Short-Term Production Limited By Poor Demand

BMI View: Norwegian gas production is falling due to poor demand dynamics from major European gas consumers. The country will remain a critical option though for supplementary gas supply to European markets as Europe-Russia relations deteriorate due to new sanctions.

June marked the third consecutive month of natural gas production decline from Norwegian fields. While this fits with the larger seasonal trend of lower gas demand in Europe over the summer months, actual gas production for June is lower than the Norwegian Petroleum Directorate (NPD) forecast. This indicates a designed reduction in output. We expect a similar picture over July, August and September due to the current weakness in European gas consumption. 

Little Appetite For Gas

Below Forecast
Norway - Monthly Gas Production (bcm)

BMI View: Norwegian gas production is falling due to poor demand dynamics from major European gas consumers. The country will remain a critical option though for supplementary gas supply to European markets as Europe-Russia relations deteriorate due to new sanctions.

June marked the third consecutive month of natural gas production decline from Norwegian fields. While this fits with the larger seasonal trend of lower gas demand in Europe over the summer months, actual gas production for June is lower than the Norwegian Petroleum Directorate (NPD) forecast. This indicates a designed reduction in output. We expect a similar picture over July, August and September due to the current weakness in European gas consumption. 

Below Forecast
Norway - Monthly Gas Production (bcm)

Little Appetite For Gas

The monthly falls in gas output are not due to natural decline, but the current dynamics of gas demand in Europe. In 2013, Norway supplied Europe with around 102.4bn cubic metres (bcm) of pipeline gas, with Germany and the United Kingdom taking around 61% of the volume. We expect this to be lower in 2014 with a mild winter and a pleasant summer minimising demand for gas from the residential and power sectors.

The power sector, particularly in Germany, has struggled with negative spark-spreads driving utilities to lose money when generating electricity from natural gas. Gas demand in both the UK and Germany is looking very bearish and we see little scope for improvement before the weather cools for the winter heating period.

Bearish Demand In Major Markets
UK, Germany - Monthly Gas Consumption (mcm)

European gas markets have benefited from a mild 2013/2014 winter, leaving above average levels of gas in storage. This is lowering the necessity to stock up over the summer months.

Above Average Storage Levels
European Gas Storage Levels (% Full)

Currently, storage levels are as high as in 2011. In particular the UKs storage is around 91% full with three more months of injection expected and there are concerns that storage will reach capacity could reach capacity before the end of August. Germany, which holds the largest gas storage capacity in Europe is 82% full.

We therefore see a slight threat to Norway's gas output levels over the coming few months with demand in Europe expected to be weak. This has been factored into our forecasts. The NPD expect total gas production in Norway to reach 107bcm for 2014, while our outlook is slightly more bearish at 106.6bcm.

Demand Dynamics Slowing Ouput
Norway - Natural Gas Production (bcm)

Russian Diversification

Despite the demand situation, there are upside risks to Norway's production potential towards the end of the year. With the EU increasing sanctions against Russia due to the country's alleged support of rebels in Eastern Ukraine, distrust is becoming entrenched in the relationship between Europe's largest gas supplier and major EU countries.

Although sanctions are not directly targeting natural gas suppliers, energy trade has previously been used as political leverage. We would expect any energy trade reaction to sanctions to materialise over the winter when gas demand is highest and Europe is at its most vulnerable.

Norway is currently pumping around 8bcm less gas than at its peak in 2012, while the start up of new gas from the Valemon field will add further production capability. The country will therefore be one of the first ports of call for supplementary gas supply to Europe's major markets if there are disruptions to gas supply from Russia over the winter. This presents upside risk to Norwegian gas production over the later part of 2014 and early 2015.

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This article is tagged to:
Related sectors of this article: Oil & Gas, Upstream, Production, Energy Policy
Geography: Norway, Germany, United Kingdom, Russia
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