Future to see increased movement in natural gas prices in Finland and the Baltics

It was only a few years ago that the price of natural gas in Europe was mostly based on the balance of pipeline gas supply and demand as well as on market prices of other energy production alternatives, i.e. mainly coal. Since then, growing ambitions concerning emission reductions have resulted in a downtrend in coal consumption – opening up more demand for natural gas in the energy balancing market.

The increasing use of wind and solar, coupled with issues such as the capacity gap in electricity balancing created by Germany’s nuclear plant closures, is going to further increase the importance of natural gas. Continental Europe’s own gas production has declined over the past few years and, for example in the Netherlands, production at the Groningen gas field will be phased out ahead of schedule, resulting in a further supply deficit. In addition, European natural gas pricing has, slowly but surely, started to switch from traditional oil and coal indexation to hub pricing at liquid trading platforms.

Share of LNG increasing in total gas supply

The price formation of natural gas has, however, been transformed almost entirely by the significant increase in the production of liquefied natural gas (LNG). In 2019, the market has seen a flood of LNG from around the word. For many oil producers, natural gas is only a by-product for which there is no economical route to the market close to the oil field. In the liquefied form, however, natural gas can be transported to the other side of the globe. Considerable numbers of new LNG production plants have been launched and will be launched over the coming years, particularly in Russia and the U.S.A.

LNG accounted for around 11% of the total European gas supply in 2018, and the rate will already exceed 20% this year. The volume of LNG shipments to Europe totaled 55 billion cubic meters in 2018, while this year's volume will be around 102 billion cubic meters. At the same time, Europe’s role as a global natural gas recipient has increased. Europe is an attractive destination thanks to its existing infrastructure, storage capacity and liquid market. As a point of reference, the total combined annual consumption of Finland and the Baltics is around 7 billion cubic meters of gas.

Maritime transport is rapidly switching to cleaner fuels, initially from heavy fuel oil to lighter products and from now increasingly to LNG. Over the next years ahead, the rate of demand growth will not yet be high enough to balance against the rapidly increasing LNG production. The market price of natural gas at Continental Europe’s gas exchanges will be moving up and down in line with LNG shipments, and these impacts are going to be seen indirectly in Finland and the Baltics, too.

Finland becoming more closely integrated into European natural gas market

Natural gas stocks currently stand at record highs in Continental Europe. Reaching maximum levels, the stocks reflect the explosive growth in LNG shipments to Europe, while at the same time Asian demand for gas has slowed due to factors including the U.S.-China trade war. Uncertainty relating to the Ukraine-Russia gas transit agreement has contributed towards intensified stockpiling mainly in Ukraine, but the impact on natural gas price has been very low so far. The completion and launch of the Nord Stream 2 gas pipeline has been delayed slightly, but this has not had any significant price impact, either.

As the gas market is open, Finland and the Baltics will mainly receive pipeline gas from Russia, with the impact of LNG shipments not yet being significant. It is, however, likely that Finnish and Baltic natural gas price levels will start following Continental Europe’s price levels more closely in the future. Price fluctuation is likely to increase, and price hedging will become a more important part of business operations, as is already the case with electricity. Solutions to this challenging situation, too, can be found in the range of products and services offered by Gasum. We are determined to help our customers in this interesting and changing market environment.

Writer is Jouni Liimatta Head of Trading, Gasum

17.12.2019