Quarterly Gas Review – Issue 4
In Europe, the Brexit unknowns are increasing, and the gas markets have still not been properly addressed, leaving little time before March 2019 to find a commonly agreed solution not only for the short but also the long-term. We are now seeing industry lobby groups like Eurogas and Eurelectric interfering in Brexit energy issues, making them less likely to be solved.
This is why more and more planning is going into the event of a no-deal Brexit scenario, like the introduction of a UK Carbon Emissions Tax (16 £/t) on top of the existing UK Carbon Price Support (18 £/t) and setting the total carbon price in the UK at 34 £/t to offset the impact of a UK withdrawal from the EU Emissions Trading System (EU ETS). This new Carbon Emission Tax is supposed to mirror the EU ETS situation as long as CO2 prices stay around 18 €/t in Europe.
The industry is closely watching European storage levels to get a better picture of the supply-demand balance. We argue in this section, that recent trends are not useful for monitoring 2019/2020. With no-deal for post-2019 Ukrainian transit and Nord Stream 2 unlikely to be in operation by then, we believe that European storages will have to be filled to their maximum effective level ahead of the 2019/20 winter.
Storage levels next summer could provide an indication of the timing of a Ukrainian transit deal. If a deal can only be reached at the last minute (or even later in January 2020), EU-27 storage will need to reach 97% full by October 2019, much higher than the 87% and 89% recorded respectively in October 2018 and 2017. In the summer of 2018 extra storage need (69 TWh) was the main reason for European hub prices to move up when demand was going down. If Europe needs another 105 TWh for storage alone in the next 12 months, (i.e. to get up to 97%) it could further tighten the regional supply-demand balance, as this is not taken into account by the actual market consensus scenario.
In a perfect world, we could expect more foreign supply (from LNG and Gazprom restarting Turkmen gas re-exports) to balance the European system in 2019 and a competitive fixed price deal for transiting gas via Ukraine. But mixing policy and economics doesn’t mean the best outcome will be achieved. Hence the market could face high level uncertainties about the Ukrainian transit contract renewal and the Nord Stream 2 start-up and ramp-up, making the 2019/2020 gas year very interesting.
Our scenario suggests that even if Nord Stream 2 is not operational in early 2020, Gazprom could refrain from signing an uncompetitive long-term contract with Naftogaz transport because filling EU-27 storage to its maximum level could help mitigate the expected transit risk.