Pipelines and LNG in Europe: Competitors or complementary projects?

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

An LNG tanker to be waiting to be uploaded. [Sonatrach]

The presence of alternative supplies – in the form of liquefied or pipeline gas fixing a price ceiling – and a well-functioning, competitive EU gas market, will hedge European consumers against high energy prices, writes Danila Bochkarev.

Danila Bochkarev is Senior Fellow in the EastWest Institute

In February 2016, the European Commission released the “EU strategy for liquefied natural gas and gas storage” as part of its sustainable energy security package. According to this document, access to LNG is expected to increase security of supply, reduce dependence on Russian gas and allow European consumers to take advantage of the global ‘gas glut’ and the availability of cheap LNG.

On the one hand, investment in LNG seems to be illogical in the present market conditions – according to the International Gas Union (IGU), as the data for EU LNG terminal utilization rate averaged only 25% in 2015. In January – April 2016 this year this number was even lower – according to Gas Infrastructure Europe (GIE) which confirmed that the average usage of Europe’s re-gasification facilities was around 17%. On the other hand, LNG supporters point out that energy security is above all imperative. A number of EU member states – particularly in Southeast Europe – are still disconnected from global/European natural gas markets and heavily dependent upon a single supplier.  Therefore, new LNG terminals are seen as a “bridge” between the gas markets in Europe. Furthermore, rapidly declining domestic production and the projected increase of Europe’s dependency on gas imports from third countries requires the EU to strengthen the resilience of its markets.

In fact, a bulk of domestic gas supplies in the EU originate from rapidly depleting fields situated in the UK and Netherlands. For instance, natural gas production in the UK declined from 96.4 billion cubic metres (bcm) in 2004 to 39.7 in 2015. During the same period, Dutch gas output fell from 68.5 bcm to 43 bcm. According to the BP Statistical Review of the World Energy, overall indigenous production in Europe (EU plus Norway) has decreased from 299.5 bcm in 2004 to 237.3 bcm in 2015. This number could fall further to 170 bcm in 2035 (CEDIGAZ 2015). Long-Term Outlook for Gas 2035 published by Eurogas estimates European natural gas demand in 2035 between 394 bcm to 527 bcm. Thus, by 2035 the EU will require between  62 bcm/year and 194 bcm/year in additional gas imports.

Do not put all the eggs in one basket

In theory, LNG supplies will be sufficient to cover all additional gas imports projected by 2035. However, we should be fully aware that the reality will likely be much more complex. Stagnation and even a slight decrease in Europe’s gas consumption does not fully reflect the supply-demand and pricing dynamics of the global energy markets and the role of gas in the world’s energy balance.

Natural gas is projected to be the fastest growing fossil fuel in the world. “We see clear winners for the next 25 years – natural gas but especially wind and solar – replacing the champion of the previous 25 years, coal,” said Fatih Birol, the International Energy Agency’s executive director. The IEA also forecasts gas demand growing 50 % by 2040, while overall world energy demand would rise by 30 % between now and 2040. Most of the growth in natural gas demand will come from Asia (additional 739 bcm of demand in 2014-2040) and the Middle East (additional 363 bcm of demand in 2014-2040), while the IEA expects gas consumption in Europe to grow only by 50 bcm between 2014 and 2040.

Is the era of cheap gas over?

The EU is currently enjoying exceptionally low prices – both for its LNG and pipeline imports. For example, in the last few months liquefied gas and Russian pipeline gas have been trading at around $4/MMBtu, with pipeline gas being occasionally cheaper than LNG sold at spot prices. As a matter of comparison – domestic natural gas prices in the U.S currently reach $3 – $3.1/MMBtu.

However, growing global demand for gas will change the current energy landscape.

It means that the era of cheap LNG in Europe might soon be over sand cargoes will follow the demand and higher price. The IEA World Energy Outlook (WEO) 2016 predicts that natural gas prices in the U.S., Europe and Japan will respectively reach $4.7/million British thermal units (MMBtu), $9.2/MBtu and $11.3/MBtu in 2025.

The pipelines are dead? Long live the pipelines! 

Mid- and long-term global energy trends show that the game is not over for pipeline gas and it still has a well-deserved place in Europe’s energy balance together with LNG and renewables.  Pipeline gas – along with LNG – is not only able to close future supply-demand gaps for gas in Europe, but also is sold at a competitive market-based price. For example, Gazprom’s pipeline gas supplies to Europe are currently triggering a buying spree by European energy companies. Furthermore, the presence of alternative supplies – in the form of liquefied or pipeline gas fixing a price ceiling – and a well-functioning, competitive EU gas market, will hedge European consumers against high energy prices. The recipe is simple – Europe should let different infrastructure projects compete with each other for customers and a market share. For example, Nord Stream 2 supplies will be able to compensate for a falling gas production in Northwest Europe with the regasification terminals in this part of Europe, offering a viable and competitive alternative to pipeline gas supplies. Similarly, the Southern Gas Corridor’s competition with traditional suppliers in South-west Europe will bring additional benefits for the consumers in the region.

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