Europe’s rising imports foster competition [NGW Magazine]
In Europe, domestic gas production is declining rapidly while import dependence is rising. The EU-27 imported almost 90% of gas demand in the first three quarters of 2020, according to data from the European Commission. If Norway is not considered an external supplier, the figure is closer to 60%.
Former EU member UK, which had been self-sufficient, is also importing more gas, despite the drop in demand from industry and power generators over the years. Production is still about half annual demand, but it is much less than that on a peak demand day, particularly when there is little wind and sun.
On the continent, production from the Groningen field in the Netherlands has declined from over 50bn m3 in 2013 to about 9bn m3 in 2020, as the operator responded to government concerns about tremors caused by rapid changes in production.
The field is expected to stop production in 2022, although its future as an emergency supply source beyond that date is still being debated by government and industry.
Key suppliers to Europe are Russia and Norway with a market share of around 44% and 28% respectively, based on 2019 data from the commission, accounting for both pipeline supplies and LNG. Other suppliers include Algeria, Qatar, US and Nigeria.
New suppliers such as Azerbaijan are also entering the market. The 10bn m3/yr Trans Adriatic Pipeline (TAP) – which became operational at the end of last year – brings gas from the BP-operated Shah Deniz field in the Caspian Sea to Italy and Greece and perhaps further onwards to eastern Europe in the future.
TAP adds to a number of gas infrastructure projects that were recently commissioned to link Europe with external suppliers. That includes Gazprom’s 31.5bn m3/yr TurkStream project which brings gas from Russia to Turkey and the Balkans. The 2.6bn m3/yr Balticconnector linking Finland with Estonia and the Baltic gas market is a smaller but still significant project, given the size of the market. That was also commissioned last year.
Meanwhile, the 2.6bn m3/yr Krk regasification terminal in Croatia became operational at the beginning of 2021. Other countries in eastern Europe including Ukraine may get access to more LNG – for example from Greece’s Revithoussa LNG terminal – once the EU-backed 3bn m3/yr Gas Interconnector Greece-Bulgaria pipeline is up and running, possibly by the end of the year. Moreover, Poland will start importing piped Norwegian gas via Denmark in October next year through the 10bn m3/yr Baltic Pipe. To this end, the soon-to-be-completed Gas Interconnection-Poland-Lithuania (GIPL) will enable Poland to export some of this gas to the Baltic market.
Europe may need these additional import routes. Gas is expected to defend its market share in the energy mix at least until 2030, although demand could decline slightly, according to various forecasts. The coal phase-out – and in some countries a nuclear phase out – are some of the supportive factors for gas demand.
“Import needs are strong and will remain very strong,” the chief economist at French think-tank Cedigaz Armelle Lecarpentier told European Gas Dialogues, a series of webinars hosted by Natural Gas World in early March.
“Europe benefits from liquid hubs, strong capacity of underground storage and diversity of gas supply sources with a large amount of pipeline gas imports and also large quantities of LNG imports,” she added.
LNG key for competition
Europe’s LNG import terminals – which now total 23 including three in the UK – have enabled suppliers such as the US to gain market share. LNG imports dropped sharply in 2020 owing to lower demand caused by the Covid-19 pandemic. Prices at European hubs did not support US imports as the bloc’s gas demand declined by almost 4% year-on-year in 2020, according to Cedigaz. However, LNG imports have started rising again in line with an economic recovery and the drop in prices in Asia.
In 2019, LNG imports rose sharply by almost 30% year-on-year. That year, Europe imported around 18bn m3 of LNG from the US compared with 32bn m3 from Qatar, 21bn m3 from Russia and 16bn m3 from Nigeria, according to BP statistics.
Egypt is also tipped to become a major LNG exporter to Europe in the future. Exports from its 7.6bn m3/yr Damietta liquefaction plant resumed this year after Eni and partners settled a long-standing dispute with Egypt relating to a lack of feed gas when Egypt’s own gas demand rose. The settlement will enable Eni to export surplus gas from the Zohr and Nooros fields as LNG.
LNG supports hub liquidity as it brings in more players competing for market share. Europe has two liquid hubs, the Dutch Title Transfer Facility (TTF) and the UK NBP – where foreign exchange is an additional risk to manage – while other European hubs are playing catch-up amid signs of improvement.
Traded volumes on all of Europe’s major hubs declined in 2020, with the exception of TTF. The two German gas hubs, Gaspool and Netconnect Germany, will merge in October this year in a move to boost liquidity.
Ukraine is also aspiring to become a gas hub. The recent unbundling of its transmission system operator will support this development as will its cross-border interconnectors and over 30bn m3 of storage capacity, of which it has not needed more than half for its own needs in recent years.
Yet plenty of work remains to be done for Ukraine to develop into a regional, competitive gas hub. For example, the 27bn m3/yr Trans-Balkan Pipeline is underused with only around 1.4bn m3 of transmission capacity contracted. High tariffs on the Moldovan section of the line are one of the key sticking points. The pipeline – if efficiently operated – could bring gas for example from LNG terminals in Greece and Turkey to Ukraine and then onwards to Europe. Alternatively, in the opposite direction, it could bring LNG from Poland’s Swinoujscie LNG terminal to Greece.
“We see significant potential for this region because of the LNG terminals in Greece, LNG terminals in Turkey and the TransAnatolian Pipeline, of course,” the CEO of the Ukrainian gas transmission system operator (GTSOU) Sergiy Makogon told European Gas Dialogues. “So we believe if the transportation cost for the entire route were attractive, we could create significant additional inflow of gas to Ukraine and then through Ukraine further to Europe. Because we are connected to Slovakia, Poland, Hungary we can create this entire south-north route,” he said.
He also flagged the idea of bringing gas from Turkmenistan and central Asia to Europe through Ukraine. Turkmenistan is a major gas producer, and shipping some of its gas to Europe through the proposed Trans-Caspian gas pipeline has been talked about for decades.
The Trans-Caspian pipeline has also been selected as an EU Project of Common Interest although the other littoral states are unlikely to let it go unchallenged as some of them also have market share in Europe to protect. The pipeline would cross the Caspian Sea to Azerbaijan and from there the gas would be shipped through Georgia and Turkey and onwards to Europe.
An alternative would be to ship central Asian gas through Ukraine but that will also not happen. “This cannot be done without the agreement of the Russian federation, to provide the transit of gas from Kazakhstan and Turkmenistan through Russia to Ukraine and further to Europe,” he said.
Ukraine’s transit deal with Russia expires in 2024. In 2019, the Ukrainian network carried over 70bn m3 of Russian gas destined for Europe. Russia will be much less dependent on the Ukrainian route once Gazprom’s second 55bn m3/yr Nord Stream pipeline is built. However, pressure from the US and eastern European countries to halt the project is strong and the project is facing delays.
Gazprom will also be required to operate the pipeline in line with the EU’s Gas Directive which enforces ownership unbundling and third party access – this means the pipeline may not be able to flow gas at full rate once it has been completed. The European Commission has already demonstrated its ability to restrict flows from Russia, capping flows through an onshore pipeline taking gas from NordStream 1.