Tuesday, January 13, 2009

NO Natural Gas to Europe on Tuesday

Jan. 12 (Bloomberg) -- Russia’s efforts to extract more money from Ukraine by cutting off natural gas supplies sent the fuel to a three-year high in Europe, and set up prices for a steeper decline.

OAO Gazprom, Russia’s state-run gas export monopoly, today said Ukraine had agreed to an accord on monitoring gas flows, which will pave the way for resuming shipments through Ukraine to Europe. The global recession is reducing demand just as new liquefied natural gas terminals open, increasing the capacity for imports. The post-winter thaw usually drives spot prices lower, and the cost of most European gas is tied to months-old oil prices, which have plunged 74 percent since July.

Natural gas “will drop like a stone,” said Thierry Bros, an analyst at Societe Generale, France’s second-largest bank, in an interview from Paris.

Patrick Heather, U.K.-based BG Group Plc’s former gas-trading chief, says prices probably will weaken to 47 pence a therm ($7.13 per million British thermal units) after the dispute between Ukraine and Russia ends. Gas for immediate delivery in the U.K. today dropped as much as 18 percent to 55.50 pence a therm, according to prices from ICAP Plc.

Deutsche Bank AG, Merrill Lynch & Co. and McKinnon & Clarke Ltd. forecast, on average, 47.9 pence a therm during the second quarter in the U.K., Europe’s biggest market. Futures on the ICE exchange show prices dropping to 46 pence a therm by June.

Hurting Gazprom

A drop would sting Moscow-based Gazprom, while reducing costs for consumers and power companies, including Essen-based E.ON Ruhrgas AG, the largest buyer in Germany, and France’s GDF Suez, based in Paris.

Only a prolonged cold spell across the continent, field shutdowns in the North Sea or a failure by Gazprom to restore gas flows to Europe would likely prevent a slump in prices.

Russia halted shipments through Ukraine last week, cutting off deliveries to at least 19 other European countries, in a dispute over prices and gas transit costs.

Top Russian officials including Gazprom head Alexei Miller flew to Brussels today to approve a European Union-brokered deal to allow international monitoring of flows into Ukraine’s pipelines. Once shipments resume, it may take three days for gas to fill the pipelines and reach Germany, E.ON Ruhrgas spokesman Kai Krischnak said yesterday.

Europe relies on Russia for 25 percent of its gas, most of which passes through Ukraine, according to Gazprom. Demand rose 23 percent in the past decade as power generators turn away from coal, which generates more carbon emissions linked to global warming.

Russian Discounts

Russia sold gas at subsidized prices to former Soviet states since the collapse in 1991. Gazprom’s policy now is to raise prices to what it considers the market level, rather than forgo revenue to build political ties.

“With the monitors it will be very clear what’s going on,” Ronald Smith, head of research at Alfa Bank in Moscow, said in an interview yesterday. With its economy slowing and gas prices peaking, Russia has an incentive to make sure shipments continue, he said.

Gazprom plans as much as 10 trillion rubles ($320 billion) for projects to bring gas to market over the next 11 years, including developing deposits in Siberia and the Arctic.

“Gazprom is now struggling for cash,” said Karen Sund, founder of Oslo-based consulting firm Sund Energy. “They need large funds for new investments in both fields and infrastructure, and they are testing the limits of goodwill with several of their buyers.”

Full Inventories

Warmer-than-normal weather in October and November allowed Italy, Germany and neighboring countries to pump record amounts of gas into underground storage. Halfway through the heating season, Europe’s natural-gas stockpiles are about the same as a year ago, according to Gas Storage Europe, an association of pipeline and terminal operators.

Inventories at Europe’s seven biggest trading hubs were 38.6 million cubic meters on Jan. 5, or 74 percent full, compared with 73 percent a year ago. Five of those were 99 percent full by early November.

Once confined to regional markets by pipelines, natural gas is becoming a global commodity similar to crude oil. Supplies are emerging from the Middle East, Africa, Russia and Indonesia in the form of liquefied natural gas, where molecules are cooled to a liquid so they can be transported by ship and stored in tanks.

Irving, Texas-based Exxon Mobil Corp., the world’s biggest oil company, and others are investing in Qatar, home of the world’s third-largest gas reserves, to raise exports. Worldwide sales grew 7 percent in 2007 to 226.4 billion cubic meters, according to Paris-based trade association Cedigaz. Wood Mackenzie Consultants Ltd., in Edinburgh, expects about 20 million tons of new LNG supply this year, the equivalent of 12 percent of 2007 exports or 0.9 percent of world gas demand.

European Prices to Fall

“European prices are going to come down significantly over the next two or three years” and approach U.S. levels, said Frank Harris, head of global LNG at Wood Mackenzie, in an interview.

February gas at the TTF hub in the Netherlands, Europe’s second most-active market, is trading at the equivalent of about $8.49 per million British thermal units, compared with $5.52 for Henry Hub gas in Louisiana, the U.S. benchmark.

As the recession drags down North American demand, growing production means more LNG tankers will end up in Europe, Harris said. Italy expects to start imports at a new LNG terminal at Rovigo by June, while the U.K. will begin three more receiving plants this year. More are under construction in Spain and France.

Economic activity is expected to decline 1 percent this year in both the U.S. and the European nations that use the euro, while Russian growth is expected to slow to 5 percent from 7.2 percent in 2008, according to the consensus of economist estimates compiled by Bloomberg.

Ties to Oil

Most of the continent’s gas is sold through annual contracts that use formulas linked to the cost of crude, with a delay of three to nine months.

“Oil-linked contracts are peaking” after crude plunged from the July record of $147.27 a barrel, said Sund, the Norwegian consultant. Oil in New York was trading near $39 a barrel today.

The slowing global economy will have a “significant impact on industrial gas demand across Europe,” said Ian Cronshaw, head of energy diversification at the International Energy Agency in Paris. About 20 percent of Europe’s steelmaking has been closed, Cronshaw said in an interview.

The IEA has no estimate for 2009 gas demand, although it expects European oil consumption to fall 1.3 percent this year. Deutsche Bank expects U.S. gas demand to decline 1.5 percent this year.

Chemical Shutdowns

BASF SE of Ludwigshafen, Germany, the world’s biggest chemical maker, said in November that canceled orders by carmakers forced it to close 80 factories that use gas to make plastics. Midland, Michigan-based Dow Chemical Co., which in 2007 has greater revenue in Europe than the U.S., said last month it will permanently close 20 factories and idle 180 more.

European spot gas prices rise during colder months, when heating demand is highest, and typically decline in the spring. U.K. prices have fallen in nine of the past 11 years during this period, ICE Futures data show. The biggest seasonal drop since the U.K. market was liberalized in 1990 was between November 2005 and May 2006, when gas tumbled 73 percent.

Temperatures across Europe are also forecast to rise this week, with the U.K. likely to average 9 degrees Celsius (48 Fahrenheit) today, up from 1 degree on Jan. 8, according to CustomWeather Inc.

With “a double whammy of a Russia-Ukraine resolution and a five degree improvement in the weather, you’re going to see it tumble” said Heather, the former BG Group gas trader, of the European natural gas market.

To contact the reporter on this story: Ben Farey in London at bfarey@bloomberg.net

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