June 6, 2017
BRUSSELS INSIDER #1 by Sonja van Renssen
LNG’s “virtual pipelines” may reshape the EU gas market
June 6, 2017
The European Commission did not foresee small-scale LNG deliveries via road or sea as a potential game-changer for the European gas market. But that’s exactly what may be happening. Andrei Belyi, a Russian researcher, came to Brussels last month to talk about how LNG – and its distribution via containers for end-use in transport – may transform gas markets in the Baltic States and Central Europe. Energy Post caught up with him and went to the Brussels Energy Club debate about the disruptive power of LNG that he was here for.
The European Commission does not talk about small-scale LNG deliveries, overland or by sea, in a first-ever EU LNG strategy published back in February 2016. That strategy, which was part of a bigger gas package that aimed to increase Europe’s energy security, focused on giving countries access to LNG through import terminals and interconnectors. In it, the Commission recognises that LNG will increasingly be used as an alternative fuel in shipping and trucks, but presents this purely as an environmental benefit. It does not foresee the emergence of small-scale LNG deliveries to deliver fuel for transport as the potential game-changer for gas markets that it may be turning into today.
On a recent visit to Brussels, Russian researcher Andrei Belyi, Associate Professor at the University of Eastern Finland and a gas expert, made the case that LNG – and its small-scale distribution through “virtual pipelines” – may transform gas markets in the Baltic States and Central Europe (see also Karel Beckman’s recent article “LNG terminals give rise to unexpected boom in the Baltics”).
European energy regulators have defined a “virtual pipeline” as “the supply chain transporting natural gas to final consumers in the form of CNG or LNG” (see this ACER presentation, p52). In other words: “LNG was a means of transport, now it’s become a fuel,” as Samuele Furfari, a long-time Commission official and author of a new book on energy and energy geopolitics, said in a recent interview with Energy Post. The Natural & bio Gas Vehicle Association for Europe (NGVA Europe), released a new study just last week, which “validates” natural gas as a key means of decarbonising the transport sector.
Small is beautiful
Belyi starts his story ten years ago: Europe was a “dead area” for LNG. “There was almost no LNG market in Europe, apart from the Mediterranean region,” he says. Today, in contrast, LNG has a growing market share, and shows a price decline and supply glut. Liquefaction capacities are due to double by 2020. Moreover, unlike in earlier times, small-scale LNG has become economically viable. The price decline seen since 2014 has also contributed to a decline in operational costs. For example, charter rates are down to US$30,000 a day, which is sometimes three to five times lower than in 2011-2014, Belyi says.
The emerging use of LNG as a fuel in its own right – like Furfari, Belyi believes this is hugely significant, comparable to an earlier shift from coal to oil products – is making the European gas market multi-dimensional: big pipelines for long-term supplies, big players in LNG (e.g. Qatar), small players in pipeline gas (through capacity markets) and virtual pipelines (LNG containers for small-scale deliveries). “Practically, the development of LNG containers reduces the need for interconnections and re-gasification facilities,” he adds. “In the mid-term perspective, they may reshape the [EU’s] policy priorities in the field.”
Belyi already detects a shift in EU interest away from re-gasification terminals to bunkering projects – financing of the former has declined, while the Commission approved seven different bunkering projects in 2016-7, he says. Bunkering could potentially take on some of the flexibility function currently carried out by underground gas storage sites, he notes – flexibility could enter the gas market from producers.
In the Baltic region, LNG is the key priority for diversification of gas supplies. But “it seems that additional large-scale import terminals make little sense”, argues Belyi. For many regional stakeholders, even the famous “Klaipeda LNG [terminal] is a good example of diversification, but not of market development [because] it includes a long-term contract with Statoil”. Long-term gas contracts are on their way out in Europe as the spot market and more storage, including LNG bunkering, take over. Fragmented supply routes via containers are getting more attention. There are already emerging supplies in Estonia by Jetgas, says Belyi. Jetgas describes its principal activity as “the import and sale of LNG in the Baltic states”.
“The politicisation of Gazprom’s supplies provides an extra impetus for LNG because it does not carry the same complex geopolitical perspectives,” continues the Russian researcher. “Moreover, Russian LNG is not subject to a monopoly and therefore we may see competing LNG projects.” Among others, LNG Gorskaya Overseas plans to develop its LNG bunkering facilities and exports independently from Gazprom. Regulatory transaction costs related to pipeline capacity markets are also helping drive change, Belyi adds: “Often, small companies prefer using liquefied gas storages and shipments than to participate in the pipeline-based market platforms.”
Gazprom under pressure
Gazprom’s own plans to get a piece of the LNG action seem to be on hold. The company’s big “Baltic LNG” export terminal has been repeatedly delayed since its inception in 2004. Originally planned with a fast-growing and under-supplied North American market in mind, the project has effectively been derailed by the US shale gas boom. It also suffers from two major drawbacks in Belyi’s mind: one, it is far from Russia’s gas production sites and two, large LNG tankers cannot pass through the shallow waters of the Danish straits.
A new memorandum of understanding signed between Gazprom and Shell in 2015 does not appear to have revived the project. Instead, rather ominously, chemical suppliers for gas refrigeration cancelled their plans for Baltic LNG at the end of last year, Belyi reports. Of course, Gazprom and Shell could reorient their project to supply a regional Baltic market with LNG for shipping for example. But “European companies prefer to buy non-Gazprom [LNG] gas,” Belyi notes. The whole point of Europe’s security of supply policy is to reduce dependence on Gazprom.
LNG exports are an opportunity for other Russian gas producers however: “European states seem very willing to see non-Gazprom Russian companies in the Baltic region,” Belyi says. “Non-Gazprom Russian gas is an opportunity to depoliticise the supply of gas from Russia to Europe.” One potential hurdle is EU (and US) sanctions on Russia: some restrictions could be applicable to Rosneft and Novatek, Russia’s first and second independent gas producers.
Belyi believes that Gazprom will come under increasing competitive pressure even in the pipeline business incidentally: “Paradoxically, the more Gazprom builds new pipeline capacity, the more new players will attempt to access it,” he says. Rosneft has reportedly already said it would be interested in using some of Nord Stream 2’s capacity. Gazprom’s share of Russian gas production has declined from 90% in the early 2000s to less than 70% today.
The most far-reaching agreement of recent months is perhaps that between Poland and Qatargas, the largest LNG producer in the world. This really lays the ground for the transatlantic LNG trade because Qatargas has partnered up with ExxonMobil in the Golden Pass LNG export terminal in Texas, which got the final green light from the US Department of Energy at the end of April. It introduces the opportunity for intercontinental “swaps”, whereby cost-competitive US LNG can be sold in the Baltic region without direct physical delivery across the Atlantic.
EU as market-maker
Not everyone at the Brussels Energy Club debate – which was held under Chatham House rules – agreed with Belyi that LNG is already a game-changer in the Baltic States. Some pointed out that, at the time of the EU’s LNG strategy, policymakers saw the glut coming but that use rates of LNG terminals went down anyway as non-LNG became more competitive.
Others argued that the real game-changer would be a change in rules – in this case, full implementation of the EU’s third energy market package – and the creation of a real regional market. But despite the EU’s high hopes on the latter, Baltic States are not necessarily fully aligned on energy policy, one expert pointed out. When it comes to the internal market, some argued that the third package is all about competition and competition alone will not guarantee security of supply; that requires diversification of suppliers too.
What does all this mean for the wider European gas market? One point that Belyi makes is that in an LNG world, the EU could go from market-taker to market-maker: “The EU has typically been seen as squeezed between US shale gas and the Asian market, but it could be the other way round in future. [Via LNG, the gas hubs] NBP and TTF could become market-makers.”
On the other hand, LNG could be a way for Russia to sell more gas to Europe and even, one day, for Gazprom to extend its reach through other means than big, controversial pipelines.
Another stakeholder argued that Europe’s gas market is not at all set up to embrace LNG: the EU’s third energy package was designed to bolster competition in a mature market dominated by big players. Instead, an emerging market like LNG may require vertically integrated – not unbundled – companies, to get off the ground. This makes the case for an update to the EU’s gas market design. There have been rumblings in Brussels of another gas package in 2018, to mirror the electricity market redesign currently on the table. If it emerges, one of the big questions will be how it drives competition and security of supply through new technologies like LNG.