Crisis averted for gas-strained Europe
Norway’s government intervened late on 5 July to resolve a strike led by the Lederne union that would have caused widespread disruption to several gas fields and pipelines, leading to a 56% drop in Norwegian gas exports if it was not averted.
Dutch TTF prices have since calmed to $46.74 per million British thermal units (MMBtu) on 6 July, as compared to $53.66 per MMBtu on 5 July when the strike started.
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TTF prices on 5 July had originally climbed to about 10% more than the previous day’s price of $49.63 per MMBtu, as the estimated impact of strikes was being weighed.
The industrial action was led by dissatisfied operators at a few Norwegian gas fields and could have resulted in knock-on impacts by the end of the week to major gas pipelines such as the Zeepipe and Langeled, as well as to major gas fields such as Troll and Ormen Lange.
Following the intervention by the government, workers are now expected to return to their posts as quickly as possible, while a settlement between oil companies and Norway’s Lederne union is expected to conclude at a later date.
The Lederne union, which has over 1,300 members, called the strike as the cost of inflation outpaced proposed revised salaries.
Had the situation not be resolved, the TTF would have been sent back close to, or even exceeding, its all-time high of $65 per MMBtu, reached in March.
The union on strike represents line managers, meaning the dispute was expected to be resolved quickly. While there were already expectations that the government would have intervened before it escalated, it came as a surprise to many that the intervention came very early on the day the strike started.
The government had previously intervened to end strikes for offshore activity in 2000, 2004 and 2012. The High Court in Norway has ruled that the government can intervene not only if life and health is at risk, but also if there are large potential socio-economic effects.
The loss of gas supply from Norwegian fields would have been a triple whammy for Europe, within just weeks of losing Russian flows and supplies from Freeport LNG in the US.
This would have come as a big shock as Norwegian fields typically provide stable flows in the range of 300 million to 350 million cubic meters per day (MMcmd).
This would have further disrupted European Union (EU) gas supply and increased gas prices significantly from the current level of almost 10 times above the historical normal.
Similarly, power prices would have surged in Europe and in southern parts of Norway that have a link with EU or typical German power prices.
The EU is already working hard to increase diversity of energy supplies.
An averted strike in Norway, and potentially reduced Russian gas volumes as the Nord Stream 1 shuts down due to annual maintenance starting 11 July, should further emphasize the importance of the EU being less dependent on gas and energy imports.
Given the swift and timely response by the Norwegian government, the message is clear that there should not be any doubts on the security of Norwegian gas supplies, and that now more than ever, the EU and allies must stay united to avert any future challenges that may come their way.
The government’s decision has protected the North Sea’s reputation as one of the most stable oil and gas investment locations globally.
The strike was expected to take place in several tranches, with the first wave starting on 5 July with affected fields halting production, followed by a second (6 July) or third wave (9 July) if no resolution could be found.
Had the dispute not be resolved by 6 July, then production loss would potentially have been as high as 46 MMcmd, or about 20% of usual Norwegian gas exports.
In revenue terms, this is equivalent to just under NOK 1 billion ($99 million).
By 9 July, after the third tranche, the loss in production would have been as high as 200 MMcmd or about 60% of Norwegian gas exports, due to high interconnectivity with major pipelines and other major gas fields.
The Zeepipe (Norway-Belgium) pipeline), Langeled (Norway-UK) pipeline), and major gas fields such as the Troll and Ormen Lange were expected to be among the other infrastructure that experience disruption.
In revenue terms, this is equivalent to roughly NOK2.5 billion, assuming a gas price of $30 per thousand cubic feet and oil price of $103 per barrel, though we understand that some contracts are also linked to NBP and Brent prices.
The Norwegian Oil and Gas Association had separately reported that 56% of Norwegian gas exports would have been cut, in which case the lost revenue could exceed around NOK 2 billion.
Norway makes up 23% of Europe’s gas supplies, so any drop in supply would have an outsized impact on storage levels and prices.
Norway had also previously promised to contribute another 8 Bcm (20 MMcmd)-worth of gas to existing flows this year to add to gas security.
The prolonged strike would have made it such that it found itself in a position where flows may have reduced while prices skyrocket.
Nord Stream 1 gas flows have held constant at around 68 MMcmd across the week. Gas flows from the Ukrainian transit have also held around 36 MMcmd.
This amounts to a total of about 104 MMcmd from Russia.
These flows have mostly held constant around the 100 MMcmd mark since a sharp reduction from 150 MMcmd due to compressor issues on the Nord Stream 1.
The pipeline is also expected to undergo annual maintenance starting next week from 11 July to 21 July, with many market participants monitoring the restart and their beleaguered gas supplies with great interest.
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