EU Security of Gas Supply in the Low Carbon Era

Speakers at the annual Gas Infrastructure Europe (GIE) conference in Prague, Czech Republic in June examined the European Union's problem of ensuring import and transit pipelines are built in a changing regulatory world.

Net4gas CEO Andreas Rau said that around 80% of the company's business is international gas transit, with 20% of its activities devoted to supplying gas to Czech customers. “This means that 80% of what we're doing is for the supply of other countries,” he explained, adding that only a few other transmission system operators (TSOs) were in a similar position. These would include Eustream in Slovakia and GasConnect in Austria.

“This also has to be taken into account when we discuss the results of the recently-published Quo Vadis study and the allocation of gas transmission costs to individual entry and exit points,” he commented. “That's a huge exercise which is ahead of us.”

Quo Vadis? is the name given to a European Commission consultation about the gas market and how it might be improved in the coming few years. The TSOs want to wait to see how all the network codes bed down before introducing fundamental reform, while some consultants have suggested root-and-branch overhaul, including creating a single European gas TSO. They argue that fewer transmission costs and greater simplicity will help gas to compete. Responses to the survey were due earlier this year.

Net4gas transmits about 45bn m³/year through more than 3,800 km of pipeline. The company's Gazelle pipeline, which carries some of the Nord Stream 1 gas, was one of the largest investment projects in the Czech Republic in the last 30 years.  

Financial investors in gas infrastructure

Net4gas was once a bundled state-owned company; Czech Transgas was privatised in 2002 and sold to the vertically-integrated RWE, and then in 2013 the gas transmission part was carved out and sold to two financial investors: the investment arm of the German insurance group Allianz (Allianz Capital Partners), and Borealis, the infrastructure arm of a Canadian pension fund.

Both are long-term investors, he said, and both have invested a lot already in European gas and power transmission and distribution. “They already have a large portfolio and would like to deploy even more capital.

Net4gas grid

Rau said he believed the rise of financial investors in gas infrastructure is a positive development. “They bring in new perspectives to an industry which has been rather sluggish. So we have more speed now in all of our processes – that's for sure. On the other hand, the more colourful shareholder structure we have in Europe means that we all have to make more effort now in getting aligned with our interests and developing joint positions for the ultimate goal of promoting natural gas as the fuel of choice for the future,” he said.

Indigenous supplies headed south, non-European imports

Regarding challenges faced by the natural gas industry, he cited the supply-demand situation in the European Union. “In principle, the figures have not changed in the last five years,” he noted. “The message has always been the same: indigenous gas production in the European Union, including Norway, is decreasing – rapidly decreasing – whereas consumption is more or less stable.”

This meant, said Rau, that a major supply gap is expected by 2030. “This supply gap has to be filled somehow, either by pipeline gas, or by LNG, or by a combination of both,” he said. “We need additional, non-European imports – that's for sure.”

Gas market progress

Noting the progress that European gas markets had seen in the last 10-15 years, he explained: “We have implemented the Third Energy Package, so we have now non discriminatory and transparent access to the gas infrastructure, we have removed most of the technical bottlenecks,we have introduced physical reverse flow and, at some of the critical cross-border points a lot has been done in order to allow for full competition in Europe.”

Calling that positive news, Rau added that the bad news was the lack of integration in Europe, and the trend towards politicising projects. “For us as investors, this creates a lot of uncertainty. And to my mind, Nord Stream 2 is a very good example for this,” he said.

Europe as the 'battleground' for LNG & pipeline gas

With the forthcoming supply gap in mind, Rau said Net4gas welcomed any kind of infrastructure project that aims to enhance import capacities for Europe, whether that be in the Mediterranean, Baltic, or North Sea, in the form of LNG terminals or pipelines. “Let's just welcome these projects, especially when they are implemented on a commercial basis – otherwise, I see huge risks that around 2030 there won't be enough supply anymore.”

Analysts like Goldman Sachs, he reported, expect strong competition between LNG and pipeline gas. “The headline says 'Europe emerges as the battleground for LNG and pipeline gas'. It's probably a little too military in style, but the message to my mind is correct and is shared by other analysts, that in the next five to seven years there will be strong competition between them, that there will be a supply gap, but afterwards most probably this oversupply of LNG will disappear again and then we still have to make sure we have enough gas for Europe.”

2050 climate targets, end of gas?

As for the long-term perspective, Rau identified the European climate targets as the one of the biggest challenges faced by the industry, as by 2050 greenhouse gas emissions need be reduced by 80-95%. Meanwhile renewable power generation is becoming cheaper and cheaper.

“The question is, how we as an industry can achieve decarbonisation? Can we transform natural gas into green gas? This is the biggest challenge for us as an industry, and I think we have to start thinking about concepts for this today.”

While 2050 seems a long time away, he conceded that implementing concepts takes a long time. “So we need to start today,” he said.

Finally, he questioned what the geopolitical implications will be if Europe goes for full decarbonisation, given gas producing countries in the Middle East and northern Africa, Russia being a big gas producer. “What happens if suddenly this production is not used anymore? All those countries have invested a lot of money into exploration and production activities and export infrastructure and I think it's also our job and the jobs of politicians to make sure that the economic balance we have established in the last 20-30 years remains intact, that the economic balance between producing countries and consuming countries remains reasonable and that we continue in a fair partnership.”

Europe needs more pipes: Gazprom

Also speaking at the GIE conference, Gazprom's deputy chairman of the management committee, Alexander Medvedev, gave his case for a Europe that will continue to purchase significant amounts of natural gas from Russia, a belief which he used to bolster the argument for the construction of both Nord Stream 2 and TurkStream.

In 2016, European gas demand grew by 6.9%. “This is a good sign that the market is strongly recovering from a few years of stagnation and loss of gas consumption,” he said, adding that in 2010-15 European demand fell by 50bn m³.

He noted Europe's significant increase in gas imports and decrease in domestic production, a trend which he said would remain. According to International Energy Agency figures, he said Europe would need an additional 100bn m³/yr of imported gas – at least 84bn m³.

"There is no infrastructure available to import this gas, even if we take into account free regasification capacity available in Europe,” he remarked.

Record years for Russian supply call for investments

Medvedev said that Gazprom “stands on firm ground”. According to him, in 2016 Gazprom provided a record share of 33.5% of European gas market supply: 178.3bn m³ of Russian gas plus an additional 1bn m³ from central Asian sources, provided to Europe and Turkey. He added that 2017 also looks like being a record year for Russian supply to Europe.

He said this made it clear that, “Russian gas is needed in Europe now and will be needed in the future.” That's why, explained Medvedev, that Gazprom is investing in large-scale gas transport pipelines like Nord Stream 2, which will bring gas to northwestern and central Europe; and TurkStream, which will secure gas supplies to countries not covered by Nord Stream.

He reported that Gazprom had submitted bids for future auctions of gas transport capacity in the south of Europe and is examining the possibilities of extending TurkStream to the European Union.

Working within regulatory framework, minimising transit risks

Recalling a “good level of co-operation” between Gazprom Group and Europe's TSOs, he said: “We do hope that this new regulatory procedure will enable all parties involved more effectively develop new transmission capacities if, when and where needed based on market demand and with due consideration or justified concerns of all the shippers, including from non European states.”

Nord Stream 2 is a privately funded commercial project that will supply Russian gas to the European energy market from the shores of northern Germany through the Czech Republic and Slovakia to the Baumgarten Hub in Austria.

“This means it can compensate declining domestic supply from the North Sea and supplement the southern corridor to southern and central European countries," he said.

“This project will enhance the European security of supply, and complement existing gas supply options. At the same time, this highly efficient pipeline, constructed using cutting-edge technologies, allows the minimisation of transit risks.”

In addition to the economic benefits of Nord Stream 2, Medvedev said that gas delivered through the pipeline would align with goals of the Paris Climate Agreement, as the route would be 45% shorter than the infrastructure running through Ukraine and it would also use fewer compressor stations.

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