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Russian ‘invasion’ of Ukraine poses risks to gas flows

Gas prices are likely to rise this year from a more bearish forecast as the market was pricing in the Nord Stream 2 pipeline, which was expected to start pumping in October

A full-blown disruption to gas flows is unlikely, say analysts, even as the US, the UK and the European Union moot the extent of economic sanctions on Russia because of its incursion into Ukraine. However, Germany has put on hold its pending approval for the opening of the Nord Stream 2 pipeline

GAS prices are likely to remain elevated through the year, according to S&P Global Platts, which had previously assumed a more bearish forecast given that the Nord Stream 2 pipeline, which runs from Russia to Germany, was expected to start pumping in October.

But with Germany’s decision to withhold approval for the pipeline, Russian gas flows to Europe will be reduced, which will lead to an increase in the global gas price forecast during the next two years. This will mean reverberations across the wider commodity complex, including power, coal and oil, said Platts Europe, Middle East and Africa gas analytics team manager James Huckstepp.

Brent crude had already breached the $100 per barrel mark last week for the first time since September 2014.

The European Union, along with several other countries including the UK and the US, are deciding on the level of sanctions to be imposed after President Vladimir Putin sent troops to the Luhansk and Donetsk regions of neighbouring Ukraine following weeks of mounting threats.

“There are not many quick fixes in the event of a Russian disruption due to sanctions,” Mr Huckstepp said during a media briefing. “But a full disruption is unlikely given the level of interdependence on Russia’s gas trade to Europe.”

He believes the threat of disruption through the Yamal pipeline which runs through Poland and Germany as well as the Nord Stream 1 pipeline is “extremely unlikely”.

There is limited scope to increase Russian gas flows to Asia in the short term as more export infrastructure (pipelines and liquefaction) needs to be built to enable this to happen, he said, adding that high gas prices, which have been driven by supply issues as well as carbon prices, will incentivise a switch to coal and oil in Europe and Asia, which will ultimately lead to higher emissions this year, he added.

An additional 17 GW of coal is seen either coming back into the market this year from Europe or not closing down as planned.

The chance of Russia “intentionally cutting its exports are remote”, according to Wood Mackenzie chief analyst Simon Flowers. “But any disruption to pipeline volumes could lead to energy chaos in Europe and ripple out into global gas and power markets.”

Russia supplied 168bn cu m of gas to Europe last year, about a third of the demand. That compares with 191bn cu m in 2019, according to WoodMac.

Volumes to Europe transiting Ukraine reached 40bn cu m, about 8% of total demand. The figure is half that of 2019.

Meanwhile, volumes of liquefied natural gas into Europe have been on the rise, hitting record highs in January, it said in a note earlier this month, as warmer weather in Asia prompted traders to reroute cargoes to take advantage of higher prices in Europe. While that led to lower imports from Russia, the situation may reverse as Asian prices increase.

Given that inventories are far below the five-year average, Europe will likely increase imports from Russia during the coming months, WoodMac said, as the region needs to prepare for next winter requirements.

Under this scenario, the consultancy does not expect European countries to consider blocking Russian imports “even if there is a full-scale invasion of Ukraine”, it said, adding that if all gas flows were to stop today, existing gas storage would run out in six weeks.

Longer term, should Europe decide to wean itself off Russian gas, that would send a bullish signal to LNG developers in the US, Qatar and beyond, ensuring that Russia would lose out.

Separately, Charles Maltby, chief executive of Singapore-based BW Epic Kosan, an owner of a dozen very large gas carriers, said it has “minimal exposure” to Russian gas and the effect of potential sanctions will be “de minimis” for the company.

Any escalation could however affect trade flows that may create inefficiencies, leading to higher charter rates.

The company does have many seafarers who are from the region, and its thoughts will be with them during the conflict, Mr Maltby said.

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