Nord Stream 2 halted as crude surges after Russia sends troops into Ukraine

Germany pressed pause Feb. 22 on the Nord Stream 2 gas pipeline project with Russia as European allies and the US finalize a response and likely sanctions after the Kremlin ordered troops into a disputed area of Ukraine.

At 1305 GMT, the April ICE Brent futures contract was trading 2% higher at $97.37/b after earlier hitting $99.50/b, the highest since July 31, 2014. S&P Global Platts assessed the day-ahead NBP gas contract at 170 pence/therm (Eur69.64/MWh, $23.13/MMBtu) on Feb. 21, over four times higher than the NBP day-ahead contract a year ago.

Under a limited incursion scenario which triggers Western sanctions impacting some oil flows out of Russia, S&P Global Platts Analytics assumes Dated Brent prices would spike in excess of $100/b again but then retreat later.

Trade

-- Russian gas transport through Ukraine has been in decline in recent years and collapsed at the start of 2022.

• Ukraine remains a key transit route for Russian gas to Europe, accounting for a little under 10% of Europe's gas demand in 2021.
• Under a five-year transit deal between Gazprom and Ukraine's Naftogaz in 2019, the Russian company agreed to send a minimum of 110 million cu m/d of gas via Ukraine to Europe under ship-or-pay terms in 2022, meaning it must pay for that level of transit whether it uses the route or not.
• Deliveries via Ukraine at the key Velke Kapusany entry point fell sharply in January, recovered then slipped again mid-February. Flows on Feb. 21 were down to 25 million cu m/d, matching January lows.

-- Ukraine is a critical route for oil flows into Eastern Europe and the fringes of the EU.

• The country moves Russian oil to Slovakia, Hungary and the Czech Republic. Its transit of Russian crude for export to the EU was 11.9 million mt in 2021, down from 12.3 million mt in 2020, while oil transit to Belarus remained unchanged at about 800,000 mt.
• Last year crude shipments via the southern branch of the Druzhba pipeline network included 5.2 million mt, or around 104,427 b/d, to Slovakia; 3.4 million mt, or around 68,279 b/d, to Hungary; and 3.4 million mt, or around 68,279 b/d, to the Czech Republic.

-- Ukraine is one of the world's largest exporters of grains, with any disruption to supplies potentially affecting food security and prices.

• Ukraine accounts for around 13% of global corn exports, is the fourth-largest exporter in the world and Europe's largest by some way. Half of its exports go to the EU, with China another major importer. The corn is used in animal feed, with the biofuel sector also taking a significant share. It is forecast to export 33.5 million mt for marketing year 2021-22 to June 30.
• The country accounts for around a tenth of global wheat exports, which have risen 27% so far in marketing year 2021-22 (July to end-June) to 16.1 million mt, as neighboring Russia increased its export taxes.
• Platts Analytics projected Ukraine's wheat exports at 22.5 million mt in MY 2021-22.

-- The country is also the world's 13th-largest producer of steel and the fifth-largest exporter of iron ore by volume.

• Ukraine produced 21.4 million mt of crude steel in 2021. Some 80% of its steel output is exported.
• It exported 44.4 million mt of iron ore products in 2021 and imported 9.85 million mt of metallurgical coal and coke products. It raised 3.9 million mt of steel scrap, of which 616,000 mt was exported.

Prices

-- Oil prices first hit seven-year highs in mid-January, spurred by a recovery in mobility levels, worries over spare capacity among key producing nations, slow progress in getting Iran's sanctions lifted and tensions over Ukraine.

• Dated Brent/Brent frontline swaps for March were up 2% at $95.69/b Feb. 21.
• Prices for Russia's Urals crude, which ships via Ukraine, have increased since mid-December in line with global oil prices, and despite the threat of sanctions on Russia. Platts assessed Urals crude at $91.49/b on Feb. 21, up 1.73% on the day, and up 34% since early December.

-- European gas prices fell heavily over New Year but rose mid-January, partly as fears of a Russia-Ukraine conflict refused to abate.

• Forward gas prices on the benchmark Dutch TTF hub were up 22% month on month at Eur45.47/MWh Feb. 21 (Season+4). Spot TTF gas surged to a record Eur182.77/MWh Dec. 21 before falling to Eur61.28/MWh at the end of the year. By market close Feb. 21 the contract was at Eur71.60/MWh, down 11% month on month, Platts data showed.
• Any conflict affecting gas supplies into Europe could have knock-on effects on power, carbon and coal prices. Curve coal prices (CIF ARA front quarter) climbed 3.26% Feb. 21 to $150.25/mt.
• Prices in the EU Emissions Trading System hit a new record Feb. 4 of Eur97.50/mtCO2e (December 2022 delivery) on the ICE Endex exchange, partly due to continued uncertainty over European gas stocks. The price had fallen to Eur89.47/mt by market close Feb. 21.

-- Ukrainian corn prices have been rising on the back of strong global demand and Russian plans to impose export duties on grains, but slipped most recently as tensions grow.

• Ukraine FOB Black Sea corn export prices hit a seven-year high of $301/mt in May 2021. Prices then dipped to $254/mt in September but have risen steadily since then, to be assessed at $286/mt as of Feb. 21.
• Ukraine's wheat exports remained steady in the week to Feb. 21 but export prices took a tumble, assessed at $306/mt, more than 4% lower month on month due to ongoing tensions in the Black Sea region.

Related infographic: Russia standoff puts spotlight on global oil and gas supply as Ukraine crisis grows

Infrastructure

-- Russia could close off Ukrainian ports due to its control of Crimea and Black Sea chokepoints.

• The Kerch Strait connects the Black Sea and the Sea of Azov and is used both ways, to supply soft commodities, ship steel/pig iron and other raw materials from Mariupol.
• Russia's Azov and Rostov ports serve as both transshipment ports to load deep water vessels at the Russian port of Kavkaz and as loading points to make small parcel shipments of wheat, barley and corn to destinations in the east Mediterranean.
• Exports of both corn and wheat take place through a number of Ukrainian sea ports, including the southwestern Panamax-capable ports of Odessa, Pivdennyi and Chornomorsk, all of which are well away from the front line. However, they are all within easy reach of Crimea, which is currently under Russian occupation.

-- The security of the Druzhba pipeline and ports are key for markets.

• Ukraine ships Russian oil to Slovakia, Hungary and the Czech Republic via the southern leg of the key 25 million mt/year Druzhba pipeline.
• Mariupol, Ukraine's main port in the Sea of Azov, is vital for pig iron and steel export from Ukraine and imports of steelmaking raw materials, particularly coking coal. In recent years, steel shipments from Mariupol have represented about a quarter of Ukraine's total exports in value terms.
• Any limitation of vessels through the Kerch Strait would likely affect supply routes used by Ukrainian mining and steel group Metinvest and other bulk shipping on the route.

-- The future of the now complete Nord Stream 2 gas link could rest on affairs in Ukraine.

• US President Joe Biden has said Nord Stream 2 "is just not going to happen" if Russia invades Ukraine.
• The EU's High Representative Josep Borrell said Nord Stream 2 would not become operational in the case of an invasion, but that did not mean it would never enter operation.
• Not only NS2 would be affected by a conflict, Borrell said. "The whole supply of gas from Russia to Europe will be affected. We have to be prepared for that -- all sanctions imply retaliations," he said.
• Political restrictions should not be applied to gas as an energy source, as they could derail the energy markets' uneven recovery from the pandemic in the wake of rising demand, Russia's energy minister Nikolay Shulginov said Feb. 21.

Platts Analytics has pushed its base case scenario for Nord Stream 2's start-up to October 2022, allowing the asset to contribute 68 million cu m/d to the Northwest Europe balance in winter 2022.