OREANDA-NEWS. Fitch Ratings says in a new report that Europe's traditional gas suppliers, eg, PJSC Gazprom (BBB-/Negative), are facing market pressures, mainly from the liquefied natural gas (LNG) market. We expect gas-to-gas competition in Europe to intensify, and European gas prices to become even more spot-based rather than oil product-linked.

Gas prices collapsed in 2015, making it a hard year for producers globally. Japan experienced the most noticeable drop - 46% yoy - as average import LNG prices reported by the World Bank fell to USD8.5 per million British thermal units (mmbtu) at end-2015 from USD15.5/mmbtu at end-2014. The trend continued in 2016, as Platts Japan/Korea Marker (JKM) for June fell to USD4.5/mmbtu. Cancellations and delays ensued for new LNG and traditional gas projects with prices at multi-year lows.

European gas demand declined in 2010-2014, as cheaper coal and low carbon emission prices, plus the push into renewables reduced gas-fired power generation, the principal user of gas in many countries. Weak economic growth added to the gas market's woes. Demand was up 4% yoy in 2015, but its future growth is likely to be weak.

European indigenous gas production has fared even worse than gas demand, as Norway's incremental gas production volumes cannot compensate for the significant production drops in the UK and recently in the Netherlands. Attempts across some of eastern Europe to drill for shale gas have been fruitless, while a number of European countries have banned fracking for shale gas and others are yet to find commercially viable quantities of shale gas amid increasing public opposition to hydraulic fracking in Europe.

Fitch views the threat from new pipeline gas flows to Europe from Azerbaijan and Iran as fairly limited over the medium term. Israel and Egypt, although both having ambitious gas programmes, are unlikely to be major gas exporters over the medium term, due to the unproven history of the gas assets under development and the increasing domestic demand that these countries need to meet before exporting any gas.

The LNG market is likely to remain oversupplied by 2021, as more LNG liquefaction plants, especially in the US and Australia, are coming on line and the growth in demand slowed in 2014-2015, particularly in the Asia-Pacific region. We believe that the gas-on-gas competition in Europe is likely to intensify, specifically between Russian pipeline gas and LNG. This is good news for gas consumers but bad news for gas producers, as gas prices are likely to remain depressed.

Gazprom may lose some of its market share or profit margin in Europe in the medium term, but the severity of the losses will depend on how accommodating the company is to the European off-takers' needs. Gazprom's low production and transportation costs estimated at USD3/mmbtu and significant spare production capacity will help it overcome the pressures. We expect Gazprom to fight back by further de-linking gas and oil products prices, lowering take-or-pay volumes and removing destination clauses.