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European Gas Market Outlook

 
02.07.2013

Despite significant reductions to our forecast for European gas demand, we also expect the supply of LNG to Europe to drop sharply and are increasing our estimate for the European call on Russian gas in 2013 by 16bcm to 160bcm. We expect future demand for Russian gas to be robust. Although we are cutting our forward gas price estimates 9%, we expect European gas prices to remain strong, despite the development of a US LNG export business by 2020. This analysis supports our Buy recommendation on Gazprom (USD 3.31, TP USD 5.1).

European gas demand was exceptionally weak in 2012, falling again, by 2.1% YoY, despite a return to more normal weather conditions. That was primarily due to the displacement of gas by coal in power generation. We cut our forward estimate of market growth 5% for 2015 and 8% by 2020.

Net LNG supply to Europe fell 26% YoY in 2012 to 66bcm as LNG was bid away to higher priced markets. We now expect LNG availability to Europe to fall to 37bcm in 2014 and to remain below the 2011 peak until the end of the decade, despite the growth of a US LNG export business.

Despite the reduction in our European gas demand forecast, reductions in import availability from other sources and a continuing decline in domestic production leave the European call on Russian gas robust. We are reiterating our view that shale gas will not be transformational for Europe.

We have previously argued that European gas prices would remain strong at around the USD 400/kcm (USD 11.4/mmbtu) mark. Despite cutting our gas price forecasts 9%, we continue to expect oil-linked contract gas to price at USD 385/kcm (USD 10.9/mmbtu) with Brent at USD 100/bbl, and to remain robust despite US gas pricing at USD 177/kcm (USD 5/mmbtu). We now forecast the European spot gas to price at USD 327/kcm (USD 9.3/mmbtu).

We demonstrate that pipeline suppliers of gas to Europe have shown price flexibility, which explains the cut in our gas price forecast. We show that Russian gas is actually cheaper than Norwegian or Dutch gas despite complaints about the lack of pricing flexibility on the part of Gazprom. We expect the lack of import alternatives to ensure a tight linkage between spot and oil-linked contract prices.

Colin Smith, Marc Jacouris
VTB Capital analyst

Tags:
gas, Europe, USA

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