By avoiding pushing too much volume, Gazprom/Russia and Statoil/Norway not only avoided a price war in 2011-2013 but managed to reset spot prices at a level that is acceptable to them.
Higher prices were leading to permanent demand destruction. Russia is not willing to boost European gas demand for power generation at a price that it considers too low. As even with no growth in demand, Gazprom’s volumes are rising to mitigate the decline in European gas production.
So why has Gazprom provided additional volumes to Europe at the expense of prices, that went down by 40% since end-2013? Higher prices were also leading to the development of alternative supply. With the Final Investment Decision (FID) in December 2013 for Shah Deniz 2 in Azerbaijan and a long list of potential LNG projects in North America, Russia could see the threat of new suppliers/competitors entering the European market after 2020e.
NBP: the downward trend continues
NBP prices are continuing with the downward trend that got under way in early December, and have fallen from €30/MWh (US$11.9/MBtu) on 3 December 2013 to €18.9/MWh (US$7.7/MBtu) on 6 May – a decrease of 37%. The average for the month of April stood at €20.7/MWh (US$8.4/MBtu), 10.8% down on March. The tense situation in Ukraine does therefore not appear to be having any significant effect on NBP – apart from a couple of one-off peaks on 3 March (8.8%, Ukraine placed its military on combat alert) and 7 April (6%, start of fighting in eastern Ukraine). The market context is the reason for this downward trend: 1/ demand is slightly below seasonal norms; 2/ European stocks (which stood at 41.7 Gm3 on 6 May) are the highest they have been at the same period since 2010; 3/ the LNG market is continuing to shrink – Asian prices are at US$14/Mbtu; 4/ there are no significant pressures affecting the oil market (average Brent prices were US$107.5 in March and April). This situation is pushing down listings which are now at around €20/MWh (US$8.1/MBtu) over the summer and €26/MWh (US$10.5/MBtu) for next winter. There is still a great deal of uncertainty over the results of the negotiations that got under way in early May between Russia and Ukraine in relation to the delivery price of Russian gas and payment terms (prepayment in June has been mentioned). Disruptions to the gas trade with Ukraine and even all of Europe are possible in June. This would doubtless affect prices.
NBP: very pronounced downward trend
The NBP price in March stood at €23.2/MWh (US$9.4/MBtu), 4.7% down from February and 13.6% down from January. The first listing for the month of April was at €20.7/MWh (US$8.4/MBtu), 10.8% below the average for March. These are relatively low levels which mark a return to the listings seen in 2011. However, the market is not expecting to fall dramatically over the summer, and a mean price of €20.9/MWh is forecast for NBP. Several factors seem to be behind this downward trend. Demand continues to be weak in the UK – 79 Gm3 in 2013, as opposed to 99 Gm3 in 2010. This is also the case for the 28 countries that make up the European Union – consumption in 2013 was at 462 Gm3 (source: Eurogas), down 13% (70 Gm3) compared with 2010. The competitive price with coal, estimated at €14/MWh, is also considerably lower than the current price. And the price of Brent is falling, now standing at less than US$106/b.