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    Editorial: Turbulent times for gas [NGW Magazine]


The start-up of the Trans-Adriatic Pipeline recalls a simpler era. [NGW Magazine Volume 5, Issue 21]

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Editorial: Turbulent times for gas [NGW Magazine]

This November, the Trans-Adriatic Pipeline (TAP) is due to start flowing gas to southern Italy. Other events this month also prompt reflection on the seismic shifts in global gas markets since the Southern Gas Corridor (SGC) was formulated in 2008. TAP is the last link in the $40bn chain.

The SGC dates back to a slightly more innocent age of gas, when the crude machinery of energy politics was more delicately draped. There was also no question back then that gas was going to play a major role in improving coal-fired Europe’s air quality.

There was no third-party access to pipelines, reverse flow, use-it-or-lose-it capacity at LNG terminals or other attributes of a competitive gas market. So Washington – and the European Commission – used every opportunity to decry Russia’s “weaponisation” of gas and illiberal markets and won major concessions along the way.

The SGC is an amazing project, and a testament to the oil and gas industry’s vision, engineering skill and diplomacy. It brings side benefits also to Albania and alternative physical routes for competitive gas to flow into the Balkans. But an 8bn m3/yr gasline in Italy makes little difference in a market that size that already has numerous sources of supply, including LNG and renewable energy.

Originally conceived as an alternative to Russian gas, the line carries gas from Azerbaijan and fills a gap in Italy that might otherwise have been filled with north African pipeline gas or US LNG.

US LNG was unthought of in the early days of the SGC, but now US export capacity is ramping up. It might have been possible for US offtakers to capture the price premium in Italy relative to other, freer EU markets, but TAP closes that gap. The recent falling-out between Turkey and the EU is also unhelpful. And Turkey has discovered its own major gas field, which will be looking for a market.

Another development has been the about-turn in Washington regarding energy politics as it has discovered it is now a member of the exporters’ club. Its determination to see the SGC project through reflects a different world. Ten or more years ago Russia’s Gazprom was the lowest-cost supplier in the region and held eastern Europe and the Balkans in its palm.

Now though the boot is on the other foot: it is the US that needs a market for its gas and to assert power through weaponising energy exports. The government is now trying to apply overseas sanctions ever more broadly and possibly in breach of international law, in order to block Gazprom from completing Nord Stream 2. This severity is strident, bi-partisan and will survive into the next presidential term.

The rhetoric has grown shriller as politicians talk of risks to Franco-US trade when Engie abandoned talks with the aptly-named NextDecade. They had been discussing a long-term offtake deal from the latter’s Rio Grande LNG project.

Losing a customer should be a private matter for the project developer, not a threat to international relations that draws in senior politicians and even the secretary of state. That is just repeating the error Russia made: it was mainly the president, Vladimir Putin, who signed or – in the case of South Stream – tore up historic deals, thereby identifying the Kremlin and all it stood for with cheap energy and associated political disputes. Markets do not like hazards like that: smaller investors, critical for competition, are scared off.

Whether or not Engie walked away because it was told to by the French government, or because gas is not zero carbon, will have to remain a matter for speculation for now. However at time of press, state-controlled EDF was still on the list of US LNG customers.

What will be interesting is if Engie buys other gas from elsewhere. It might be too late to back out of the Nord Stream 2 project. The operator argues gas exports through that line will have a smaller carbon footprint than gas shipped in from the US. But that also should be Engie’s choice.

Certainly there is no shortage of sellers for Engie to choose from. This month saw the first formal meeting between Opec and the Gas Exporting Countries Forum (GECF), a knowledge-sharing event that took place virtually.

Although the organisation’s membership and name inevitably recalled Opec and its production quotas, for much of its short life GECF has been mainly a talking-shop. When it came to moderating gas flows in response to prices, its members’ hands were tied by their preference for long-term, oil-indexed contracts.

They had to produce and sell LNG or be in breach of contract. The price was what the oil price had been a few months ago, giving precious visibility on LNG revenues for some months ahead. And there was no real competition in most of the end-user markets so the buyers had little to complain about when prices were high: the costs could be passed on.

But along with the short-term nature of today’s LNG trade with its free-on-board contracts and flexible volumes come other possible attributes of oil trade. As buyers push for full freedom from the usual constraints, the contractual balancing of risk means sellers too will have more freedom.

Colluding in this through a cartel is a step too far for OECD members such as Norway, Australia and the US. And Opec’s lack of discipline has been a problem limiting the cartel’s effectiveness. But whereas until lately producers had no mechanism for withholding output by agreement, they might at least be moving that way. How times change.