Europe: When Will LNG Come Back Home?
In a speech about LNG perspectives on the supply side for the European gas sector, at the European Gas Conference in Vienna, Austria, Laurent Vivier, SVP Strategy, Markets & LNG, TOTAL Gas & Power, commented that energy security was the “white elephant in the room.”
His presentation included a chart displaying gas supply-demand balance for the EU 28 plus Norway and Switzerland, which stacked up various sources of supply and showed the delineation between flexible supplies (like spot LNG) and inflexible supplies (like take-or-pay contracts from Gazprom). The demand trajectory in the figure showed a slight uptick around 2022, the time when he said it will be necessary to balance supply with demand.
“When we talk about security of supply, there is enough gas to supply Europe,” commented Mr. Vivier.
As for the prospect of whether LNG can play a credible alternative in the context of energy security, he observed, “Europe has a lot of developing infrastructure, has a lot of import regasification terminals – the logistics are there. What we need to keep in mind is that all the flows are being directed to Asia which has contracted most of the flows – those which have been re routed from Europe to Asia have been contracted with asia and are just waiting for Europe to call them back.”
Europe, he said, must send a price signal towards this end.
“When you know that the prices in Asia – even spot – are between $9-10/mmBtu, they are much higher than Europe, and long-term contract prices are at above $10/mmBtu, so this security, if it comes from LNG, will come at a cost,” he opined.
According to him, Europe is lucky to be surrounded by an ample supply of gas, whether from the North Sea, Russia, new pipelines traversing Turkey or from North Africa.
Total, he said, sees the concept of gas restabilizing at current levels and does see an increasing demand for natural gas in Europe, just pass 2020.
However, noting the chronic state of low demand in Europe, he recalled, “For 5 years we've heard 'it's a bit worse than the previous year, but we've hit bottom and it's going to be better next year.'”
But past 2020, Mr. Vivier said, there are now reasons to believe that European demand will indeed grow. Showing a diagram, he explained: “It's basically decreasing all the time, a bit lower than last year, but it's going to increase in the future.”
The reasons? For one, he said gas-fired generation has bottomed out. His presentation showed a multitude of factors affecting gas demand in power, like nuclear phase-out, environmental regulations and their impact on coal, and the need for flexible renewables back up.
He offered, “We hope we are right thanks to the impact of new regulations, and we will start feeling the impacts of new regulations, maybe a new CO2 reduction initiative, which should help gas go back into the power mix.”
A few years ago, he said, gas was being presented as the best friend of renewables. He admitted, it has not exactly been the reality, “but we do hope in the future that the increasing share of renewables and their variability of wind or solar that the intrinsic value of gas will at some point be recognized. It is the most flexible way to ensure back up for variable sources of electricity.”
Meanwhile, while gas is still gloomy in Europe, it certainly isn't outside of Europe. Mr. Vivier showed the LNG supply-demand balance in North America, Europe and Asia.
He commented, “You see a demand which is growing steadily, in all sectors.” Industry, for one, transport and export projects.
“All the conventional and unconventional production will allow the US to keep prices which are much lower than anywhere else in the world in terms of Henry Hub being around $4-5 mmBtu, which should allow for exports.”
Showing Asia's residential demand, as well as industry and power generation, he said: “The supply of Asia in general will be met by increasing domestic production. China, for example, will see a massive increase in unconventional gas.”
LNG, according to Mr. Vivier, will provide the balance in Asia. “Asia has been the driving force behind all the development of LNG in the past 5 years,” he commented.
For the time being, that LNG will definitely not be coming to Europe, he opined. Post-2020 Europe's increase in demand can be met by domestic production and pipeline imports, he showed.
But he noted the uncertainty in gas demand, and that 50% of contracts are linked to oil (whose price has dropped precipitously).
Meanwhile, in Europe gas is struggling with three layers of subsidies, according to him: CO2 price, feed-in tariffs and capacity mechanisms, all of which the gas industry is still struggling.
While Mr. Vivier said he believes the objective of CO2 reductions is for the common good, he said that when it gets mixed up with renewables policies and efficiency measures, market signals are weakened. The parameters for the ETS and target for 2030, he offered, will definitely harm some industries and their profitability.
Showing the three main prices for natural gas – Henry Hub, NBP and JKM – he observed that the past year had been troubled and complacency had set in the three years previous. “We are just back to a highly volatile market,” he said, but added that oil companies are used to big swings so they won't jeopardize their entire investment programs.
“It is not the right time today for any actor to launch a massive energy plant, which are increasingly complex and costly,” he commented. LNG plants, he said, needed $20-30 billion, so decision on such will be weighed carefully.
The low price of oil, he said, is also likely to freeze US LNG exports, of which he said, “are now uncompetitive in Europe and are just barely competitive in Asia.”
According to Total, US exports will be at levels just contracted, about 75 BCM. He opined that further projects might not see FID unless a change in the economic situation is seen.
Of Total's global LNG position, he said it is set to grow. “Total is a bit of a frontrunner in LNG, but we are seeing that other companies are also trying to build an international portfolio with sources of LNG worldwide,” he observed, mentioning Austria, the US and the Middle East.
Total, he reported, has LNG plants being built in Australia and Yamal in Russia; the latter project, he said, is going forward despite the obstacle of sanctions against Russia.
“LNG plants usually have a habit of slightly being lat and overrunning cost,” he said. “Yamal is the exception. It's going very smoothly with the suport of Novatek and CNPC, construction of the terminal is going very well.”
Sanctions, he admitted, are an obstacle to the project's financial planning.
Meanhwhile, Mr. Vivier said that Total recently announced that it is now producing more gas than oil.