European Gas Demand: Back to 2000 Levels

The European gas market is a disaster in terms of the weather, according to Anne-Sofie Corbeau, Senior Gas Expert at the International Energy Agency (IEA), who offered her insights on European gas flows to Natural Gas Europe at Flame in Amsterdam, the Netherlands.

Ms. Corbeau comments, “The demand has totally collapsed. I mean it was already on a downward trend, but with the weather effect across all Europe we are seeing in some cases demand being down by up to 20%. So this year from the demand perspective is going to be way below, probably at the level that we saw at the beginning of the year 2000. So we are back to one decade ago.”

She explains that the IEA has recently released (on June 10) its Medium-Term Market Report 2014 on natural gas, which she says covers the period from 2012 up to 2019.

Given that European gas production is likely to continue to decline, she says that Europe will still have basically the same existing suppliers, “but on top of that very end of the period, of course, we have Azerbaijan increasing the supplies because Shah Deniz is hopefully going to arrive at that time, so that will be probably mostly be swallowed by Turkey, because Turkey is one of the few countries, where gas demand is going to generally increase.”

In terms of indigenous European gas and the potential for replacing depleting supplies, Ms. Corbeau observes that in the UK the government is relatively bullish and wants to develop unconventional gas. She says: “It makes sense considering the drop in domestic gas production. We shall see, I mean, obviously all these developments take a bit of time. So probably we’ll have a bit more clarity on, I mean we know that there is a potential but how good is it, really?”

Drilling needs to commence in full, in numerous areas, she says, separating the wheat from the chaff.

“And you know that really when you start drilling in several places. I mean maybe there are one or two places that are good and the rest is not so good, so I mean, it requires a little bit more drilling and then we will know. We will know whether there is a really huge potential there, how much it is going to cost also, because, I mean there is a debate, you know. If it is lower cost to produce than the import, then of course, it's a no-brainer, you want to produce shale gas.

“If it is at the same cost, then well, you may actually want to produce that anyway, because it is good for energy security. If it is more expensive, then you have to make the calculation - there is energy efficiency, there is employment, so you need to look at all the parameters.”

Given other places in Europe like the Netherlands, where indigenous gas production is also seeing a downward trend, Ms. Corbeau offered her views on Europe replacing such resources.

“In the medium term, European gas production is going to decline, like in the UK we see a slower decline compared to what we saw before, because before in the United Kingdom it was declining 6% per year. So it’s going to stabilise somehow, but unless there is a development of shale gas, which doesn’t look to be happening tomorrow, it’s going to be very, very difficult to reverse the trend. And even if you are relatively optimistic regarding shale gas, at best you are going to have a stabilization of European gas production, but you have to be extremely optimistic to see a reversal,” she says.

Still, she notes the relatively bullish attitude towards shale gas in Britain. “It makes sense. Obviously all of these developments take a bit of time. We know that there is a potential, but really how good is it?

As far as how countries in Central & Eastern Europe will meet their total energy needs, she notes that there are plans to build some new nuclear facilities, like in Lithuania, Slovakia and the Czech Republic. “These are under discussion, but of course they need to be financed. Across the board we still see this strong growth in renewable energies across Europe. I think coal is very important, because right now we already have relatively low gas prices in Europe because of the very mild weather, but if we are looking at the prices we have seen over the past few years – around $10/MmBTU – gas is simply not competitive.”

She recalls that a few years ago she was in Hungary, where a brand new gas-fired plant was not functioning at all because power demand had dropped, with some increase of renewables, so the gas was unnecessary.

“It's a shame, because you have a brand new CCGT which is more efficient than the older gas plants, but you cannot use it because there is simply no demand for it.”

Increasing efficiencies in CEE countries, she adds, could place a downward pressure on overall energy demand.

Meanwhile, she is fairly certain that US LNG is going to happen, and its availability will have an effect upon European gas markets. “The real questions are how much, and by when will you be able to buy it. There are several projects that have the US Department of Energy’s approval, but so far have not taken the final investment decision, so we are waiting impatiently to see whether and when the final investment decision will be taken which then can give us an indication about how much LNG will be there by 2017- 2020.

“But if the companies are taking the final investment decision now that means that the LNG is going to arrive by the end of 2017 - beginning of 2018 - if we are looking at how much time will be needed for Cheniere to get their plans up and running.”

Taking all of global LNG flows into consideration by that time, Ms. Corbeau says she sees other sources like from Panama, Qatar, etc. coming online, all of which are also likely to go to Asia.

She adds, “So we may actually see a lot of swap arrangements whereby actual US molecules are going to land in Europe and somebody else in the Middle East will just transfer their LNG towards Asia, which will save cost of course in terms of shipping distances, etc. and possibly solve some bottlenecks in terms of transport.”

At the end of the day, however, there will still only be a limited amount of LNG available. “And some countries will need that and will be ready to pay a certain price. It will not that much affect the demand for gas and where the supply is coming from, it will affect the flows. So, I don’t think that because Europe will suddenly physically receive US LNG it will become more attractive. Maybe it will be the case, but I mean the producers want to get the same amount of money. But if you can make some savings in terms of transport cost, this is even better and it’s better for the environment, less CO2 emissions.”

As for the potential of Iranian and Kurdish gas feeding Europe, she says she finds it quite an interesting prospect. According to Ms. Corbeau, Iran has tremendous potential and is worth looking at.

“But there are also some issues. I mean first of all, the sanctions are still in place. So we are not completely fine yet - this is the first thing. Iran is still importing some gas. Also, it is just at the limit of being a net exporter and net importer. According to our statistics, it’s a net exporter in 2012, but it has been a net importing country for many years.”

This means that Iran will need to increase supply so it is actually exceeding the increase in demand to be able to potentially export more natural gas. “But the problem with demand is that we have a lot of inefficiencies. In the residential sector for example in Iran gas prices remain still relatively low, so people of course are consuming a lot of natural gas.”

She says that Iran's residential and commercial sectors consume about 50 BCM/a, which is roughly one-third of demand.

“And you have the same inefficiencies in the use in the industrial sector and also in the power generation sector, where the efficiency of the plants is much lower than what you can see for example in the European countries. So there are a lot of things to do there,” explains Ms. Corbeau.

According to an International Gas Union survey release, she says that Iran's pricing is near the bottom of the organization's ranking. “So you need to find a way to slightly increase the gas prices, while, I mean of course taking it into consideration that it can be extremely politically sensitive vis-à-vis the population, so you need to balance. Maybe also help in terms of energy efficiency, because if the people pay the same but they consume less and they pay more, this is all benefit, because then you can allocate more natural gas which is produced for export, your consumption in the residential sector and in other sectors is going to be reduced. But it has to be done with a lot of care,” she says, explaining that price increases usually encourage consumers to change their habits.

Drew Leifheit is Natural Gas Europe's new media specialist.