Norway may send more gas to UK, Europe take more Russian

Analysts said on Monday that Britain may receive more Norwegian gas in the 2012/13 gas year as continental European customers take more Russian supplies, which became more competitive following contract negotiations during the past months.

European gas buyers and sellers adjust supply volumes on Oct. 1, starting the new gas year, as the winter heating season starts in Europe.

While Norwegian gas exports to continental Europe are supplied under long-term contracts that are linked to the oil price, Britain receives most of its Norwegian gas under hub market terms that are priced off Britain’s National Balancing Point (NBP) and have lesser binding supply obligations.

A global gas market analyst has said Gazprom’s discount is assumed to have a positive volume effect on exports to continental Europe because its gas has become more attractive than Norway’s.

In several recent contractual renegotiations Russia’s Gazprom, the world’s biggest exporter of pipeline gas, and Qatar, leader of liquefied natural gas (LNG) exports, have given in to customer pressure and reduced their prices.

With continental Europe taking more Russian gas, Norway would redirect more gas to Britain, mostly through the 70 million cubic metres (mcm) per day Langeled pipeline, an analyst has said and that the UK is a residual market to Norwegian gas supplies and gets what is left over from continental Europe who receives its supplies in long-term contracts and therefore has priority. So if continental Europe takes less that leaves more gas for export to the UK.

It is expected Norwegian gas supplies to be between 26.3 to 31.8 billion cubic metres (bcm), up from 25 bcm for the 2011/2012 gas year, which is about a quarter of Britain’s annual needs.

Only in the lowest scenario, which would see unusually low supplies from Norway’s huge Troll oil and gas field, would Britain receive slightly less gas than last year, with expected imports of 23 bcm.

In the gas year 2011/12 Norway supplied Britain with around 25 billion cubic metres (bcm) of gas.

Domestic British production stood at 36 bcm in the last gas year, with the rest coming from LNG as well as supplies from continental Europe, mainly the Netherlands.

Overall European gas demand is expected to remain relatively stable in 2012 overall compared with 2011, according to data published on Monday by the European gas industry lobby group Eurogas.

“Early indications from the Eurogas data suggest that gas demand in Europe is likely to remain stable throughout 2012, registering a slight decrease of 1 percent compared with 2011,” Eurogas said.

NO LOWER PRICES

Even if Norway’s gas supplies to Britain rise in the coming gas year, analysts have said that they did not expect prices to drop as other supply sources dwindle.

Domestic British gas production is falling by an annual average of 5 percent, and although Europe’s LNG imports from Qatar have risen in the last quarter as Asian and European prices converge, the price and demand outlook still favours Asia as a destination for LNG ships over Europe.

“We believe global LNG markets will remain tight as Japan continues to face nuclear plant outages, China and India rapidly build out regas capacity, and Thailand, Indonesia and Malaysia emerge as new players in global LNG markets,” Bank of America Merrill Lynch said in a research note. The bank also added that a Pacific bid for Atlantic LNG cargoes heading into the winter could support European natural gas prices at a time when demand remains in the doldrums.

It has also been said that the dominance of oil-indexation in LNG contracts was a bullish price signal for LNG markets.

Given the dominance of oil-indexation in LNG contracts, the price of Brent crude is still a key driver of the pricing and opportunity cost of LNG cargoes. While the Brent price accompanied spot Asian LNG prices lower in June (towards $90/bbl), it has since recovered (to around $110/bbl). Oil-indexed LNG contract prices will have recovered accordingly.