Tension in the gas market remains high. The throttling of the supply of gas to Europe by Russia will have an effect on gas prices. Europe is diligently looking for LNG to replace Russian gas. This appears to be a favorable development for LNG suppliers. Still, the oil companies are also feeling the pain of the high prices.
Natural gas remains unprecedentedly expensive in Europe. However, in recent days the listing on the TTF has taken a small step back. Yesterday (Tuesday, August 9) the TTF closed at €192,18 per MWh. Today the price is on the rise again and at the time of writing the TTF is at €205,25 per MWh, 6,7% higher. This brings us very close to the record price set in March.
The cause of the high gas price is the difficult supply of gas from Russia. There are roughly three routes for the supply of natural gas from Russia to the EU: via the Baltic Sea (Nord Stream), through Belarus (Yamal) and via the network in Ukraine. The Nord Stream has been the most important supply route in recent months. Transport on the other routes has largely been reduced since the Russian attack on Ukraine. Since the planned maintenance of the Nordstream in July, the Russians have also further curtailed gas exports via this route. The pipeline was used for approximately 40% of its available capacity for the work. That has now dropped to approximately 20%.
However, there is also a bright spot to report about Russian gas exports. On July 30, Gazprom stopped supplying gas to Latvia due to its refusal to pay the bill in rubles. However, exports resumed on August 5. Reuters reported this yesterday based on data from grid operator Conex Baltic Grid. Both Gazprom and Latvia have not provided any explanation about the reason for resuming gas supplies.
High LNG price not only beneficial for the oil industry
Due to the problems with Russia, Europe has suddenly become an important buyer of LNG. This makes buyers in the traditionally important sales area of Asia nervous. Countries on both continents are competing to ensure sufficient LNG. You might expect the laughing third party to be the LNG suppliers. In practice, the price explosion on the LNG market is also causing headaches for oil companies. The problems for them arise from unplanned problems at the LNG terminals, which cause production to drop. LNG producers and traders continue to sign long-term offtake contracts. The traders make agreements about deliveries to customers based on that portfolio. Problems with an individual LNG factory are rarely included in force majeure clauses.
If a problem occurs at a production location, it is resolved by another production facility or by purchasing LNG from a competitor. In a somewhat stable market this is not a problem, but if the market is extremely tight with ditto extreme prices, it will cost a lot of money. The explosion at the Freeport plant in Texas, sabotage of the gas pipeline to the LNG terminal Bonny Island in Nigeria and a strike at the floating Prelude factory in Australia are causing problems for the oil companies. Not only do they miss out on the proceeds from the loss of production, but they also have to go to the market to purchase additional gas to meet their delivery obligations. This urge to buy in turn pushes up the gas price on the spot market.