Statoil: "We Will Need More Gas"

It was quite a statement from a representative of one of Europe's biggest gas producers.

In his appearance at the European Gas Conference in Vienna, Rune Bjornson, Senior Vice President Natural Gas at Statoil, said looking at the European gas market in a global context it had seen the most significant changes ever.

"I think the main markets are still characterized by regional differences, but to a lesser extent - they don't operate in splendid isolation as they did just a few years ago," he said. "Secondly, Europe is the only region, which, to a limited extent, recognizes gas as part of the solution to climate change. They are putting in place regulation which distorts price signals and to a large extent, now at least, favors coal."

He pointed out that coal could become the world's most consumed fossil fuel, which was a bit of a paradox when politicians worldwide were trying to address climate change.

"Thirdly, he said, "I don't think there's not a single European market as national differences on structure, price formation and energy policy persist."

First, he asked whether Europe truly had interlinked markets. "In my mind, we don't have a truly global gas market. Regions are less isolated today, thanks to a growing LNG market, but also due to continuous and efficient price information. The huge price gap puts pressure from consumers on suppliers, regulators and governments," said Mr. Bjornson, who said that Statoil did observe that the growing LNG trade did connect the markets, but with a caveat.

"However, I don't think the LNG trade is large enough to make for truly global market in the next decade. We do believe that the demand will increase in all the three major regions."

He recalled that the rapid growth of gas in the US related to the introduction of technology was also to do with competitive pricing that attracted investment to production, gas-to- power generation, pipelines, the petrochemical industries, etc., describing it as a "hat trick."

Bjornson explained: "It has resulted in lower energy prices, thereby increasing US competitiveness, also reducing US energy import dependency, perhaps becoming an LNG exporter in the years to come.

"On top of this, the US has experienced the lowest CO2 emissions for 20 years mainly due to the fact that natural gas is substituting coal in power production."

Asian gas demand, he remarked, was set for significant growth in the medium term due to China's economic expansion, and Japan's need for replacing nuclear in electricity generation.

As for European gas markets, Mr. Bjornson said they were very much dependent upon energy market regulation and policies, in addition to the general economic environment. He opined: "I think it is increasingly becoming a politically regulated market where pricing is significantly distorted. Even so, we are pretty optimistic. We believe in a relatively robust European gas market - toward 2030 we still expect it to grow by 100 bcm, mainly driven by the power sector.

"If look at the supply side, indigenous production is declining, and that trend is set to continue, especially for the Netherlands and UK. Shale gas could change this picture, but the jury is out on when and how much this could impact the supply picture - I don't think it could contribute significantly, and there is considerable political opposition on the continental part of Europe."

This, he explained, left Europe with a 250 bcm supply gap by 2030, which could be filled by gas from the Caspian region. Referring to Statoil's involvement in the Shah Deniz II development, Mr. Bjornson said, "We're working closely with our partners to materialize production and taking it all the way to Europe."

He also emphasized LNG supplies from existing and new producing regions, but said that no LNG production was dedicated to Europe, which had to compete for the resource.

Liberalization, he explained, was driving integration of European gas markets, but there were three speeds: the early phase, most mature (in the northwest) and slower liberalization (Central & Eastern Europe).

Energy policy was a national prerogative, he contended, and climate targets had not taken Europe towards a harmonized view. He said the different approaches to tackling energy and climate challenge had created uncertainty for market participants.

To illustrate his point, Bjornson compared the energy policies of the UK versus those of Germany. He said that gas, over time, would increase in the UK market at the expense of coal, reducing CO2 emissions.

"Germany has no clear stand on gas as a backup to renewables in their energy mix; there are no plans to reduce consumption of coal, which now backs up renewables when the sun isn't shining, leading to 1.2% CO2 emissions in 2012. They're paying a very high price subsidizing renewables achieving nothing," he commented.

Germany and the UK, he noted, had some vastly differing attitudes and approaches. "We believe the price of a commodity should be determined by the market. With heavy subsidies it is difficult to understand the price formation and also difficult to compete, so it is unclear who pays for what and what they get at the end of the day."

"The critical role of natural gas in the energy mix has been forgotten, when Europe could have set up a regulatory framework for lower emissions at a lower price: increasing natural gas use, decreasing consumption of coal.

"Even though we're facing these uncertainties, the fundamentals suggest we will need more gas, both in terms of supply and demand, and will continue to develop new supplies to meet demand," he continued.

Of the 100 bcm of natural gas from Norway to Europe, he reported that Statoil provided 80 bcm.

Bjornson added that Statoil was developing new gas value chains, adapting legacy contracts to new market realities where relevant and possible, and expanding commercial relationships (for example in the Caspian region, Tanzania, etc.).

He contended that, faced with a regulatory regime which subsidizes renewables, the Emissions Trading System (ETS) was about to collapse, as coal was so easy to burn.

"Unless we see a sign reduction in coal consumption, Europe could be stuck on a very expensive path, taking into account the heavy subsidies on renewables. These developments are not sustainable either on economic or environmental terms," he said.

Global gas markets remained regional but not isolated. "Europe is moving from market-based solutions to state intervention, distorting price signals," said Statoil's Rune Bjornson, who concluded there was no European market for natural gas, because of the national differences.