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ANALYSIS: Italian gas supply sources shift in Q2, Russia now dominates

London (Platts)--7 Apr 2017 909 am EDT/1309 GMT


Since the start of the second quarter, gas flow dynamics around Europe have shifted -- both by route, source and destination -- pointing to continued supply flexibility in the European gas market.

Italy is often a good gauge of whether supply contracts are competitive versus each other and versus the northwest European hubs at any particular time, with Russian gas seemingly the most attractive since the start of Q2.

Italian buyers have import contracts with Russia's Gazprom and Algeria's Sonatrach, but can also import gas from the northwest European hubs, giving them options when long-term contract prices diverge from hub prices.

Italy also has 11 million mt/year (15 Bcm) of LNG import capacity and significant storage of around 16.5 Bcm, making it well disposed to optimization.

Since April 1, the country's supply trend has again shifted dramatically, suggesting new contract optimization by Italian buyers, and also comes as Italy needs to fill its storage stocks by a minimum volume on a regular basis under Italian legal requirements.

Russian gas flows to Italy have jumped sharply to more than 90 million cu m/d since the start of the month compared with an average of just 48 million cu m/d in March, according to data from Platts Analytics' Eclipse Energy.

By contrast, imports from Algeria have dropped since the start of April to a little more than 50 million cu m/d having been running at a much higher rate than Russian imports for all of March.

Algerian exports to Italy averaged 68 million cu m/d last month.

And imports from northwest Europe are also down dramatically since the start of April -- at below 8 million cu m/d this week compared with a March average of 21 million cu m/d.

The reversal in fortunes for Russia, Algeria and European supplies suggests that buyers have been able to optimize their supply portfolios through a higher mix of Russian gas, and less Algerian and European gas.

It also comes at a time when Libyan gas supplies to Italy have been severely cut due to the shut-in of the Wafa field by disgruntled workers.

LNG send-outs are also up ahead of the start of a raft of LNG imports following the award of a tender for 16 unloading slots at the Livorno terminal for April-September.

PRICING

The higher Russian imports come despite hub prices being competitive with oil-indexed contracts, especially the current month-ahead price.

However, Italy's Eni is thought to have more hub pricing now in its contract with Gazprom. CEO Claudio Descalzi said last year that Eni had a price cap and floor in its contract to make sure the price it pays doesn't fluctuate too much when either oil or European hub prices diverge significantly.

In addition, an oil-indexed contract is still cheaper now than it is for the rest of the summer, so even under a heavily oil-indexed contract it is wiser to buy now than later in the year.

Given the take-or-pay levels in contracts -- typically around 80% of Annual Contract Quantity (ACQ) -- companies may also want to make sure they are ahead of their commitments while prices are favorable rather than wait till later in the year when it may be even more punitive to pay an oil-indexed price.

It is also possible that Italian buyers secured their volumes currently being delivered at an earlier date when the Russian contract price was more favorable ahead of the storage injection season.

Despite falling off from their March highs, Algeria supplies are still at elevated levels since the start of Q2, but the drop-off comes as the main Eni import contract has been amended for the period October 2016-September 2017 to better reflect hub prices.

RUSSIAN SUPPLIES TO EUROPE

The increase in Russian gas supplies to Italy has also had a knock-on effect on the delivery routes of Gazprom's volumes to Europe.

Exports via the Ukrainian route to Europe have picked up since April 1, with some 147 million cu m passing through Velke Kapusany on Wednesday, the highest volume since January 9 when Europe was in the midst of a prolonged cold snap that saw demand for Russian gas soar across the continent.

The Ukrainian route via Velke Kapusany is likely the cheapest route for Russian gas to reach Italy.

Supplies via the Nord Stream pipeline to Germany are a little lower since the start of April, but not by the same amount as deliveries via Ukraine are up.

Indeed, Russian pipeline gas flows to Europe generally since April 1 are much higher, at a combined 356 million cu m/d via Nord Stream, Belarus and Ukraine on Wednesday -- the highest level since the end of January.

This is despite limited gas demand in Europe given warmer-than-usual temperatures.

The main demand pull currently is storage as shippers look to fill stocks quickly while prompt gas prices remain competitive with month-ahead and summer contract prices.

Day-ahead prices on the Dutch TTF hub were priced at a discount to front-month and Summer 17 prices in the past few weeks, according to Platts assessments.

On Thursday, Platts assessed day-ahead TTF at Eur16.075/MWh, now a slight premium to the May contract (Eur16.025/MWh) and Q3 (Eur16.05/MWh).

But May would still be a cheaper month to inject than later in the year. The fact that Russian gas is the preferred choice in Italy suggests the Gazprom contract became especially favorable since the start of Q2.

FUTURE ITALIAN IMPORTS

Italy -- more than any other country in Europe -- is due to become even better connected in the coming years, increasing yet further the country's optionality when it comes to gas.

If all goes to plan, Italy will be able to import gas from Azerbaijan via the Southern Gas Corridor -- TANAP plus TAP -- by 2020, while Russia's Gazprom has plans to link its TurkStream pipeline into the once defunct, but now revived, ITGI-Poseidon pipeline, with Italy its final destination.

Italy will also be able to flow gas south-north with reverse flows to Germany under the TENP project, likely at the end of the summer of 2018, according to TSO Fluxys.

Momentum is also gathering for an East Mediterranean pipeline from Israel and Cyprus via Greece to Italy.

On Monday, Israel, Italy, Greece, Cyprus and the European Commission signed a joint declaration in Tel Aviv to advance construction of the 1,300-km pipeline from Israel's Leviathan offshore field to Italy via Cyprus and Greece.

The ministers said at the signing ceremony they envisaged the project would be completed by 2025.

A feasibility study conducted by IGI-Poseidon for the EC estimated the cost of the pipeline at $5.7 billion. The study was based on a capacity of 12-16 Bcm/year.

--Stuart Elliott, stuart.elliott@spglobal.com

--Edited by Alisdair Bowles, alisdair.bowles@spglobal.com




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