GGP: EU Needs Pipelines And LNG: Comment
The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.
In the new political era, Europe needs to hedge all its bets where gas supplies are concerned – and that means opportunism backed up by long-term resilience in the system.
In early June 2017, The Netherlands is expected to receive its first LNG cargo from Cheniere Energy’s Sabine Pass terminal in the US. On May 22, Reuters reported that the Arctic Discoverer vessel, with a carrying capacity of 133,500 m³ of LNG, departed Cheniere’s facility on the Gulf Coast and is heading for Rotterdam.
This will be the first US LNG cargo to reach northern Europe – so far it has only gone to Spain, Portugal, Italy and Malta in the south. In most of cases, LNG shipments from Sabine Pass to Europe were requested during the peak demand periods. For example, in early December, Uniper won a tender from the Italian government to meet peak demand and so needed gas which came from Sabine Pass.
The expected arrival of US LNG revived hopes that LNG supplies – especially from the US – would be able to close growing supply-demand gap in Europe created by a rapid decline in the domestic natural gas production in the EU. According to the “EU strategy for liquefied natural gas and gas storage”, 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 and flexible LNG supplies.
While no one doubts that the new suppliers increased liquidity in the LNG markets, LNG might not be a panacea per se. The IEA report Global Gas Security Review: How Flexible are LNG Markets in Practice? published in 2016 stressed the fact that the “business model underpinning LNG production is by definition rigid…The result is a basic lack of short-term upswing capability in LNG production.”
The supply-demand dynamics might get complicated in the next decade as well when global gas markets will recover and soak up the oversupply. New demand will have to be covered from the new projects launched in an uncertain investment environment. A LNG Supply Outlook 2016 to 2030 published by the Center for Energy Economics (University of Texas at Austin) in July 2016 warns that taking final investment decisions (FIDs) in “an environment of low prices with buyers and off-takers of LNG reluctant to enter into the long-term commitments that most developers need to underpin the investment will be a major challenge. Yet if FIDs are delayed for too long there is a risk that at some stage after 2020 buyers could face a shortage of supply and rising prices once again.”
This means that Europe might soon be forced to compete with other consumers for LNG and consumers will pay a higher price. Already nowadays LNG-dominated regions in Europe – such as southern France – are subject to the sharp price spikes during the cold winter days while this is not the case of regions with access to both LNG and pipeline gas. For example, on January 20, price on France’s TRS hub reached €45/MWh.
A possibility of restricted LNG shipments by exporting countries following gas demand and price spikes at home should also be considered. In April the Australian government announced partial restriction of gas exports from July 1, 2017 for exactly those reasons. The “home market first” move might not be limited to Australia. Other major exporters may follow suit which might put an additional upwards pressure on prices.
Discussions on price dynamics in Europe have become more prominent in the media. While LNG is often portrayed as a source of “cheap energy”, some new pipeline projects – such as Nord Stream 2 – are seen as decreasing EU’s energy security and leading to higher natural gas prices in central Europe.
A study called The Impact Of The Construction Of The Nord Stream 2 Gas Pipeline On Gas Prices And Competition was published by Hungarian consultancy REKK in February 2017. The study assumed that that the project will have a “crowding out” effect on the capacities allowing access to western European gas markets, owing to the change in delivery point of the long term contracts. This inhibits market integration of western and eastern Europe, resulting in a higher price difference between (these) two regions”. Hence, the study assumes that in Hungary and Slovakia the prices will increase – compared with the 2020 reference scenario – respectively by €2.9/MWh and €1.7/MWh.
REKK’s report is however based on the static assumptions while the future is dynamic and the market will respond to price differences. One assumption is that only contracted volumes of gas to Bulgaria, Greece, Macedonia, Moldova and Romania will continue to be transmitted through Ukraine.
Speaking at the St Petersburg International Economic Forum in June 2016, Gazprom’s CEO Alexey Miller said that up to 15bn m³/yr of Russian gas will be transiting Ukraine by 2020 after the launch of the Nord Stream 2 pipeline. According to Gazprom Export statistics, the company’s gas exports to Bulgaria, Greece, Macedonia, Moldova and Romania barely reached 10.3bn m³ and will be in decline owing to the import diversification policies implemented by the governments of these countries, such as the Caspian.
Furthermore, even full use of Nord Streams 1 and 2 and the Yamal-Europe would require Ukraine’s gas transit system for winter peaks.
Second, eventual price differences between west and east would justify new interconnectors. Network codes have changed the capacity booking and new rules are already in place to build additional capacity. Market players will be able to book pipelines to access the hubs in the west as capacity is sold via an open auction process, and unused capacity, even if it is booked, is always available to the market.
Ukraine transit and interconnectors will therefore reduce the price gap between ‘mature hubs’ and emerging gas markets in central Europe. An assessment made by Eurogas Benefiting from a unified European gas market showed that greater west-east gas flows following the launch of Nord Stream 1 and Opal pipelines has already brought greater correlation to western European prices. One can assume that the same logic could be applied to the Nord Stream 2 as well.
One can argue that gas prices depend on many factors but infrastructure seems to be one of the most important variables in this price equation. The consensus seems to be that any additional infrastructure will have a positive effect for the consumers.
In an interview with Interfax Natural Gas Daily published on May 2, Vaclav Bartuska, Czech ambassador-at-large for energy security said: “Our interest is to have as many pipelines with our neighbours and as many gas sources as possible. We already buy gas from Russia, Norway and the German exchange, while the price has been for many years decided at the northwestern gas hub [TTF]. We have learned that having a bunch of interconnectors only helps the market in getting a better price from the suppliers.”
It is therefore in Europe’s interest to have as much sources as possible as they would provide increased liquidity, as well as an additional insurance against high prices and supply cuts. Healthy competition between LNG and pipelines could be beneficial for Europe if markets – not officials – decide which source is more convenient. Promoting one source at the expense of others – especially with the help of non-market mechanisms – could have a seriously damaging effect on Europe’s competitiveness.
Danila Bochkarev, East-West Centre
Disclaimer: The views expressed here are solely those of the author and do not represent views of his organisation.
The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.