Weekly Overview: Europe's Gas Security Blanket
When is a gas pipeline not a gas pipeline? When it is a Russian export project. Then it is the subject of conferences and debates and legal argument about what exactly Russia is trying to do and on what grounds it could best be stopped.
Europe is keen to diversify its gas supplies and that includes new routes. Nord Stream 2 could bring to Europe five times more than the Southern Gas Corridor each year, with less transit risk – political or seismological. Nord Stream 1 has worked fine so far. There is gas to fill it, and at relatively low cost of production, with the developed Bovanenko field on stand-by.
Second, Gazprom owns just half of the project: the other half belongs to well-regulated companies who have been for decades the bedrock of Europe’s gas supply, if not at the forefront of the moves to liberalise the market.
They can see potential value in shipping gas for several decades through an unregulated subsea pipeline that they have paid for out of their own pockets, to their customers in central and western Europe as their own gas production there shrinks each year, not to mention in strengthening their hand with the world's biggest gas exporter.
On the other hand they can also see the wave of LNG coming to Europe, and what low oil prices have done to the gas price. They can also see the ease with which a floating storage and regasification LNG terminal may move from concept to an operational reality in a year or so. The decision to proceed with the project, which is due this year, is not therefore a given.
No doubt Poland – now host only to the 33bn m³/yr Yamal line – and other countries in the region – some of which incidentally have not allowed foreign investment in the energy sector and have been slow to liberalise their markets – are regretting the further loss of transit revenues. They are lobbying hard for the line to be halted. Slovakia is relatively safe as Gazprom has a long term ship-or-pay contract for 50bn m³/yr until 2028 and it can make money out of reverse flow as well. Still, that's little more than half the available capacity.
Ukraine is the really vulnerable country but its pipelines too need a lot of money spent on maintenance and upgrading and metering, so there is some additional cost attached to that route as it is. But Nord Stream does nothing to stop other people’s gas flowing through it. And Gazprom will still find Ukraine’s pipelines useful to deliver gas contracted by Bulgaria and Romania.
Against that background the European Commission presented its security of energy supply package this week, some aspects of which dealt with natural gas in its various forms.
The idea that security of gas supply exists as a problem that the European Commission should address on behalf of its member states has been around at least since the early 2000s. But it has already eased a lot of the problems with the various incarnations of the gas directive, the last version finally enforcing the separation of energy supply from transport. That created open markets with commercially priced third party access. Gas can now flow much more freely towards the highest bidder.
Individual countries though – the Baltic states are an example – have also rebalanced their portfolio, widening not only their primary energy sources but also the number of companies they buy them from.
So it is unfortunate timing that the package should be presented just when European supply has never looked safer or cheaper. Gas demand is shrinking as renewables energy generation grows and industrial demand wanes. Buyers are under-nominating on their contracts, which means there is scope to increase supplies if an emergency occurs.
Second, low oil prices set the price for LNG, with dollars/barrel translating into dollars/mn Btu at a negotiable percentage, or slope. That used to be 14.8% of some $100/b before the crash of 2014, but it has since come down to 12% of something around $33/b, equating to a drop from $16/mn Btu to $4.00/mn Btu.
Changing LNG perspectives
LNG cannot reach every corner of Europe: there may be a lot of under-used capacity in import terminals in the Iberian peninsula but these are not useful for security of supply in mainland Europe except where they have reloading facilities. There is very little transport capacity overland into France.
But there are a some terminals planned that would be straightforward to set up as floating regas units, such as at Krk, an island of Croatia off the Adriatic coast. This approach costs a few hundred million dollars, making finance easier and so allowing more companies to get into the business by the time that Europe becomes the world’s LNG sink. It also creates flexibility that pipelines do not.
Ten years ago this would have been fantasy: technology, onshore infrastructure, and the market were not developed enough. But the old model of LNG is fast disappearing. It used to be built around 20-yr deals with the shipping, upstream and downstream bound irrevocably together. This is being replaced by a far leaner structure with each link in the chain now offering an opportunity.
Traders have lower overhead than utilities, they are better able to offset counterparty risk, they have fewer long-term business relationships to protect, and they are incentivised to take advantage of sudden price movements. And technology is improving too. As boil-off rates reduce and engine efficiencies rise, so the storage opportunities grow, allowing LNG finally to become like oil – a commodity whose security of supply the EC is apparently quite relaxed about.