Nitrogen+Syngas 381 Jan-Feb 2023
31 January 2023
Global gas markets after Ukraine
GAS MARKETS
Global gas markets after Ukraine
With Europe facing a long-term shortage of natural gas, and Russia looking east for new customers, how will changing global gas markets affect production of key syngas-based chemicals?
The war in Ukraine and associated cutbacks on Russian supplies of natural gas to Europe have had a devastating impact on ammonia and downstream nitrogen markets. Natural gas is Europe’s key source of energy; in 2021, the EU-27 consumed 412 bcm of gas, mainly for power generation, but also household heating and industrial processes. Over 30% of households in the EU use gas to heat their homes. But of that 412 bcm, 83% was imported from outside the EU in 2021, and half of those imports came from Russia.
After the imposition of sanctions on Russia, supplies of natural gas began to be curtailed, sending prices to record levels and forcing the shutdown of two thirds of EU ammonia capacity. By August, the Dutch TTF gas price had risen to e320/MWh (approximately $100/MMBtu). The Nordstream 2 pipeline had already not received certification by the German authorities, and in September sabotage destroyed the Nordstream 1 pipeline across the Baltic Sea. With gas transit via Ukraine very limited, only the Yamal-Europe line via Belarus and TurkStream across the Black Sea were still delivering gas from Russia to Europe, and even here the volumes were dwindling. In November only 1.86 bcm of gas was delivered from Russia to Europe, compared to a figure of 10.1 bcm for the same month in 2021 and closer to a usual figure of 14-15 bcm in 2018-19.
Europe’s response
The response by European authorities has been a duel pronged approach of managing demand and looking for alternate sources of supply. To an extent Europe can rely upon higher imports of liquefied natural gas (LNG), with LNG imports rising by 65% in the first six months of war. The US has been a key supplier, with around 9 million t/a of new long term supply contracts signed in 2022, as well as Qatar and Nigeria. Volumes of pipeline gas from Norway and Algeria have also increased substantially. However, in the absence of Russian supply, there is not enough physical infrastructure to fully meet European gas demand at peak, and there were serious concerns about the impact of a cold winter on European gas use.
To this end, there was a concerted attempt to fill gas storage capacity during the summer, with storage capacity reaching 88% going into winter, compared to a figure of 45% for the previous year. EU gas storage looks to be on course to exit winter at around 50% capacity, reducing the call on LNG. Shutdowns by industrial consumers, including the ammonia industry, also helped ease the demand situation. It is estimated that European gas consumption will be 10% lower in 2022 compared to 2021, with industrial consumption falling by 15%, contributing to a global decline in gas demand of 0.8% for the year.
The situation was also eased by a mild winter weather in December, leading gas prices to fall significantly. By December TTF prices were down to e135/MWh ($40/ MMBtu), and by January gas prices of $17/ MMBtu were available – still high by historical standards, but back to more normal levels than the extremes seen in mid-2022.
The EU has now agreed a cap on wholesale gas prices from Russia, beginning on February 15th. After that date, if prices rise above e180/MWh for more than three days running, gas prices will be capped at a level equivalent to or below the global price of LNG, plus e35, for 20 working days (5 weeks). The cap will include a suspension mechanism that would kick in if energy supplies came under threat or demand began to surge. Russia has condemned the mechanism as anti-market, and Intercontinental Exchange (ICE), which operates trading at the TTF gas trading hub, says that it may relocate activities from the Netherlands to outside EU jurisdiction as a result. There are wider concerns that Europe’s gas market could face a breakdown of buyers and sellers, risking security of supply and higher energy costs.
Meanwhile, there is also an attempt to rush new gas infrastructure into service. Floating storage and regasification units (FSRUs) could be one such solution. Germany is rapidly commissioning its first floating LNG import terminal, and there are another five such projects under development – Germany is one of the countries in Europe most affected by the loss of Russian supply. Sky high gas prices have also been a major impetus to increased supply of renewable electricity.
LNG
The impact on the LNG market has been a significant one. The IEA forecasts that Europe’s LNG imports will increase by over 60 bcm in 2022, or more than double the amount of global LNG export capacity additions, keeping international LNG trade under strong pressure for the short- to medium-term. LNG prices peaked at record levels of $54/MMBtu in August 2022, though they have fallen back since then as the gas supply situation eased in Europe. Still, both Japan and Korea have instituted policies to reduce reliance on imported LNG for power generation and have developed contingency plans for possible LNG supply disruptions. Asian gas demand growth was flat in 2022, after rising by 7% in 2021. The International Energy Agency forecasts that 2023 could see a rise of 3% in Asian gas demand, but this may affect European LNG purchases. One of the issues going forward is that as China eases its draconian covid lockdown regime, ad its economy picks up, so it is likely to return to the LNG market in a more significant way. Morgan Stanley has predicted that Chinese LNG demand could increase by 16% (10 million t/a) during 2023. The global LNG market expanded by 5% in 2022, driven primarily by European demand.
North America
US natural gas prices spiked counter-seasonally in 2022 due to the tightness in global gas and power markets. NYMEX front month contracts reached a high of $9.68/MMBtu in August 2022, though they have fallen back since then in line with falling gas prices around the world, reaching $4/MMBtu by the end of the year. The shutdown of the Freeport LNG export facility has helped gas volumes that might otherwise have been sucked out into the international market stay within the US, providing something of a cushion to US prices. US gas demand is still rising, however, as coal-fired power stations continue to be replaced with gas-fired ones. US LNG exports are also high and rising, and with Europe still desperate for US gas, this is likely to continue. US dry gas production has been at record levels and still rising since June 2022. However, there are concerns that shale gas well completions are not keeping pace with rising demand, and the forecast is for generally higher US gas prices over 2023 and 2024.
Ammonia production
Europe’s ammonia production has been badly affected by the record gas prices over the past year. By August it was estimated that around 70% of production capacity across the continent had been idled. This coincided with ammonia prices of over $1200/tonne in Europe. High European ammonia prices drew in imports from all over the world, especially the US. Argus calculates that US Gulf coast-based ammonia producers exported more than 620,000 tonnes of ammonia in 2H 2022, the total in more than 10 years. Even with relatively high US gas prices, delivered prices into Europe gave US producers record margins. Even with European gas costs falling and some producers re-starting, Argus assesses, European producers’ feedstock costs at more than $1,270/t, still well above the delivered c.fr price for northwest Europe.
The outlook for 2023
There is no sign of the war in Ukraine stopping or of any serious negotiations that might bring fighting to a halt. It seems that both Russia and Ukraine (and its western backers) are in things for the long haul. That being the case, there is no prospect of any let-up in the current difficult market for natural gas. Indeed, things may worsen.
Table 1 shows IEA estimates for 2022 and predictions for 2023 in terms of demand and production. European gas demand is forecast to continue to slip this year as gas prices remain high and volatile. While Europe will probably exit this winter with historically high levels of gas storage, and banking giant ING has said that the present gas supply situation in Europe “could not have been better”, it is likely that Russian supplies will fall still further, possibly to zero this year, meaning that European supply will remain tight. “The ability of the EU to completely turn to other sources is just not possible. Therefore, Europe is likely to go into the 2023/24 winter with tight storage, which could leave the region vulnerable,” said ING. While some FSRUs will be deployed during 2023, Europe still faces a hard cap on how much gas it can import, and making it through the winter of 2023-24 will likely require further cuts in consumption.
On the supply side, supply chain issues, labour shortages and rising costs will all play a role in the more modest supply growth expected over the coming year.
