Gas Demand & Infrastructure: The Lights are On in Turkey

Most places are covered in terms of gas supplies for Europe, with pipelines in the north delivering gas from Russia, and pipelines in the south offering gas from the Caspian region and maybe beyond, not to mention LNG.

But how might natural gas infrastructure projects change the dynamics of the natural gas sector in Europe?

At the European Autumn Gas Conference, Henning Kothe, Project Director, Nord Stream AG, said that while he was aware of the pressure being placed on natural gas from renewables subsidies, there were investors investing in the gas business and, contrary to earlier gloomy forecasts by industry leaders, the future of gas was not so dire.

Showing a forecast diagram, he stated: "We don't put a question mark on the increasing role of renewables, but we see a clear decline in the role of oil and coal in the future in the energy mix."

The availability of energy was a must for Europe, according to Mr. Kothe, who said it must also be environmentally friendly and affordable. He noted that while a lot of money was being spent to support cleaner energy, it also needed to be affordable.

"This is currently the role of coal, which is being used as much as possible."

Additional costs were being paid to support renewables, while greenhouse gasses were increasing in Europe.

"Everyone should ask themselves, if we all feel that this is a scenario for the future - I, personally, cannot imagine that would be the scenario for the future; I see a clear need to change the current situation, where we need available, environmentally friendly and affordable resources.

"I personally see there is still a big future for gas in Europe," he contended.

He noted that 21% of supply was still being fulfilled by Russia, and that there would be a long-term import gap.

Mr. Kothe commented, "It's not necessarily Russian gas, pipeline gas or LNG - in the end it's competition between different sources that are competing in the European market in the future."

Current projects, he explained, would cover 55bcm of the gap, but how to deliver the outstanding 150bcm of natural gas was still a question.

While Nord Stream was currently operating purely as an operator, he reported that the company had done a feasibility study on third and fourth lines in the Baltic Sea.

"The current status is, the feasibility study is finished, it has been presented to the shareholders, who have concluded that based on these results they have engaged in the process of creating a new company responsible for the extension project, and the current shareholders need to take the decision on whether they will participate in the extension project as a shareholder. We expect that these decisions are in place and the company is funded by the future shareholders for an extension project in the first quarter next year," he said, reiterating that he saw a clear need for further investments in Europe's gas infrastructure.

John Baldwin, Group Political Adviser, BP, spoke about the Southern Corridor's role in European gas infrastructure.

To contrast the slides shown to delegates of different pipelines traversing Europe, he showed a map of lights over Europe (including Turkey, which was quite well illuminated) at night.

"I think that the other interesting part of this picture, is that you can see that the lights are on in Turkey."

Mr. Baldwin pledged to speak about the role of gas in the world economy versus in Europe; Azerbaijan's potential to supply Europe; and what BP had been up to in that context.

He stated: "There is, on a world scale, a growing demand for gas - this is not at all surprising given the growth of gas in the north OECD countries. What this tells us is that renewables are important and, of course, growing fast. Hydro/nuclear is sort of relatively stable up to 2030, but coal and oil look to be in long-term decline - bad news for the oily part of our business - but that's more than compensated for the growth in gas demand worldwide."

While optimistic on a world scale, he admitted that in Europe there was a relatively flat demand profile, with the exception of Turkey and southeastern Europe, where Mr. Baldwin said he believed there would be increasing gas demand.

"The key is the decline in domestic or indigenous production in Europe," he added. "By 2013, I hope that our numbers and Nord Stream numbers are roughly in the same territory - what you see is that by about 2030 there will be a significant requirement for gas import into Europe, and it's a big number.

"How are we going to supply that? By additional imports, whether they be from Russia, North Africa, additional LNG imports, and these sources of gas will all compete with one another. To that list, for Europe I would like to add the potential from the South Caspian basin."

According to him, a reasonable history of production development had been established in Azerbaijan, mostly driven by an oilfield that exports through the BTC pipeline, which showed the country's ability to develop very large projects.

"Shah Deniz, which was discovered in 1999, began delivering gas in 2006, and today it delivers some 9bcm/annum of gas into Turkey. That's not the end of the story - there are additional volumes of gas in Azerbaijan, but further out, will have the potential to supply gas to both Turkey and to Europe."

He said that BP was quite well advanced in looking at Shah Deniz "deep gas" which was expected to add 20% onto the plateau production of Shah Deniz.

"What have we been doing on Shah Deniz II and how does that fit into the supply of gas to Europe?"

It was an enormous project, he said. "If you look at it from end-to-end, adding up the upstream terminal expansions, the pipeline through Azerbaijan and Georgia to Turkey, the Trans Anatolian pipeline across Turkey and then the options for supply to Europe - either the Nabucco West up to Baumgarten in Austria, or alternatively, the Trans Adriatic pipeline that goes across to Italy - you're looking at something in the region of USD 40 billion, when you add it all up."

He explained that Shah Deniz II was a 26bcm/annum project, with 6bcm having been sold to Turkey and 10bcm intended as a destination for Europe.

"It's actually a gas condensate field and we expect it to produce around 100,000 barrels of oil a day."

He reported: "The project's pretty well advanced; we've signed MOUs - (EC President José Manuel) Barroso and (Azerbaijani President Ilham) Alijev have signed an overall political framework in January of 2011. There are a number of agreements with the Turks concerning the transport of gas across Turkey; earlier on this year, BP, along with its partners on Shah Deniz, SOCAR, committed to front-end engineering design, which was the initial commitment of around USD 4 billion to the project."

"I hope I have given you a sense of the potential for the supply of gas to Europe from Azerbaijan in the context of European gas demand and also some sense of what we're also doing in the ground to turn the project from a dream into a concrete reality of concrete and steel," concluded BP's John Baldwin.

E.ON Ruhrgas' Matthias Keuchel, Senior VP, Gas Supply Division, South-Caspian Region, said the supply options from the Caspian region would have an effect upon liquidity in the European gas markets, which he pointed out had quite a wide spectrum of liquidity: the highest in the UK and northwestern portions of the continent, falling as one went further south and east.

Showing a pipeline chart, he asked, "How can the Southern Corridor improve this situation to get better inter-connectivity into the market? E.ON is a shareholder in the Trans Adriatic Pipeline (TAP) project, along with Axpo and Statoil, and we believe that the development of this project can bring a lot to the southeastern region when it comes to development of the gas market there."

Mr. Keuchel explained that TAP was supposed to reach Italy. "The additional volumes landing there - 10bcm/year - would then feed into the Italian market, get them to the trading hub in Italy, but it's also possible due to new developments to bring the gas more north, because there will be investment into reverse flow, so the gas is not solely dedicated to Italy, but could go further on because its not such a promising market and might not be able to take the gas. It's the entry into the European gas market which becomes more and more interconnected."

He added that TAP would also improve the supply situation in the western Balkan area.

"There is a pipeline project planned here," he showed on a map, "the only Adriatic pipeline going up to Croatia finally, which would bring Caspian gas into a region that is currently very much dependent on Russian gas; some countries are 100% supplied by Russia and they are interested in getting additional supplies from new sources.

"Turkey is the greatest growing gas market in Europe," he noted. "Last year there was a consumption of 43bcm - this will increase up to more than 70bcm by 2030, so there is still a great potential to absorb additional gas."

What was necessary, according to Keuchel, was that the players be prepared to believe in the future of gas; to invest into respective infrastructure; and the willingness of producers (like the Shah Deniz group) to offer market adequate pricing within long term contracts.

"Which means that we really have to cope with the current market uncertainties and the future ones of volatile pricing and the dominance of spot market pricing in Europe," he said.