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
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
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
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
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
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
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
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
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
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
--Stuart Elliott, firstname.lastname@example.org
--Edited by Alisdair Bowles, email@example.com