In October 2019, the European natural gas market was characterized by two important events.
On October 25th, Danish Energy Agency, Energistyrelsen, gave green light to the crossing of its territory by the Baltic Pipe, which will supply Poland with Norwegian gas. The Baltic pipe is estimated to have a capacity of 10 Gm3 of natural gas a year.
On October 30th, the same Agency granted the pipeline Nord Stream II permission to cross its territorial waters, like it did with the Nord Stream I in 2011. Both the Nord Stream I and the Nord Stream II have a transport capacity of 55 Gm3 of gas a year.
From a political point of view, the timing of those decisions is a real turning point. In fact, it highlights the important attempt of international détente that the Russian Federation, the European Union and the United States of America are currently trying to implement, after the strong tensions that have erupted since 2014, in the wake of the coup d’état occurred in Ukraine.
The hope is that this attempt comes to the conclusion of sanctions.
Baltic Pipe: Warsaw's ambitions fleeing Moscow
From an energy point of view, the Baltic Pipe could allow Poland to significantly get rid of Russia’s gas supplies. In fact, Poland approximately purchases 10 Gm3 of natural gas a year from the Russian Federation. In addition, Poland has committed to transit 8.78 Gm3 of gas a year via the Baltic Pipe when it will become operative. The project is estimated to be finished in October 2022, in coincidence of the expiring of the contract between Polish State company PGNiG and Russian Gazprom.
To be more precise, here are the words of Piotr Naimski, Polish official in charge of the country’s strategic energy infrastructures: “We are not diversifying our supplies to carry on with Russia. It is an issue of security and the Baltic Pipe is not part of the negotiations with Gazprom. If we want to prolong the Gazprom contract, we would need to start talks in December 2019, but by that time we’re going to be certain that the Baltic Pipe will be built, so we’re in a comfortable situation. At the same time, Poland is ready for any kind of supply risk in the transition period.
Without any doubt, the United States of America have welcomed, if not favoured, the attempt of Warsaw’s energy disengagement from Moscow. However, the Polish leadership, like the European Union, have to pay great attention to the risks rising from this choice.
Firstly, taking into account that 16% of the 2018 Polish energy mix was covered by natural gas, 66% of which – equal to 13 Gm3 – was supplied by the Russian Federation, it is very probable that Norwegian gas supplies will be more expensive than the Russian ones.
Secondly, Warsaw does not hide the desire to become an Eastern European gas hub thanks to the resale – through pipe or LNG, which is more expensive – of part of the gas imported by Norway to neighbouring countries, Ukraine in primis (first of all). What would happen if only one of those countries decide not to buy Norwegian gas anymore? Will Poland take on the burden of withdrawing it or paying it? Last, but not least, is Warsaw really aware that the Turkish Stream on-shore extension – which will bypass the Ukrainian territory from the south – could directly involve Hungary?
Thirdly, thanks to submarine pipelines, Norway supplies Germany, the United Kingdom, France and Belgium. Taking into account that the country is currently extracting close to its full capacity, in the event that the Baltic Pipe would actually be built, Norway should necessary reduce its supplies to North-Western European countries in favour of Poland. Given the unexpected drop of Groningen’s output in Hollande, the risk that this hypothesis becomes reality is very concrete.
The hope is that Poland may carefully analyse all the geopolitical consequences deriving from an economically less convenient option which is, at the same time, legitimate in terms of energy diversification.
After long negotiations due to U.S. strong opposition over Nord Stream II, Denmark granted Gazprom permission to transit the pipeline which will directly connect the Russian Federation to Germany , through its territorial waters and under the Baltic Sea floor. This will allow Russia to double its off-shore gas export capacity through the Baltic route from the current 55 Gm3 a year to 110 Gm3 a year.
If Denmark had not granted permission, Gazprom would have carried on the project in any case, prolonging the pipe by approximately 35 km on the seabed of international waters thus, bypassing Denmark’s territorial waters. In that case, costs would have certainly increased. For this reason, it is wrong to think that the green light given to Gazprom was a sort of Danish spite over the disagreement, which occurred with U.S. President, Donald Trump, regarding Denmark denying the United States attempt to purchase Greenland by the Unites States, that was denied by Denmark.
After arriving in German territory, the Nord Stream II on-shore extention carries on until the Czech border under the name EUGAL and is currently under construction. Furthermore, the main Nord Stream I on-shore extention till Czech border is called OPAL, while NEL is the second on-shore line, which moves towards Holland.
At the moment, OPAL can be used at 50% of its transport capacity and not at 100% as it has been since 2016 due to the decision taken by the European Court of Justice in September 2019 after the petition made by Polish State company, PGNiG. This appeal had a clear anti-Russian political meaning. In fact, as explained by Petr Wozniak, the decreasing of OPAL transport capacity, allowed Poland to receive gas – through Ukraine – which was previously booked by Germany. If OPAL had been used at 100%, South-East Poland would have been left without gas with serious consequences for the population stated the head of the Polish State energy company on September 26th. There is no doubt that the Polish choice went to the detriment of Germany’s energy security.
In October 2019, during the Russian Energy Week in San Petersburg, Vladimir Putin stated: “We will sign a transit agreement with Ukraine in accordance with European law. If Ukraine fails to do so – a likely scenario because there are internal legislative and political procedures that the Ukrainian partners still have to face – we are ready to extend the existing transit agreement for some time, for example for a year”.
This important statement made by the Russian President brings up a couple of considerations.
Firstly, the new elected Ukrainian President, Volodymyr Zelenskyj, has the possibility to pick up the “olive branch” offered by his Russian counterpart, rather than listening to the “Polish sirens”.
Secondly, the construction of the Baltic Pipe, like the full utilization of OPAL and EUGAS, is in EU’s interest. If this were not the case, the concrete risk is that conflicts within European member states will further exacerbate, instead of diminishing.
Frankly, after the cancellation of the South Stream project pipeline, of which Italy has paid the highest price, both in geopolitical and economic terms, more tensions are not needed.
Latest data and estimates on oil & gas
Thanks to the figures provided by the Oil Market Report, published in the International Energy Agency on October 11th 2019, global oil demand recovered from June levels, rising 800,000 b/d year-on-year in July and 1,400,000 b/d in August.
In September, after the attacks on Saudi oil facilities, global supply decreased by 1,500,000 b/d to 99,300,000 b/d. IEA further reduced its global growth estimates for 2019 and 2020 by 100,000 b/d, to 1,000,000 b/d and 1,200,000 b/d, respectively. OECD commercial stocks rose by 20,800,000 barrels in August 2019 (month over month) to a total of 2,974,000,000 barrels and stood 43,100,000 barrels above the five-year average.
Based on the Drilling Productivity Report figures issued by the Energy Information Administration on October 15th 2019, the American unconventional crude output is estimated to increase by 58,000 b/d to 8,971,000 b/d in November 2019.
The U.S. crude production, after the former peak of 9,627,000 b/d gained in April 2015, decreased to its lowest of 8,428,000 b/d on July 1st 2016 It then started increasing to the estimated record of 12,600,000 b/d, which was reached on October 4th 2019 and maintained during the entire month (weekly forecasts).
Thanks to the statistics provided by Baker Hughes on November 8th 2019, the 817 current U.S. active rigs, of which 684 (83.7%) are oilrigs and 130 (15.9%) are gas rigs, plus 3 miscellaneous (0.4%), were 39 less than October 11th 2019, the lowest level since September 16th 2016.
According to Reuters, Goldman Sachs has just cut its estimate for U.S. shale growth next year. Moreover, the investment bank now expects U.S. shale oil production to increase by just 700,000 b/d in 2019, compared to an earlier forecast of 1,000,000 b/d growth.
In August, U.S. crude oil imports lightly increased by 9,000 b/d to 6,944,000 b/d. They were 6,9350,000 b/d in July, 7,141,000 in June, 7,158,000 in May, 7,025,000 b/d in April 2019, 6,759,000 b/d in March 2019, 6,652,000 b/d in February 2019 and 7,520,000 b/d in January 2019. The 2019 U.S. crude oil imports average stands at 7,017,000 b/d, on the fall in comparison with 7,757,000 b/d in 2018 and 7,969,000 b/d in 2017.
Based on the data provided by the Energy Information Administration on October 2nd, U.S. crude oil exports boomed by nearly 1,000,000 b/d in the first half of 2019 in comparison with the same period of 2018, reaching an average of 2,900,000 b/d. In June 2019, the U.S. set a monthly average record of 3,200,000 b/d of crude oil exports.
Oil and currency trends
In October 2019, barrel prices remained steady. In particular, Brent North Sea quality started the quotations at $59.5/b and closed at $60.21/b, while West Texas Intermediate crude opened the listings at $54.30/b, closing at $54.07/b. At the time of writing (November 14th), Brent is trading at $62.40/b, while WTI at $56.89/b.
On October 3rd, both benchmarks reached their monthly low, respectively pricing $56.53/b and $51.37/b due to the U.S. inventory build of 3,100,000 barrels to a total of 422,000,000 barrels reported by the U.S. Energy Information Administration.
According to a report published by Global Platts on October 14th, for the first time since April 2019, China imported 10,080,000 b/d in September (+ 11% y-o-y). Over the first nine months of 2019, China’s average daily oil imports stood at 9,910,000 barrels (+ 9.7% y-o-y).
In addition to these statistics, the rumors regarding the possibility that OPEC+ might strengthen its cuts during the next meeting in December 2019 in order to counterbalance weak demand growth supported a slight oil price recovery, which occurred in the second half of the month.
On October the 22nd, Le Yucheng, China vice Foreign Minister stated, “as long as both sides [China and the U.S.] respected each other, no problem could not be resolved. No country can prosper without working with other nations. The world wants China and the United States to end their trade war […] rather than a new Cold War”.
Waiting the developments of this geopolitical stalemate, U.S. oil inventories reached 438,853,000 barrels on October 25th 2019.