Today is the final day of the International Gas Forum in St. Petersburg. Nevertheless, the participants of the event have already set the main accents in the current state of the gas market: prices will rise, the world needs more fuel, Europe is in danger, and China is increasing demand.
Europe ‘without a future’ and ‘insatiable’ China
Many statements were made at the PMGF from 8 to 11 October. But the main attention was drawn to the statements of Alexey Miller, the head of Gazprom, and delegates from China, the main importer of Russian gas.
The head of the energy giant, in fact, predicted Europe’s return to the ‘dark ages’ without Russian gas. The region, he said, would continue the process of deindustrialisation. Now, Miller noted, the price of gas in the United States is 4-5 times lower than in Europe, and the cost of electricity is 2-3 times less, and this cost disparity makes it difficult for European companies to remain competitive on the global stage.
‘Many companies have already closed down, and half of German companies are considering moving their production to third countries or reducing production. Meanwhile, gas consumption in the EU and the UK is down 11 billion cubic metres in the first nine months of 2024 compared to the previous year. What is happening in the European gas market has already been firmly defined as the artificial destruction of gas demand. But there are harsher assessments and expert opinions. Some say that it can be called Europe’s energy suicide,‘ Miller said, noting that the European authorities’ policy on Russian gas has caused local industrial production to fall by 10 per cent – to its lowest level in 10 years.
The Gazprom head also warned that gas price hikes in the EU and supply disruptions will continue. In his opinion, the average annual gas price in Europe, which is formed by the end of the year, will be twice as high as the average price for the period from 2016 to 2020.
‘As of today, European investment funds hold volumes on the scale of 25 billion cubic metres of gas in individual positions, which corresponds to one fourth of all gas pumped into EU underground storage. But this is not an end consumer, it is a speculative player, and we see already very vivid situations that say that this player has a very, very strong influence on price formation and high volatility. Before 2020, there was plus or minus 5 per cent fluctuation from the opening price during the day, after COVID-19, in Q2 2022, plus or minus 10 per cent during the day. [When there was] a sharp decline in Russian gas supplies to the European market, the volatility during the day was plus or minus 15%. It turned out that the decline in Russian gas supplies to the European market was worse than COVID-19,’ Miller said.
As a reminder, Russia supplied only about 15bn cubic metres of gas to Europe via Ukraine in 2023. This is about 8% of the volume it sent to Europe via various routes in 2018-2019. Russian gas supplies to Europe have fallen sharply since Moscow launched the SWO in Ukraine in February 2022. Since then, most of the EU’s deficit has been met by suppliers from the US, Norway and Qatar. As a result, Gazprom posted a net loss of about $7bn in 2023, the first year it has been in negative territory since 1999. And Gazprom’s shares are now falling almost permanently. They have lost 20 per cent in the past six months.
‘In our view, there are no prerequisites for new shocks in the European gas market now. The situation in 2021-2022 was unique with a combination of low inventory levels and declining supplies from the largest supplier, Gazprom.’ Now, of the volumes that may be lost, we can single out only transit through Ukraine (about 15 billion cubic metres per year), but this has already become the baseline scenario, and the market is ready for it. At the same time, the high level of UGS reserves and the growth of supply on the LNG market practically guarantee the absence of new crises. Against this background, we expect stable gas prices of around $400 per thousand cubic metres in the base scenario in the coming months, although a lot will depend on the weather factor in winter,’ commented Sergey Kaufman, analyst at Finam.
China is another matter. It is currently Russia’s main trade and economic partner. And this year it has received 1 billion cubic metres of gas from Gazprom more than its contractual obligations. It is also expected that in 2024 the demand for gas in China will increase by 6.8%, reaching 420 billion cubic metres. Such figures were quoted by CNPC Vice President Huang Yongzhang at the PMGF. He added that the country’s gas consumption will continue to grow until at least 2030-2035, reaching a level of 600-650 billion cubic metres.
‘China is indeed expected to be the driving force behind global gas demand growth in the next 10-15 years. By 2035, the country’s gas demand could reach 600-650 billion cubic metres, implying a growth of more than 50% relative to 2023 levels. At the same time, competition among suppliers is also increasing amid a supply boom in the LNG market,’ Kaufman said.
It should be noted that as recently as last year, China made significant progress in restructuring its gas market. And despite the fact that the country is considered the world’s largest gas importer, it currently meets about 60% of its demand through domestic supplies. In 2023, for example, China consumed 394.5 billion cubic metres of gas, up 7.6% from a year earlier. This has been possible in part due to reforms in terms of introducing technologies to increase domestic exploration and production and reduce emissions, as well as tariff reforms that are likely to further increase fuel supply, lower end-user costs and increase consumption.
The world needs more, even more gas?
As a result of trading on Thursday, 10 October, gas prices rose by 4% to $453 per thousand cubic metres. Since Friday morning, 11 October, they have lost almost 1% and reached $450. However, Miller believes that by winter the quotations may go sharply upwards again. He attributes this to the cessation of supplies to the EU via Ukraine due to the possible non-renewal of the contract, which expires at the end of 2024.
‘If Russian gas supplies via Ukraine are cut off on January 1, gas prices could rise by $50 per 1 cubic metre if the winter is warm; by $150 or more if the winter is normal or cold,’ the Gazprom head said.
His forecast, however, strongly diverges from the experts’ calculations. They do not expect a sharp rise in prices, let alone price shocks in the gas market.
‘For the year as a whole, exchange prices remain below 2023 values (by 15-25% depending on the index), but this is due to the too high base of winter 2023. If we take Q3, spot prices have already exceeded the 2023 level: in Europe – by 8%, in Asia – by 4%. This is due to the shortage of LNG on the global market, which makes the overall balance of international gas trade rather tense. At the same time, the price growth is restrained by the decline in LNG demand from Europe (-21 million tonnes in 9 months): if Europe consumed as much LNG this year as it did in ‘23, I think spot prices would be much higher. Prices should seasonally rise in the early Q4. Some growth is observed in the first weeks of October, but it can be explained by the increase in world oil prices – this factor does not directly, but influences the exchange pricing of gas: after all, there are still a lot of long-term gas supply contracts in the world that are tied to oil prices. I do not think that in the coming months we will see any explosive price growth or even more so price shocks, but prices will rise, and this is normal. What will happen in Q1 2025 is not very clear yet, as it strongly depends on weather conditions and the schedule of commissioning new LNG capacities,’ said Alexei Belogoriev, Director of Research and Development at the Institute of Energy and Finance Foundation.
At the same time, the Finam interlocutor agreed with Miller’s words that gas demand in Europe continues to decline in 2024, while other regions are seeing growth.
‘The only macro-region where gas demand continues to decline in 2024 is Europe, in the EU by about 3% y/y. But if temperatures in Europe are lower in November-December than in 2022-2023, this decline could be offset. In the rest of the regions, demand is growing. The main growth is naturally provided by Asia, especially the PRC, but good rates in South and Southeast Asia as well. Overall, global demand will return to strong growth in 2024. If we believe the IEA’s latest estimates, the year-end growth will be +2.6% YoY against +0.7% in 2023 and a -1.5% decline in ‘22. The gas market has recovered from the 2021-2023 price shock, although prices remain significantly higher than in the 2010s,’ Belogoriev added.
Recall that Gazprom is now betting in countries different from Europe. Thus, for 9 months of the current year the company has doubled the volume of supplies to Central Asia compared to the same period last year. The new gas regions Gazprom is now focusing on also include South Asia, the Caucasus and the Far East.
‘Gazprom now has plans to increase exports to China to 98 billion cubic metres on the horizon of 8-9 years, as well as to develop relations with Central Asian countries and Iran, and the company also has plans to launch Baltic LNG.’ In an optimistic scenario of implementing all development projects, Gazprom will be able to regain the scale of the 2021 business in 8-9 years. At the same time, it is important to note that many of the projects may turn out to be unrealised,’ Kaufman noted.
In addition, the company expects that the world will still need gas in the future. By 2050, global demand for gas could reach 5.7 trillion cubic metres, driven by population growth and digitalisation, the Russian company said. Much of this growth will come from countries such as China, India and Russia, with demand in the global south also growing.
‘In the absence of new price shocks, gas demand should grow progressively for another 10-15 years for sure. Gas is a relatively affordable and economically still very efficient solution not only for power generation and boilers, but also for industry, households and partly for transport. We can argue a lot about how good or bad gas is as a transition fuel to a low-carbon economy, but there is little doubt that it will remain in demand in the coming years as a substitute for coal,’ Belogoriev emphasised.
As for the US, Miller in his speech noted a slowdown in gas production due to the depletion of shale gas fields and growing domestic demand. He said the US has increased its purchase of pipeline gas from Canada by 6 per cent this year. And that could indicate that even the world’s largest gas producer and consumer is facing problems.
Miller also stressed that Russia sees new opportunities in partnerships with global organisations such as BRICS, which could shape the future of the gas market.
Gazprom’s prospects
Miller’s forecasts paint an excellent future for Gazprom, whose position has indeed improved recently due to a number of factors. These include the company’s strong report for the first half of the year and the cancellation of the mineral extraction tax from 2025. And further growth in the gas giant’s financial results will be fuelled by the consolidation of Sakhalin Energy in IFRS reporting after bringing its stake in the company to 77.5 per cent.
‘Because of these factors, we estimate that Gazprom is now valued at 2.5 2024 earnings and just 2.2 2025 earnings. It is also important to note that the cancellation of the additional MET and the consolidation of Sakhalin Energy will reduce Net Debt/EBITDA below 2 for the current year and below 1.5 for 2025. In line with Gazprom’s dividend policy, this allows the company to expect a resumption of payments over the next few years. If Gazprom follows its dividend policy, the payout for 2024 could reach 26.3 rubles per share (19.9 per cent yield). At the same time, due to a number of uncertainties, we still estimate the payout probability at 50%. However, locally, we have a positive view on Gazprom shares and recently raised our target price on them to RUB 179.4. In our view, all the negative factors in the investment case have already happened. Of the additional negative factors, we expect only a partial loss of the volumes that are now flowing through Ukraine. At the same time, a number of positive factors have not been taken into account by the market,’ Kaufman commented.
Other experts interviewed by Finam also gave their views on Gazprom. And it was not as positive as Finam’s.
‘We maintain a neutral view on Gazprom’s shares, with a target price of RUB 180 on a one-year horizon. The dividend yield in 2024 is likely to be a modest 5%, although the cancellation of the additional RUB600bn mining tax in 2025 could significantly increase dividends with a payout in 2026. As for the gas forum, Gazprom’s share prices hardly reacted to the statements made. NOVATEK shares are also traded on the market now, but we also look at these securities neutrally. The target price is 1300. Active traders can also trade natural gas futures on the Moscow Exchange, but we are talking about the pricing of US gas,’ commented Albert Koroev, head of the stock market expert department at BKS Investment World.
Russian investors cannot trade European gas futures directly, while US gas futures (Henry hub) do not reflect the global market picture due to the isolation of the US gas market, Kaufman explained.
‘It is possible to play off the growth of the gas market, for example, through the shares of American and European LNG producers (Cheniere Energy, Shell, TotalEnergies), but their quotations already take into account the potential of LNG production growth to a greater extent. Against this background, Russian gas companies look more favourable,’ the expert added.
Belogoriev, in his turn, drew investors’ attention to the fact that there are few “pure” gas companies not only in Russia but also in the world, as they are mostly oil and gas corporations, and their profitability is still more dependent on the oil component.
‘In many respects, this applies now to Gazprom and partly to NOVATEK as well. In the global context, the main challenge for the gas business until 2030 is the expected formation of a supply surplus in the LNG market. There are different estimates of when it will develop and when it will end, but roughly it is 2026-2028. It is likely that gas exchange prices will fall significantly during this period. What will happen to oil-linked prices is a more complicated question. The year 2025 looks like a transition year to a state of supply surplus, and prices may behave very volatile during the year. In the case of Gazprom, the tax burden and the dynamics of domestic regulated gas prices are also of great importance, while for NOVATEK the timing of the start of full-fledged shipments from the first and second stages of Arctic LNG 2, which is currently under construction,’ the expert concluded.
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