Wood Mackenzie: Ukraine Transit Disruption Could See Europe Compete with Asia for LNG

Wood Mackenzie’s latest analysis demonstrates the impact of a disruption of Russian gas transit to Europe via Ukraine. It compares a potential disruption of two months in spring 2014 and a six month disruption during winter 2014/15, and how this could affect European and Asian Liquefied Natural Gas (LNG) markets.

Wood Mackenzie estimates that Europe imported 155 billion cubic metres (bcm) of gas from Russia in 2013, some 30% of its overall gas demand. Ukraine is the key transit route for Russian gas to Europe, with 50% (82 bcm) transited through Ukraine in 2013.

Stephen O’Rourke, Senior Global Gas Analyst for Wood Mackenzie explains, “Central and Eastern Europe will be most affected by a Ukraine transit disruption, as eastward-flowing pipeline capacity would be insufficient to meet gas demand in Eastern Europe. The region will have to draw upon strategic storage volumes, and some demand will not be fully met. On the other hand, North West (NW) Europe has direct access to Russia’s Nord Stream pipeline, which mitigates the impact of any transit disruption.”

Noel Tomnay, Head of Global Gas Research at Wood Mackenzie asserts, “Based on our analysis, if there is a two-month disruption to the Ukrainian transit route in spring 2014, the Southern European countries of Turkey and Greece will require additional LNG, but this should be less than two million tonnes. If the disruption is more severe, for example of six-month duration over the 2014/15 winter we expect further Southern European countries, including Spain, to call on extra LNG. But, robust European storage volumes going into the winter should limit overall additional LNG demand to less than five million tonnes.”

The combination of rising demand for LNG in Asia Pacific and Latin America combined with recent stagnant LNG supply availability has been making the global LNG market tighter. So, any additional requirement for LNG in Europe would exacerbate this situation. “A tighter LNG market would place upward pressure on global LNG prices, including those in Asia. And Southern European markets would need to compete with Asia and Latin America for these additional LNG cargoes. This would push spot prices in some Southern European markets higher – to levels equivalent to Asia, allowing for shipping differentials,” Tomnay adds.

O’Rourke offers, “To try and alleviate the impact of a winter disruption of Russian gas flows, Ukraine would need to utilize its strategic storage reserves and prioritize gas demand in the residential and power sectors. Should the EU seek to supply Ukraine with gas, additional reverse flow capacity would need to be negotiated and accessed. While we believe deliveries to Ukraine would blunt the impact of a Russian disruption they could exacerbate a difficult position for several Eastern European countries.”