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Fitch: the competition among suppliers of gas to Europe will increase

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Fitch: the competition among suppliers of gas to Europe will increase

Fitch: the competition among suppliers of gas to Europe will increase
July 13
16:00 2016

Analysts of the international rating agency Fitch Ratings expressed the opinion that the traditional exporters of gas to Europe, including “Gazprom”, will soon be confronted with the pressure mostly from the liquefied natural gas. “We expect the increased competition among gas suppliers in Europe. It is also expected that European gas prices will be largely based on spot prices, but not tied to the prices of petroleum products”, – reported in the Fitch report “The medium-term outlook for the European gas market”.
Gas prices fell last year, turning it into the most difficult year for manufacturers around the world. The most significant drop was recorded in Japan (by 46%) due to the decrease of the average import prices for liquefied natural gas. According to World Bank report, the average price of import fell to $ 8.5 per 1 million British thermal units (BTU) at the end of the last year, compared with $ 15.5 a year earlier. The same trend is stable in the current year. According to Platts, the spot price for LNG in Japan and Korea in June fell to $ 4.5 per 1 million BTU. In its report Fitch pays attention that due to the fact that prices are at a minimum level over many years, cancellations and delays in the construction of new projects for production LNG and conventional gas take place.

“European demand for gas fell in 2010-2014, because cheaper coal and low prices for CO2 plus abrupt development of renewable sources of energy have reduced gas power industry, which is the main consumer of gas in many countries. The weak economic growth increased the problems of the gas market. The demand rose by four per cent to the previous 2015 year, but its future growth is likely to be weak”,- stated in the message of the agency.

The extraction of gas from the European producers fell more than the demand, because the additional production volumes in Norway cannot cope with the compensation of the substantial production decline in the UK and the Netherlands, especially recently. Tentative efforts for shale gas drilling in a number of countries in Eastern Europe have been unsuccessful. While some European countries have vetoed the use of hydraulic fracturing technology for the extraction of shale gas, other states have not found yet a commercially significant shale gas reserves due to increased public protests against the use of hydraulic fracturing technology in Europe.

Fitch evaluates the threat of new pipeline gas supplies to Europe from Azerbaijan and Iran as rather limited in the medium term. Despite the fact that both Israel and Egypt have ambitious gas programs, they most likely will not become major gas exporters in the medium term. The reason for this is the lack of production history and the lack of the domestic demand growth, which these countries have to meet before starting the gas export.

Most likely, the market of liquefied natural gas will experience oversupply by 2021 as before. This can happen because many LNG plants are being put into operation. Especially there are a lot of them in the United States and Australia. At the same time, the increase in demand was hampered in 2014-2015, for example, in the Asia-Pacific region. “We believe that the competition among gas suppliers in Europe will, probably, grow especially between the Russian pipeline gas and LNG. This is good news for gas consumers, but bad for producers as low gas prices are likely to remain”, – said in the Fitch review. “Gazprom” can probably lose a part of its market share or profit margin in Europe in the medium term. The significance of these losses will be directly dependent on the readiness degree of the company to make concessions to the requirements of consumers in Europe. “Gazprom” has low costs for production and transportation, which are estimated at $ 3 per 1 million BTU, and significant unused capacity for gas production. The agency experts believe this will help the company to cope with the competitors.

“We expect that “Gazprom” will retaliate by further retreat from the binding gas prices to oil products prices, decrease in the delivery volume on terms of “take-or-pay” and the refusal of restrictions on the gas resale”, – stated the Fitch report.

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