti-Russian party Union 90/Greens party, which opposes any cooperation with Moscow, wins the parliamentary elections slated for September 2021. And no one knows what can happen to the Russian gas pipeline in this case.

In general, the current situation in Europe once again shows that gas plays a very important role in the energy balance of the EU countries, and stresses the significance of pipeline projects for ensuring the energy security of the region. In this context, the SGP project has very good prospects for further development. There are plans to increase the annual capacity of the system to 20 billion cubic metres. Thus, Baku can expect the support of both the EU and the US, which consider Azerbaijani hydrocarbons as an alternative to Russian supplies. There should be no problems with filling the pipeline, especially considering the latest discoveries of BP at the Shafag-Asiman structure and other promising sections in the Azerbaijani sector of the Caspian Sea.