ENERGY WATCH #4 - October 9, 2018
Russia sees gas exports to Europe grow – but Europe boosts competition and renewables
by Karel Beckman
While Europe is planning for the “decarbonisation” of its gas sector, and considering how to reduce its dependence on Russian gas supplies, the Russians themselves are enthusiastically planning for rising gas deliveries to Europe.
At the ONS oil conference in Norway recently, Elena Burmistrova, the head of Gazprom Export, said the Russian gas giant wants to increase its exports to Europe beyond record high levels seen last year.
“Last year we achieved the record figure of 197 bcm (billion cubic metres) and our ambitions are going much higher for the next year,” she said.
In her presentation to the conference, Burmistrova showed that Gazprom’s share of European gas use is on the rise:
Burmistrova said she expected European gas demand to grow by 80 bcm by 2030:
Russian energy minister Alexander Novak is equally bullish on the prospects of Russian gas exports, both to Europe and to China.
At the St Petersburg Gas Forum, on October 4, he said he expected Russian gas exports to grow by 6-7% per year to 2035, while global gas demand would grow – according to Novak – by 2.6% per year.
In addition to pipeline gas, Russia is increasingly getting active in the LNG market. Russia exported 205.4bn m3 pipeline gas and 15.5mn mt LNG (21bn m³ of pipeline gas equivalent) last year, according to the BP Statistical Review of World Energy. Novak said that by 2035, Russia could export 80-115mn mt/yr of LNG.
“Gas demand in China will increase by 447 bcm, in the US by 446 bcm; in the rest of Asia by 197 bcm, and in Europe, we expect growth of about 70 bcm by 2035,” Novak said.
Russia is making a lot of money with its gas exports: gas prices rose by a fifth last year in Europe.
At the same conference, Gazprom CEO Alexei Miller noted that the Nord Stream pipeline was working at 7% above its design capacity of 55 bcm, year, “further proof that Nord Stream 2 is needed”, according to a report in Natural Gas World.
Millers said he expected Nord Stream 2, which also has a capacity of 55 bcm, to become operational on 1 January 2020.
Gazprom is also building a 33 bcm pipeline to Turkey, Turkstream, which is expected to be completed in two months, and a 38 bcm pipeline to China, the Power of Siberia, which should be ready in 2020.
There are essentially two ways in which Europe can reduce its reliance on Russian gas: it can try to increase competition in the EU gas market or it can replace gas by alternatives.
ACER – the European Agency for the Cooperation of Energy Regulators – on 3 October published a new edition of its Market Monitoring Report (MMR), which on the whole is positive about the competition in the EU gas market. ACER said that “gas wholesale market integration continues”.
However, it also noted that “the situation is diverse geographically. Important barriers remain in some Member States, in particular in South-East Europe, negatively affecting market functioning and liquidity.”
In addition, ACER reported that “Europe is becoming more dependent on gas imports. Demand for gas in the EU rose by 5% in 2017 compared to the previous year. The increase was mainly driven by increased gas-fired electricity generation. The EU imported 76% of the gas it needed, most from Russia, Norway and Algeria. LNG imports were 12% higher in 2017 than in 2016. Domestic production continued to decline and stood at 24% of EU consumption.”
Nevertheless, according to ACER, “the European gas system is characterised by high overall levels of Security of Supply (SoS).On average, only 25% of the available capacity of LNG facilities was used in 2017. Underground Gas Storage (UGS) facilities’ utilisation rate was 57%. The utilisation rate of cross-border Interconnection Points (IPs) measured by the yearly average ratio of nominations over booked capacity in 2017 was estimated at 57%.”
“Investments in infrastructure and regulatory measures (like the application of reverse flows) to alleviate bottlenecks appear to be effective”, noted ACER. “However, in some regions, mainly in South South-East (SSE), bottlenecks remain.”
The EU gas system also “showed high levels of resilience in the face of accidents (e.g. Baumgarten IP accident) and climatic conditions (colder winter than usual) in 2017. Year-on-year changes in gas flows were smoothly accommodated when market circumstances dictated it. This shows that many markets have improved in terms of flexibility and liquidity and that the infrastructure can guarantee gas supply even during unexpected events. Markets in the North-West Europe region tend to be the most competitive and resilient. A few Member States (MSs) still depend on a single source, which hinders the development of a competitive gas wholesale market.”
More positive news is that “European gas wholesale markets continued to show increasing levels of convergence in 2017, in terms of both supply sourcing costs and of gas hub prices…”
Europe is trying to improve gas market competition in South East Europe in various ways, in particular in the form of four projects: three pipelines and one LNG terminal, Krk in Croatia.
The pipelines are TAP (Trans Adriatic pipeline), BRUA (Bulgaria, Romania, Hungary, Austria) and IAP (Ionic-Adriatic Pipeline).
Analyst John M. Roberts wrote an article recently for the Atlantic Council in which he discusses where those four projects stand today. The publication is part of what is called the “Three Seas Initiative”, which was adopted at a summit in Dubrovnik in 2016 by twelve European member states.
Some of his conclusions:
- “It is absolutely crucial for European and national institutions to view commercial and energy security considerations on a truly European basis, rather than through a narrow national lens.”
- “There needs to be a great deal of grant aid or highly concessional funding to secure the development of such infrastructure. In this context, the Three Seas Initiative can play a crucial role, since its focus is as much on the need to ensure regional energy security as on the commerciality of the links required to connect the countries of the Baltic, Adriatic, and Black Seas.”
- “If BRUA, IAP, and Krk all proceed as they should, this will go a long way toward securing the gasification of the Balkans, particularly the western Balkans. The completion of these three projects in or around 2020 will also contribute significantly to the goal of various EU member states, notably Poland, of ensuring that gas can flow freely between the Three Seas. And, if problems concerning Hungary are resolved, they will go a long way toward achieving the goal of substantial gas-pipeline interconnections between the Three Seas.”
- “That said, more will still need to be done. The IAP is required not only for gasification in the western Balkans, but also to serve as a backup system for regional energy security, particularly if the problems concerning TAP’s landfall in Italy are not resolved. There is still a need to ensure that existing and planned pipeline systems and interconnectors in Central Europe are capable of ensuring that, if necessary, Caspian gas can flow north from TAP into Central and Northern Europe, and that liquefied or piped gas entering Poland can flow south to the Balkans via BRUA and, ideally, the IAP.”
- “Once the Three Seas are connected with bidirectional pipelines, that will leave only one major regional gas-security issue still to be resolved: the use of the major trunk pipelines developed by Gazprom’s antecedents in the Soviet era, once Gazprom implements its policy to halt gas transit via Ukraine in or after 2019. The answer will largely depend on events in Ukraine itself, including whether the reform movement there— epitomized by the new generation currently managing Naftogaz Ukraine—wins out against a corrupt, but entrenched, establishment. But that is another story.”
There is a second way of reducing reliance on Russian gas – and that is just using less gas.
As a matter of fact, whether European gas demand will really grow as much as Gazprom thinks it will, is very uncertain. Elena Burmistrova in her presentation based herself on what she called a “consensus forecast”. But she also showed a chart demonstrating that projections of European gas demand vary hugely, so that there really is no “consensus” on any forecast:
Note also that these projections go only to 2040, while Europe has great ambitions of course for 2050.
In an analysis of a recent gas conference in Barcelona, Henning Gloystein of Reuters noted that the “global gas industry, boosted by a host of new projects to feed booming demand, is in better shape than at any point in the last five years but analysts warn it is getting ahead of itself, pointing to the rise of renewable energy as a threat.”
“The oil and gas industry are undergoing major disruption from electrification and renewables,” said Bernadette Cullinane, of Deloitte Consulting. “LNG producers must lower costs to compete with solar plus storage,” she said, warning that projects vying for investment, but unable to reduce costs enough to compete with renewables, were likely fail.
“We are an industry in flux. There are public policies in place around the world and technology developments that fundamentally challenge the gas industry outlook,” said Deepa Poduval, senior managing director for oil and gas at U.S. engineering, procurement and construction firm Black & Veatch.
The gas industry is growing by just 1 to 2 percent annually, said Dumitru Dediu, who leads the global gas and LNG group at consultancy McKinsey & Company.
Judging by sales of large gas turbines, growth may slow further, writes Reuters, “with orders down from the equivalent of 70 GW sold at the start of the decade, to less than 30 GW this year, according to GE, one of the major turbine makers.”
Siemens, another leading turbine maker, said growth of renewables was the main reason for a 56 percent fall in profits from its power and gas division in the third quarter.
News agency Bloomberg also noted in a recent article that “Natural gas-fired power plants will be facing more price competition from solar farms in some parts of the U.S. as falling battery costs make it possible to deliver electricity produced from sunshine even after dark.”
“Solar projects that incorporate storage are becoming cheaper to build per megawatt-hour in parts of the U.S. Southwest than new gas-fired generation”, according to Bloomberg New Energy Finance.