European Natural Gas - The New Configuration

Introducing the IHS Markit Pan-European Gas Flows and Price Differentials Model

A new configuration for natural gas supply is poised to refashion the pattern of gas flows in Europe. The next few years will see new supply pipelines built, and potentially larger volumes of LNG flowing to Europe. By the early 2020s, most European gas customers will have a wider choice of potential suppliers and delivery routes, and thus an enhanced opportunity to choose among competitive supply options. The development is particularly timely given that the Dutch government announced in spring 2018 that production from the Groningen field—the bedrock of European gas supply for more than 50 years—must be reduced drastically by 2022, and must close completely as soon as reasonably possible.

New supply configurations, plus the high and growing extent of gas market integration, will be particularly important for ensuring security of supply as indigenous gas production in Europe declines in the years ahead.

To better understand these emerging dynamics in a post-Groningen European gas market, IHS Markit has developed a model: Pan-European Gas Flows and Price Differentials Model. This new model makes it possible to explore the implications of three key background conditions—new infrastructure, competitive purchasing, and global pricing dynamics—that will set the terms under which gas is bought and sold around Europe for the coming decade and beyond.

Key developments over the next four years will include the following:

  • A strong buildup of global LNG supply—notably in the United States and Australia—in the context of a situation where Europe’s 32 regasification terminals have large amounts of spare capacity
  • The construction of major new cross-continental delivery routes into Europe’s southeast—Turk Stream, bringing Russian gas, and the Southern Gas Corridor (consisting of the Trans-Adriatic Pipeline [TAP] and Trans-Anatolian Pipeline [TANAP] pipelines), which will initially deliver gas from Azerbaijan
  • The potential construction of Nord Stream 2, which would change the entry point for some Russian gas
  • Consolidation and extension of the well-developed network codes, liquid spot markets, and flexible contract portfolios that already allow gas buyers representing the vast majority of European consumers to procure gas on competitive terms
  • Further progress on the part of policymakers and regulators to expand Europe’s single market for gas, in particular through interconnector pipelines, to ensure that customers in eastern and southeastern Europe can have access to gas on terms that match those currently available in the northwest and central European markets

IHS Markit has run its gas flow model for a variety of cases in order to examine two particularly topical questions:

  • The implications of fluctuations in LNG import levels. Although Europe has abundant regasification infrastructure, the actual level of LNG imports will depend on global dynamics, with volumes potentially showing significant variation from year to year, and even within a single year. The IHS Markit model allows us to test the impact of different LNG scenarios on gas flows and prices within Europe
  • The impact of proposed new pipelines (specifically, Nord Stream 2 and Eugal, Turk Stream, and TAP/ TANAP) on the pattern of gas flows. We have also used the model to test the impact on pricing and price differentials that occur as a result of the operation of these new pipelines

For more information about the report and the Pan-European Gas Flows and Price Differentials Mode, contact Shankari Srinivasan

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