It is a generally accepted fact that gas is the fuel of the near future. Amid growing environmental concerns, a combination of gas and green energy is replacing coal-fired power generation. In 2018 alone, according to the International Energy Agency, 95 million tons of CO2 emissions were avoided by switching from coal to “blue fuel”. Russian gas is among the global leaders in the natural gas market, but in 2020 the sector faced a double setback due to a warm winter and the coronavirus pandemic. Our analysts discussed questions of how badly the industry was affected, what impacts the crisis Russian companies see in the future and how the sector will further develop with representatives from both Gazprom and NOVATEK.
The first half of the year, the oil and gas sector took blows from several sides at once. In addition to the coronavirus pandemic, commodity markets were shocked by the absence of an agreement on the OPEC + deal in early March. Meanwhile, gas prices were already low prices for quite some time due to warm weather over the past two winters.
According to the Statistical Yearbook of World Energy, Russian gas exports accounted for about 18.5% of the global balance in 2019. This year, its volume decreased due to lower demand in Europe due to both warm winter and the coronavirus pandemic. At the beginning of the summer, European gas storage facilities were 77% full, which is normal coming into autumn. By of the end of September, however, gas storage facilities in Europe were almost 95% full.
Against this background, export prices for gas have also decreased. The average retail price of gas in markets outside the CIS will amount to $ 119 per 1,000 cubic meters this year based on Fitch projections. At the same time, according to the Federal Customs Service, the average export price for Gazprom’s gas in July was $ 86.2 per 1,000 cubic meters (average for January-July 2020 – $ 119.6). Both companies note that gas prices are already recovering as seasonal factors come into play. In the medium term, the equilibrium price (that is, the level acceptable to both consumers and producers) is expected to range between $ 200-250 per thousand cubic meters of gas.
It is important to note that the demand for “blue fuel” in all major global consuming regions did not suffer any serious setbacks during the economic contraction as demand for gas turned out to be less elastic. Meanwhile, the liquefied gas (LNG) consumption continued to grow in the first half of the year, despite all the difficulties. In India, it grew by 20% during the first eight months of 2020, and in China by 9%.
The recovery in global demand for natural gas is expected to occur faster than demand in the oil market. By 2021, demand is expected to exceed levels established pre-crisis in 2019. Gas is currently the most economical, environmentally friendly and safe fuel, and in the long term, demand growth will be supported by coal substitution and increased industrial use.
Gas demand will continue to grow steadily in the coming years. By 2040, nearly half of all gas demand will come from the Asia-Pacific region, while China alone, according to analyst estimates, will account for a quarter of all global growth. These factors will allow Russia, already a major player in the world gas market, to increase its share in providing global supply. Alexander Novak, head of the Ministry of Energy, assures that by 2035, Russian gas may already occupy 26-27% of the world market.
Gas demand will continue to grow steadily in the coming years. By 2040, nearly half of all gas demand will come from the Asia-Pacific region, while China alone, according to analyst estimates, will account for a quarter of all global growth. These factors will allow Russia, already a major player in the world gas market, to increase its share in providing global supply.
NOVATEK and Gazprom
Both Gazprom and NOVATEK, Russia’s first and second largest natural gas producers both strive to strengthen their positions in the growing global market. Gazprom has announced ambitious plans to significantly increase supplies to China. Earlier, the head of the company Alexey Miller noted that Gazprom’s supplies to the country could exceed 130 billion cubic meters in the foreseeable future (compared to the design capacity of Power of Siberia’s 38 billion cubic meters). NOVATEK, in turn, confirmed its commitment to its growth strategy (increasing LNG production to 57-70 million tons by 2027-2030) thanks to the launch of the 4th Yamal LNG line, Arctic LNG-2 projects. The company has yet to make a final decision on the Obskiy LNG and Arctic LNG-1 projects. Projections are that supply to the Asia-Pacific region in the long term will account for about 80% of the company’s exports.
We should also mention the Nord Stream 2 project, which is perhaps the most ambitious in the Russian gas industry in recent years. In addition to high hopes, there are now many risks associated with it. At present, a lively discussion continues around the pipeline project, especially after the Polish anti-monopoly regulator fined Gazprom an unprecedented amount of $ 7.6 billion (this is the maximum possible fine—10% of annual turnover) for building a gas pipeline without the agreement of Polish authorities. No matter how large this fine is, it, in our opinion, will not greatly worsen the state of affairs of the entire project and is unlikely to pose risks for those who have already concluded financing agreements. Gazprom and its European partners will challenge the regulator’s decision until the end of the process.
Sanctions are already in force against Nord Stream 2 (a 55 billion cubic meter gas stream should have been commissioned back in 2019), but we do not consider such a delay critical for Gazprom. At the end of last year, Russia and Ukraine signed a new gas transit agreement for five years. The disruption to commissioning additional capacities was not so critical, given the reduced demand for gas in Europe this year. According to our estimates and Gazprom’s calculations, the project will be completed at the end of 2020-beginning of 2021.