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Mixed fortunes for pipeline supplies to Europe

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With Europe in the grip of a gas shortage, new pipeline flows into the region could provide some relief. These include a hike in deliveries from Azerbaijan into south-eastern Europe, as well as new Norwegian developments. However, questions remain over Nord Stream 2, and the Baltic pipeline bringing gas from Norwegian waters to Poland has been delayed by Danish courts, while Algerian exports via Morocco ceased on November 1st.

With prices at record levels, Europe is eager for fresh pipeline gas supplies. To help mitigate the shortage, Equinor will provide an extra 2bn m3 from the Troll and Oseberg fields this winter, as well as redirecting gas from Johan Sverdrup that is normally used for injection. Norway is Europe’s second-biggest gas supplier after Russia, shipping 107bn m3 in piped supplies last year. Deliveries from Troll will increase to 37bn m3, while shipments from Oseberg will be raised to 6bn m3.

Looking ahead, Equinor recently announced the launch of gas flow from Troll’s third phase – a project it expects to be “one of its most profitable” ever, which will recover an additional 347bn m3 of gas over the coming years. The project cost NOK8bn ($924mn) to implement, giving it a breakeven price of less than $10 per barrel of oil equivalent.

Elsewhere, additional gas is also coming into south-eastern Europe from Azerbaijan, via Turkey. Exports from Azerbaijan to Turkey and Europe increased by 36%, or by more than 6.5bn m3/yr, between 2017 and 2019. And in October 2020 the 10bn m3/yr Trans Adriatic Pipeline (TAP) connection was completed, extending the main Southern Gas Corridor route to more European countries.

This year the first Azerbaijani supplies have been delivered to Greece and Italy, along with smaller volumes to Bulgaria via Greece, and further rises to Turkey and Georgia. By September 16, 2021, a total of around 5bn m3 had been delivered through the new TAP, mostly supplied by higher output from BP’s giant Shah Deniz gas fields in Azerbaijan.

Baltic pipeline and GME run into trouble

However, not all pipelines have proceeded as planned. Denmark’s environmental and food appeals board announced in June that it had repealed a construction permit for the onshore section of the 10bn m3/yr Baltic Pipe - which runs from the Norwegian North Sea to Poland. This has led to concerns that the pipeline will not come online in October 2022 as planned. The timing of its launch is key because the main buyer, Poland, wants to use the gas to replace a Russian contract that expires next year.

Danish gas grid operator, Energinet, and Gaz-System, which operates Baltic Pipe’s Polish section, are unclear when construction might resume. Energinet is currently in the process of obtaining a new permit but has warned of a €135mn ($157mn) hike in costs for the Danish overland section. Design changes to Baltic Pipe’s connection with Norwegian infrastructure and high demand for construction contractors have also pushed up costs.

Poland’s state owned PGNiG has established a significant upstream position offshore Norway, with around 20 exploration and exploitation concessions, and the company has said that it intends to produce at least 2.5bn m3/yr of gas, which will make up some of the flows to Poland. The remainder will be sourced from other producers in Norwegian waters, including Equinor. The pipeline’s capacity would be about the same as the current 10.2bn m3/yr supply deal Poland has with Gazprom, which meets about two thirds of Poland’s demand.

And further south, in Spain, supplies of Algerian gas via Morocco via the 11.5bn m3 Gaz-Maghreb-Europe (GME) pipeline appeared to end on November 1st. Spain’s Enagas – the main customer - said a political dispute had led Algeria to decide not to renew its 25-year transit agreement with neighbouring Morocco. An expansion of 2bn m3 to 10bn m3 at Algeria’s alternative Medgaz route to Spain will not fully compensate, and this could increase Spain’s reliance on LNG.

However, Algerian officials have said that gas will continue flowing to Spain, either through the Medgaz pipeline or via direct tanker shipments of LNG. Algeria remains Spain’s largest single source of gas, accounting roughly 30% of all supplies. Morocco also received some of the GME gas and now hopes to reverse the line and import from Spain.

Algeria is Europe’s third largest pipeline supplier and also exports LNG. Total exports are typically around 25-35bn m³/yr, which go roughly equally to Italy and Spain. Earlier this year, supply of Algerian gas to both countries rose significantly – largely because Algerian gas is mostly priced against Brent crude, making it cheaper than imports linked to Europe’s sky-high gas benchmarks.

NS2 conundrum

Of course, all these pipelines are relatively small compared to the 55bn m3/yr Nord Stream 2 pipeline from Russia to Germany, although supply through this line looks like being taken from existing routes through Poland and Ukraine – if EU regulators allow it - and so will not mean much more additional gas. In addition, both Poland and Ukraine have legal cases against NS2 pending with European courts, alleging the line undermines European energy security.

Initiated in June 2015, by Gazprom, Shell, E.ON, OMV, Wintershall and ENGIE, NS2 allows Russia to bypass Ukraine’s gas transit network, via the Baltic Sea route directly to Germany, avoiding the need for transit tariffs, which must be paid to Slovakia and Poland, as well as Ukraine, on deliveries through other Russian export pipelines – which reduces Gazprom’s take and puts the price and chance of interruption up for Germany. NS2 has also faced US sanctions, legal action from environmentalist groups in Germany opposed to its pipelaying, and (successfully) from EU members based on third party access rules. Exports via NS2 are currently being held up by a German regulator.

While supporting the project, Germany’s Chancellor Merkel has also insisted that Ukraine should retain its importance as a gas transit country, although with 110bn m3 of Nord Stream (NS1+ NS2) capacity available, this might not prove commercially or logistically attractive anymore. Gazprom has agreed to transit only 40bn m3/yr via Ukraine until 2024, well down on recent years. Ukraine is also preparing legal action against Gazprom to lift the 15-year block on gas supplies from central Asia, which must flow through Russia to get to Ukraine.

Over recent months, Gazprom has continued to meet contractual obligations to its European customers but has avoided booking additional pipeline capacity to Europe through Poland or Ukraine – which has contributed to the current record prices. However, President Putin says Russia will refill its European storage from early November, and Gazprom’s CEO recently noted that his company maintained sufficient capacity to meet up to 150bn m3 of European cold winter demand. That, along with LNG arrivals, for which Europe must compete with NE Asia, constitutes almost all Europe’s swing capacity now Groningen and North Sea production is lower.

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