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Europe and Asia could compete for LNG

LNG Industry,

The latest analysis from Wood Mackenzie shows the impact of a disruption of Russian gas transit to Europe via Ukraine.

The analysis compares a potential disruption of two months in spring 2014 and a six-month disruption during winter 2014/15, and how this could affect European and Asian LNG markets.

Key transit route

Wood Mackenzie estimates that Europe imported 155 billion m3 of gas from Russian in 2013, approximately 30% of its overall gas demand. Ukraine is the key transit route for Russian gas to Europe, with 50% (82 billion m3) transited through Ukraine in 2013.

Insufficient pipeline capacity

Stephen O’Rourke, Senior Global Gas Analyst for Wood Mackenzie, commented: “Central and Eastern Europe will be most affected by a Ukraine transit disruption, as eastward-flowing pipeline capacity would be insufficient to meet gas demand in Eastern Europe. The region will have to draw upon strategic storage volumes and some demand will not be fully met. On the other hand, North West (NW) Europe has direct access to Russia's Nord Stream pipeline, which mitigates the impact of any transit disruption.”

European storage volumes

Noel Tomnay, Head of Global Gas Research at Wood Mackenzie added: “Based on our analysis, if there is a two-month disruption to the Ukrainian transit route in spring 2014, the Southern European countries of Turkey and Greece will require additional LNG, but this should be less than two million t. If the disruption is more severe, for example of six-month duration over the 2014/15 winter we expect further Southern European countries, including Spain, to call on extra LNG. But, robust European storage volumes going into the winter should limit overall additional LNG demand to less than five million t.”

Tight LNG market

The combination of rising demand for LNG in Asia Pacific and Latin America combined with recent stagnant LNG supply availability has been tightening the global LNG market. As a result, any additional requirement for LNG in Europe would exacerbate this situation.

Europe to compete with Asia

“A tighter LNG market would place upward pressure on global LNG prices, including those in Asia. And Southern European markets would need to compete with Asia and Latin America for these additional LNG cargoes. This would push spot prices in some Southern European markets higher – to levels equivalent to Asia, allowing for shipping differentials,” Tomnay added.

Winter disruption

In conclusion, O’Rourke explained: “To try and alleviate the impact of a winter disruption of Russian gas flows, Ukraine would need to utilise its strategic storage reserves and prioritise gas demand in the residential and power sectors. Should the EU seek to supply Ukraine with gas, additional reverse flow capacity would need to be negotiated and accessed. While we believe deliveries to Ukraine would blunt the impact of a Russian disruption they could exacerbate a difficult position for several Eastern European countries.”

Adapted from press release by Katie Woodward

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