Fitch Ratings mentioned in its report that traditional suppliers of gas to Europe, for instance Gasprom (BBB-, forecast Negative) will face the pressure on the market, mainly from the market of liquefied natural gas (LNG).
We expect stronger competition among the gas suppliers in Europe and the fact that the European gas prices will be mainly based on the spot prices, instead of being tied up to the oil products prices.
In 2015 gas prices went down, making last year difficult for the manufacturers throughout the world. As the prices are at their lowest, new LNG making projects and projects of extraction of traditional gas have been canceled and delayed.
Between 2010 and 2014 demand in gas in Europe went down and development of renewable sources of power reduced gas electric energy, which the main consumer of gas in many countries. Poor economic growth has increased problems of the gas market. The demand increased by 4% against 2015, but its future growth will, probably, be a weak one.
Gas extraction by the European manufacturers dropped more, than gas demand, because additional volume of gas extraction in Norway cannot compensate its significant decline in UK and lately in Netherlands.
Fitch considers threat of new gas pipeline export from Azerbaijan and Iran to Europe as rather limited in mid-term. Although Israel and Egypt have ambitious gas programs, they could hardly become big gas exporters in mid-term.
The LNG market will, probably, still experience excess of supply by 2021, because more plants manufacturing LNG will be launched, especially in US and Australia, and the demand will slow down in the Asian and Pacific region in 2014-2015. We believe that competition among the gas suppliers in Europe will, probably, become stronger, especially between the Russian pipeline gas and LNG. This is good news for the gas consumers, but bad news for the manufacturers, because we will most likely have low gas prices.
Gazprom could lose part of the market share or profit margin in Europe in mid-term, but the seriousness of losses will depend on whether the company is ready to meet demands of the European consumers. Gazprom’s low transportation and extraction costs, which are estimated at $3.00 per 1 million British thermal units, and significant unused gas extraction capacities will help it to deal with the competitors.
* Since 2020 Azerbaijan plans to break into the southern European gas market with 10 bcm of gas a year.
