Rumors of Ukrainian Pipeline Closures May Affect LNG Shipping
The London gas market has been volatile this week as traders assess the impact of potential pipeline closures on the European gas market.
Rumors swept the market mid-week that Azerbaijan was contemplating a complex deal with Ukraine to provide a substitute source for Russian gas previously supplied to East European customers through Ukraine by Gazprom. The main Gazprom pipeline is already disrupted by Ukraine’s capture of the pumping station at Sudzha, but Ukraine has also suggested that it does not want to renew the contract covering these shipments when the present contract expires at the end of 2024, by which time 14 billion cubic meters will have been piped through Ukraine to Europe over the year. Officials in Ukraine and Azerbaijan both dismissed reports that any such negotiations were taking place, and trading patterns in the commodities market reinforced these denials.
Nonetheless, Ukraine is clearly intent on reducing the flow of pipeline gas from Russia through to Europe, if not immediately then gradually. Nor is there much spare pipeline capacity to support either a diversion of gas through Azerbaijan (or Turkey) to Europe, or any arrangement whereby increased supply from Azerbaijan is back-filled by increased supply of Russian gas to Azerbaijan. The net effect of this capacity blockage therefore is that over the next few years more gas will need to be shipped through LNG sea terminals in order to meet European demand - providing there is no cessation of hostilities in Ukraine.
In the analysis of commodity traders, it is probable therefore that there will be increased demand for LNG tankers to serve the supply channels to Europe, both from America and the Middle East. This does not translate necessarily into increased demand for LNG shipping globally. Shipping days-at-sea from source to market are shorter in Europe than to markets in Asia, and higher prices mean that shipping will be diverted and gravitate towards routes to Europe.