Europe’s Gas Buyers Told to Prepare for Nord Stream 2 Delay

(Bloomberg) -- Natural gas buyers in Europe should prepare for the risk of a supply crunch in the winter even though there’s a glut at the moment.

That’s one of the messages emerging from the industry’s biggest annual gathering. Many participants expect both a delay in the opening of the Nord Stream 2 pipeline, which would expand a route for gas into Europe, and for a deepening of the dispute between Russia and the Ukraine, a main transit country, over pipeline transport fees.

If those two events collide during a cold snap, it could rapidly change the balance the market. Gas prices this spring have plunged to their lowest levels in three years after a warmer-than-usual winter and slack demand in Asian nations, which scaled back purchases of liquefied natural gas, allowing more cargoes to land in Europe. The outcome of the Ukraine talks may determine whether that situation shifts.

“If I was a shipper, I’d think about how to react to the various scenarios,” Walter Boltz, a member of the board of appeal at the Agency for the Cooperation of Energy Regulators, said in an interview at the Flame conference in Amsterdam. “I’d think about that now and not wait until December, when there’s a panic -- some nervousness is more likely than not.”

Europe’s Gas Buyers Told to Prepare for Nord Stream 2 Delay

Ukraine has a pivotal role in the market because it maintains the biggest pipelines from Russia into Western Europe. Volodymyr Zelenskiy, Ukraine’s most-watched comedian, won a landslide victory in last month’s election and may be emboldened to stand up to Russia in the talks.

“The whole thing is what does the president elect want,” Jonathan Stern, a senior research fellow at Oxford Institute for Energy Studies, said in an interview. “If we have a harsh winter, LNG prices will go through the roof.”

The current deal underpinning Russian gas flows through Ukraine expires at the end of this year. That agreement was agreed in early 2009 after a series of failed talks that led to a disruption in supplies when the prior contract expired at the end of 2008. Trilateral talks that also include the European Union were scheduled to take place this month.

Europe’s Gas Buyers Told to Prepare for Nord Stream 2 Delay

Russia’s main gas pipeline company, Gazprom PJSC, had promoted the Nord Stream 2 link as a way to diversify supply routes into Europe. The link that travels under the Baltic Sea to northern Germany is under construction and due to be complete in December. Few market participants in Amsterdam expected it to be done on time, partly because of the complexity of the project and partly due to hesitation by the Danish government in awarding permits to complete the link in its waters.

Europe’s Gas Buyers Told to Prepare for Nord Stream 2 Delay

Nord Stream is sticking with its plan to complete late this year, a company official said on Tuesday, acknowledging construction risks including a pending Danish permit.

Nord Stream 2 might start flowing gas on time, but that’s not the most likely scenario,said Trevor Sikorski, an analyst at Energy Aspects Ltd. Prices are signaling business as usual this winter, but the “market might go crazy,” if a Nord Stream 2 delay coincides with a flareup in tensions between Ukraine and Russia.

Europe’s Gas Buyers Told to Prepare for Nord Stream 2 Delay

``These are risks that may create a bullish scenario for prices in what's now seen as an oversupplied market," Jason Tate, chief operating officer of European gas and power at BP Plc, said in an interview.

Russia also plans to start its TurkStream pipeline directly to Turkey later this year, which will also reduce the need to ship gas through Ukraine and will add to regional supplies. Therefore, European gas for winter will probably only surge if there's both a delay in Nord Stream 2 and in the Russia-Ukraine transit talks, said Murray Douglas, research director for European gas analysis at Wood Mackenzie Ltd.

``You really need both of these circumstances to happen in tandem,'' he said.

Nord Stream has become a political lightning rod, with the U.S. warning that further gas links will make Europe overly reliant on Russia for energy. German Chancellor Angela Merkel has encouraged gas as a way to make up for government efforts to close coal and nuclear plants, which generate half of the nation’s electricity.

Boltz, the regulator, said that even under a best-case pathway, the reliability of both sources of transit from Europe’s biggest supplier will probably be questioned by traders for months.

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