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Germany’s gas plan: diversify, increase, clean

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German Gas plan: diversify, increase, clean

by Zuzanna Nowak, June 10, 2019

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The German Energiewende is under stress. Nuclear and coal have both been consigned to eventual history putting gas firmly back on the agenda environmentally, economically and politically. It makes Germany, like the UK, an informative prism through which to consider gas’s role in the EU energy transition and there are some clear signals about the direction of travel. The recently-launched German Gas 2030 Dialogue should answer the EU-wide question that whilst natural gas is abundant, relatively cheap and up to 60% cleaner than coal, is it clean enough to have a role in the long run? Balancing climate concerns with security of supply and affordability make this a politically-charged, complex debate. Zuzanna Nowak considers the over-arching factors informing German policy decisions – decisions which could create a template for the EU as a whole.

Back in 2014 and contrary to expectations, Ralf Dickel of the Oxford Institute for Energy Studies observed that “the role of gas in the Energiewende was hardly discussed and is not addressed in official policy”. While climate and energy policies have remained at the top of government considerations, only now is gas receiving due attention as a way of supporting the transition. The Gas 2030 dialogue process launched recently by the Federal Ministry for Economic Affairs and Energy attempts to provide answers to pressing questions on the role for gas in the German energy transition now and in the long term. Conclusions from expert consultations are not due till the Autumn, so what factors are at play for the role of gas in Germany?

Consumption overview

Germany is still relying to a large extent on fossil fuels. The country’s power production mix currently comprises coal (lignite’s share amounts to 22,5%, hard coal 12,9% of the mix)and natural gas (12,9%), nuclear (11,8%) and renewables (34,9%), and others (5%). (See more tables)

These equations are, however, to be changed. Nuclear phase-out should be accomplished in 2022 with the last reactors, in Isar 2, Emsland and Neckarwestheim 2 plants, shutdown. Yet, renewables have overtaken the electricity generation gap created so far by nuclear infrastructure closure and are likely to mop up the remaining nuclear market share after 2022 with no impact on security of electricity supply.

It appears there is little room for gas plants to manoeuvre except as baseload for RES’ intermittency. However, at the beginning of the year, in addition to nuclear phase-out, Germany’s coal exit commission proposed a pathway towards decommissioning the last coal-fired power plants by 2038. While it is not obvious which energy sources will cover the demand gap, there is a high likelihood that the pace of renewables development will slowdown leaving at least a few percent of the market open to natural gas.

Gas demand growth will come from outside the power sector

Or more. Electricity production is not all. In fact it is only small part of the German gas story, as over 3/4 of this resource is used for other purposes – heating, cooling and heat for industrial processes.

The primary energy consumption structure shows a far greater predominance of fossil fuels: oil (34,3% share), natural gas (23,7%), coal (lignite 11,3%, hard coal 10%), nuclear (6,4%) and renewables (14%), and others (0,3%). Furthermore, with LNG development, transportation provides an increasing role for gas. (See tables)

Hence, whilst gas will probably remain in the background for electricity generation discussions, its role in other sectors is far more interesting. A lot will depend on the ability of renewables to respond to energy policy developments, the measure of success of energy efficiency measures and its own technological evolution but in any event, the quick carbon reduction wins combined with increasingly competitive price put gas in a strong position compared with alternatives under current and medium-term market conditions.

The Challenge: overcoming the Energiewende impasse

There is no doubt the Energiewende is in trouble. At the beginning of April 2019, Federal Environment Minister Svenja Schulze said that after four years of stagnation, Germany’s levels of CO2 emissions are finally decreasing. However, as well as being down to higher use of solar and wind energy and lower use of oil, gas and coal, it was also a direct result of freak weather conditions. She stressed that Germany has to implement new energy policy measures in order to get back on track vis-a-vis climate protection. Indeed, ambitious goals set in the framework of the EU energy policies and Paris Agreement will only partially be met by Germany in the next years. It seems that this impasse stems from the fact that they have set too much store by an all-renewable/all-electric approach while devoting less attention to the wider use of energy. In such a situation, the question on the supportive role of gas (after all, the fossil fuel with lowest CO2 emissions) in Germany’s energy transition becomes highly pertinent.

Security of supply and affordability

This imperative for growth is what makes price and security of supply such a pressing issue across the EU but especially in Germany. Angela Merkel admitted in her January 2019 speech, that due to nuclear and coal phase-outs, gas will play a more important role in Germany for another few decades and therefore announced that gas infrastructure is to be expanded in all directions. This kills two birds with one stone.

Firstly, whilst Germany’s gas supply sources have been reliable over in recent years, supply patterns will have to change by 2030.

Domestic gas production (currently catering for around 7 bcm out of 102 bcm consumed) is expected to decrease rapidly and by 12 years’ time only two major suppliers (Russia and Norway) will continue supplying when the Groningen field in the Netherlands will finally stop production. Both Gazprom and Equinor claim they are able to increase supplies to Germany in order to fill the supply gap that might occur but that leaves serious questions concerning security of supply. Germany, like Europe as whole, must diversify its supply to address this – and to maintain a competitive market to manage affordability.

Diversification = LNG

In order to stimulate diversification, in March 2019 the German cabinet agreed on a draft regulatory reform to reduce the costs to private investors willing to build LNG infrastructure. Three projects, in Brunsbuttel, Stade and Wilhelmshaven, are already in the pipeline. What sense does LNG make in a country that has a very well developed gas pipeline grid, numerous interconnectors and is a major European gas hub (planning to merger its two gas market areas)? By acknowledging LNG’s importance for security of supply as well as a solution to cleaner maritime and road transport, the reforms serve as a way to ease tensions with the U.S., counter the risk of tariffs (e.g. on cars) and mitigate against possible Nord Stream 2 sanctions. And of course, import American LNG. Politically and economically, it fits the bill.

Looking ahead – clean gas

Germany has it all to benefit from abundant and relatively cheap gas which in the short and medium term can constitute a flexible friend (combining access via pipeline and LNG transport infrastructure) as well as a temporary remedy (quick win) along the energy transition path. Yet, at least in theory, despite important infrastructural investments, there is little chance of perpetuating the use of this fossil fuel beyond the 2050 milestone of the “extensive greenhouse gas neutrality in Germany”. Being short-termist could result in expensive-to-undo carbon lock-in. Building in diversified, secure competitive gas as renewables’ partner of choice means Germany (like the rest of the EU) needs to think long term…ie post 2050. That means gas has to get clean.

The good news is there are numerous initiatives designed to create favourable conditions for synthetic and renewable gas technology development. These will directly contribute to 2050 decarbonisation goals. Turning clean electricity from RES (with temporary or seasonal oversupply) into energetic gases such as hydrogen or methane is not a new idea. Over 128 power-to-gas research and demonstration projects in Europe are already realized with the aim of testing such possibilities, with, among others, two flagship projects underway in Germany – Uniper in Falkenhagen for methanation and HaSynGas in Brunsbuttel for hydrogen. What is more, the existing and soon-to-be constructed gas infrastructure can be used for the purpose of storage of such carbon-free energy. This repurposing can prove in the future to be more economically viable than building new grid infrastructure, transmission lines and batteries for RES. Not surprisingly, both Russia and Norway want to include decarbonised gas in their export portfolios.

The topic has also reached the EU level. The clean gas and system repurposing idea was recently discussed during the 1-2 April 2019 meeting organized by the Romanian presidency. 17 countries’ delegates signed the Declaration on Sustainable and Smart Gas Infrastructure for Europe. But Germany wasn’t among the signatories (they refused to sign the document claiming it was not ambitious enough), whilst some major German companies did give their support (e.g. Uniper, Ontras).

Diversify, increase, clean

The Gas 2030 dialogue is Germany’s first move to attempt to answer the most salient questions on the future of gas demand, importance of renewable gas for non-power sectors, cost-effectiveness and the possibility of industrial scale implementation of new gas technologies, etc. It is clear that the fate of the German gas sector will depend on how climate-friendly it becomes and at what price. But it also depends on the capacity of the German authorities to properly guess where political and regulatory intervention is necessary, and where it might be harmful, so that in the short term, the government does not hamper natural gas (necessary for the transition) and in the medium and long term encourages green gas solutions.

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Thanks to Heiko Lohmann from ener|gate Gasmarkt for sharing his knowledge and views on this topic.

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Sails make a comeback as shipping heads for complete decarbonisation by 2035

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Sails make a comeback as shipping heads for complete decarbonisation by 2035

by Eric Marx, February 19, 2019

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Maersk Pelican replete with Norsepower Flettner rotary sails

Last year’s ITF report asserts that an almost complete decarbonisation of shipping could be achieved by 2035 using currently known technologies. Whilst LNG is gaining momentum, hydrogen, ammonia and biofuels could be more sustainable means of delivering much of the required reductions, complemented by a mix of electronic propulsion and wind assistance. The message, according to independent journalist Eric Marx, is “Hold on. There’s a decade of experimentation ahead”. He counsels against becoming locked-in to any one solution with so many alternatives about to come to market. One, the power of the wind, is already making waves.

The commercialisation of various wind propulsion technologies, underway in Europe since 2018, is set to take off this year as looming carbon targets generate renewed interest in one of the world’s oldest means of travel – catching and harnessing the wind.

The future of shipping could see automated kites deployed from 40-foot containers. Fixed wing sails hoisted atop 35-meter-tall rigs are also being taken seriously, as is the recent deployment of Flettner rotors on a Greek-owned dry bulk carrier, a Scandinavian passenger ferry and the Maersk Pelican, a 100,000 ton tanker vessel.

Flettner rotors were first trialled in the 1920s, but only now have been brought into commercial use with the advent of modern composite materials and software automation, explained Jarkko Väinämö, the CTO of Finland’s Norsepower, which added its Rotor Sail Solution technology to the Pelican in August, a world’s first for a tanker vessel.

It took all of 24 hours to install the two 30-meter-high spinning cylinders, which don’t resemble sails but which create a similar vertical force that can be used as an “auxiliary system” to a ship’s main engines.

“Without any integration, we can bring from five to 20 percent fuel consumption savings,” said Väinämö.

Integration in this case would include new-build ships that take into account wind propulsion together with innovative hull designs, and the use of alternative fuels such as hydrogen, ammonia, LNG and second- and third-generation biofuels, alongside engines powered by electricity or fuel-cell technology.

Each has its drawbacks and advantages. There’s no single solution, warn experts, and yet there’s much that can be done quickly by retrofitting existing ships.

Carbon regulations

Wind propulsion took on greater urgency after the International Maritime Organization (IMO) reached an agreement in April to slash emissions by 50 percent by 2050.

This helped prod Maersk, the world’s largest container shipping company, to announce in December a pledge to cut its emissions to zero by 2050 – going beyond the IMO targets, but in line with a report issued by the International Transport Forum (ITF), an intergovernmental organisation with 59 member countries which acts as a think tank for transport policy.

“We will have to abandon fossil fuels,” Soren Toft, Maersk’s chief operating officer, told the Financial Times. “We will have to find a different type of fuel or a different way to power our assets. This is not just another cost-cutting exercise. It’s far from that. It’s an existential exercise, where we as a company need to set ourselves apart.”

For Maersk to meet its targets, carbon-neutral vessels will have to be sailing by the early 2030s, say experts.

As well as all the new fuelling options, The ITF report authors also point to a list of efficiency measures, such as “slow steaming”, which could yield a substantial part of the needed emission reductions. Over the past two years, for example, Maersk has discovered it could cut fuel use by as much as 30 percent by slowing down ship speed.

LNG-fuelled hybrid could be dead-end

Why then commit to LNG-powered vessels if zero-carbon shipping is just on the horizon?

“LNG can reduce air pollutants significantly, but it’s carbon footprint is more or less the same as with Diesel/HFO [residual fuel oil],” e-mailed Dietmar Oeliger, head of transport policy at NABU, a German environmental group that monitors shipping.

Some LNG ships claim a reduction in CO2 emissions of 15 percent, though that depends crucially on keeping leakage of the greenhouse gas methane to a minimum in ships and bunkers.

“If we are serious about decarbonisation mid-century, that [LNG] is wasted money,” Dr. Lucy Gilliam, T&E

Investing massively in LNG infrastructure might cause lock-in effects, said Dr. Lucy Gilliam, an aviation and shipping expert with Transport & Environment, which campaigns for cleaner transport in Europe. “Why not instead switch to diesel, install emission abatement technology, and wait for a decarbonized fuel?”

That’s the course many are now taking – in light of a global sulphur cap due to take effect next year and owing to the high cost of new LNG engines.

“If we are serious about decarbonisation mid-century, that [LNG] is wasted money,” added Gilliam.

Diesel engine manufacturer Man Energy Solutions is one of those in the LNG camp.

“Switching ship engines to LNG as a fuel not only reduces harmful emissions at a first step, but also enables the engines to use fully decarbonized e-fuels as soon as these are available on a large scale at a later time,” e-mailed Jan Hoppe, a Man spokesperson.

E-fuels are the result of transforming electrical energy from renewables into CO2-neutral synthetic fuels.

But backing e-fuels – by, for example, producing synthetic methane or synthetic diesel through electrolysis from water using cheap renewable energy – would require a massive build-up in solar and wind deployment, noted Gilliam. Moreover, it would necessitate advanced isotope analysis in order to ensure proper regulatory oversight.

“It’s useful to actually reduce the amount of fuel you need to burn,” she added. “We are very much saying we need to do both – alternative fuels and new propulsion systems.”

Transport & Environment, which represents the environmental community on matters before the European Union in Brussels, favours hydrogen made from natural gas in land-based industrial processes. Ammonia is also top on an efficiency basis and is easier to transport and store, though large scale ammonia usage does present health and safety issues that still need to be worked out.

Electric power with battery storage could also play a role, especially on short haul, regularly scheduled ferry passage. Norway’s parliament certainly thinks so – having adopted a resolution last April that would halt emissions from cruise ships and ferries in the Norwegian world heritage fjords “as soon as technically possible and no later than 2026.”

The assumption is that the fjords will only service electric ships in just 8 years time, bringing about what would be the first zero emissions zone at sea.

Wind sails ahead

As for wind propulsion, shipping companies are waiting to see what can actually be delivered.

A total of 14 Flettner rotors are currently sailing on six commercial vessels, according to Gavin Allwright, secretary of the International Windship Association (IWSA), a trade body that represents the wind propulsion sector.

Generally, retrofit wind propulsion rigs can deliver between five to 20 percent fuel savings, with an upwards potential of 30 percent, and 30 percent and above for new build optimized systems, meaning a renewable energy source with free and abundant delivery at the point of use, said Allwright.

In addition to Norsepower, the British company Anemoi Marine Technologies has four rotors spinning on the MV Afros, a 64,000 ton bulk carrier operating in the Pacific. Magnus, a US company, has developed a retractable rotor that acts like a telescope, while the interregional project fund Marigreen has seen German and Dutch partners recently launch a commercial vessel in the North Sea.

The sector is also expecting announcements this year from other hard and soft sail developers.

The next step is to establish regional hubs, said Allwright, in order to bring down costs and bring further integration to the sector.

Yet, all eyes are on Flettner rotors, for now at least, given the recent announcements from Maersk and Viking.

Norsepower alone has another six to seven rotor sails launching in 2019, with its first new-build project in hand and set for installation in 2020, according to Väinämö. In five years the company forecasts annual revenue exceeding €100 million, a projection that would see upwards of 60 to 70 installations a year.

“That’s where the market is currently focused,” said Allwright. “Rotor sails are on the water and have opened the market.”

A vision for shipping’s net zero-emissions future is rapidly coming into focus. The industry should hold off from making any sudden moves as we enter a decade of experimentation which will reveal the optimum cost/benefit result using the best combination of all the solutions on offer.

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EU ETS permit price fuelling demand for gas

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EU ETS price contributing to gas demand

by Gaurav Sharma

January 30, 2019

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Whilst the top-level 40% 2030 emissions reduction target looks relatively safe, share from RES is definitely not. Carbon pricing, in its various forms, is working but, frankly, not in a predictable way. A closer inspection of the market-driven EU ETS permit scheme illustrates how and why gas – especially American LNG – is going strong, putting the 32% share of final energy consumption from renewables in doubt.

Whenever European energy industry dialogues touch on market volatility, much of the obsession seems to be on oil and gas prices, reduction in coal usage, security of supply and the fundamental renewable versus conventional power cost implication.

But away from consumer scrutiny, the driving mechanism in an inexorable pan European march to a low carbon future that to some extent links all of the above is equally volatile – the European Union’s carbon permit pricing scheme. The concept has been around since 2005 and is pretty simple to fathom, but its pricing and dynamics are anything but.

As part of the scheme, carbon permits or allowances are traded under the common market’s Emissions Trading System (ETS), which charges commercial carbon emitters (most notably power and manufacturing plants) for every tonne of carbon dioxide they emit above a certain limit.

Simply put, higher carbon prices make it pricier for European utilities and selected manufacturers to burn fossil fuels and provide monetary incentives to shift to lower emissions or cleaner sources of energy generation.

The allowances are distributed via a combination of free allocation and auctioning. While that’s simple enough, trading carbon is anything but as the ETS has often suffered from too many or too few permits with a lack of balance. Things started with a bang and by 2006 prices spiked above €30 per tonne, only to slump to lows of €2-3 in the wake of the global financial crisis, when fears of a surplus of permits became a reality.

Plenty of tussles in Brussels

Most EU policymakers agreed something had to be done. However, problems arose in streamlining the process to begin with and getting member nations to agree on a common framework. Meanwhile, the ETS continued to progress to its next phase (from 2013-2020) adding sectors such as aviation but not materially altering its trading structure.

Furthermore, several markets – including France and Nordic EU members – put complementary carbon taxation policy measures in place alongside the ETS, slapping levies on sectors exempt from it.

Nobody in Brussels was all that keen to drive energy intensive industries to relocate for the sake of onerous climate legislation. So the situation triggered lengthy deliberations in Brussels – not about whether to head to a low carbon future but rather about finding the most optimal way of getting there. The answer, after two years of wrangling, was first offered in November 2017 – the Market Stability Reserve (MSR) mechanism.

The MSR provides a framework to restrict a certain number of permits from market auctions effective 2019 with an aim to address oversupply scenarios. However, the timing of it all has created yet another market muddle.

Carbon pricing makes for pricier carbon

An EU spokesperson says that, courtesy of the ETS, by 2020, emissions from sectors covered by the system will be 21% lower than in 2005 and added: “The scheme and subsequent reforms have proved that putting a price on carbon and trading in it can work.”

Be that as it may, those at the receiving end might be forgiven for not sharing that enthusiasm, especially about the timing. Just as the MSR appeared over the trading horizon, in November 2018 Germany – one of the biggest markets for carbon permits – paused auctions until the first quarter of 2019 as its contract with the European Energy Exchange expired.

In its wake, anecdotal evidence suggests buying increased in early in fourth quarter of 2018 as carbon traders built long positions due to reduced supply from auctions, and higher energy prices as the European winter approached. Sources in London and Frankfurt say around 22 million permits from auctions already logged will have to be sold as German auctions resume.

And let’s not forget, MSR has already put 2019 in a serious deficit. That means prices could average at their current levels of €25 per tonne in 2019, and as high as €30 in 2020, according to projections by investment bank Berenberg.

The ongoing situational price spike, to the highest level on record since the fourth quarter of 2008, is unlikely to be a one-off and Berenberg is not the only forecaster with a bullish stance, not least owing to firm German commitments for a coal switch-off by 2038 or earlier.

“The Germans have no choice but to revert to natural gas so utilities can keep emissions costs in check. Renewables, as events this winter illustrate, won’t be the primary beneficiary” Gaurav Sharma, Energy Post

As early as 2023-24, prices as high as €40 are not inconceivable and the knock-on effect on already high German baseload power prices remains to be seen. But when wholesale energy prices rise after feeling the effects of higher carbon, utilities – not just in Germany but across Europe – will have to pass on some of the cost to consumers through higher retail energy prices and raise capital expenditure on alternative energy.

The Americans are coming, the Americans are coming

Renewable energy is supposed to be the beneficiary of higher carbon prices, but another fossil fuel is the medium-term beneficiary as Germany, Italy and Spain attempt what the UK is doing with a degree of success – swapping coal with natural gas as a low carbon bridging fuel.

And as things stand at the time of writing, the Europeans can’t get enough of it and are scrambling well beyond Russia in their quest for volumes. According to Refinitiv Eikon data (see graph), European utility companies have stepped up their efforts to procure more US natural gas as carbon prices bite.

US LNG shipments to Europe totalled 3.23 million tonnes, or 48 cargoes, from October to end-January, compared to 0.7 million tonnes, or nine cargoes, over the corresponding period a year ago, the data analysis firm says.

That makes the US currently second only to Qatar when it comes to supplying LNG to Europe, more than European imports via Russia’s Yamal LNG project. While Gazprom still exports on average 145 million tonnes of pipelined Russian gas a year to Europe, which is four times the current capacity of all onstream US LNG export terminals, the Americans are quietly cheering ETS and MSR.

That’s because the currently high Dutch benchmark gas prices in the $7-8/MMBtu range compete favourably with Asian spot prices for LNG which have dropped to the $8-9/MmBtu range. More expensive carbon pricing and the winter has driven prices higher in Europe, cutting the conventional Asian premium. In absence of the premium, it is cheaper for American exporters to ship to Europe and make money, at least this winter.

Not only that, UK’s Centrica, Spain’s Naturgy, Iberdrola and Endesa, France’s EDF and Total, and Italy’s Eni have all inked contracts with US LNG exporters with cargo deliveries speared throughout the year. Although most attribute it to “competitive LNG pricing”, high carbon costs remain a driver.

Floored by Alphandéry

Nonetheless, all US exporters do is provide a mitigation mechanism for carbon pricing exposure, while the market remains far from perfect. That has led some, including Edmond Alphandéry, former French economy minister and founder of the Euro 50 Group, to demand a continent-wide carbon price floor.

He has been scathing about the ongoing carbon price volatility, describing it as “bad for business” and has called on the European Commission to set a carbon price floor around €20. However, an EU spokesperson dismissed the idea saying it was not the commission’s job but that of the market. “We regulate the volumes in consumer interest, and not the price of emissions.”

In that respect, there should be some sympathy for the policymakers. Alphandéry’s proposed floor is a political hot potato, and not exactly low in any sense of the word. Taxing carbon emissions at EU-level would open a whole new can of worms for Brussels, which has delegated it to national governments.

What’s more, with European elections around the corner, while few would admit it, there is no appetite for providing populists with another reason to fan anti-EU sentiment. However, high prices do provide an incentive to lower emissions and Alphandéry’s stance remains a popular one among policymakers.

The Intergovernemental Panel on Climate Change (IPCC) has often called for polluters to pay more and for the proceeds so obtained to be streamed into industry innovation. France’s EDF and Germany’s E.ON have also called for a more detailed examination of carbon pricing, and have proposed visiting it at regional level, notching things up a level from the current national frameworks.

How this will play out remains unpredictable. MSR will inflict pain on utilities and manufacturers, while US LNG exporters and other natural gas providers will provide a short-term balm. As for the way forward – there’s guaranteed to be a lot of political hot air about but at least it will be carbon neutral.

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Shipping: the rise of LNG

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Shipping: the rise of LNG

by Arasan Aruliah

January 25, 2019

The Aida Nova

How do we solve shipping’s “chicken-and-egg” dilemma: LNG producers wait for enough ships to run on LNG, while shipping companies wait for producers to increase their supply? The ‘virtuous circle’ of steady growth in LNG shipping in the North Sea/Baltic Sea area can provide an important case study for the rest of the world, according to a reportby the Oxford Institute for Energy Studies. It concludes that LNG will grow as a shipping fuel globally. But ship replacement rates spanning decades and the cost of new infrastructure means there will be no sudden rush.

In December, German shipbuilder Meyer Werft delivered the world’s first cruise ship to be powered solely by LNG. The AIDA nova, of AIDA Cruises, welcomed its first guests aboard in Tenerife on December 19. The 180,000 tonne ship can carry 6,600 passengers. It’s an impressive achievement for LNG ship propulsion. There is surely more to come, thanks to the new emission rules.

The emissions rules are tightening

Between 2006 and 2015, several rounds of increasingly stringent environmental targets regulating sulphur oxide (SOx) emissions were applied in the Emissions Control Areas (ECAs) of Northern Europe and North America, driven by the International Maritime Organization (IMO). The North Sea/Baltic Sea are two of four ECAs. Similar, though less stringent, IMO restrictions of SOx emissions were established at a global level in 2005 and tightened in 2012. In a highly significant development, substantially more stringent global regulations of SOx emissions will enter into force in January 2020.

On top of this, last year the IMO adopted a greenhouse gas (GHG) strategy for international shipping. Called the “Initial IMO Strategy on Reduction of GHG emissions from ships”, it plans to reduce the total annual GHG emissions by at least 50% by 2050 compared to 2008. Although burning LNG emits carbon, it is far less than traditional marine fuels, and its potential for further energy efficiencies make it an important part of the solution.

Emission Control Areas are leading the way

In those designated ECAs, the regulation of SOx emissions is the tightest. There are currently four ECAs, where most of the progress in emissions reduction is happening:

  • the Baltic Sea
  • the North Sea
  • the Pacific and Atlantic coastal areas of North America (the USA and Canada)
  • the Caribbean Seas of the USA

An LNG “value chain” is being built in the Baltic and North Seas

In the Baltic and North Seas the tightening regulations, as well as help from government subsidies, have incentivised the construction of the LNG infrastructure. It started with the development of truck-loading facilities in the region’s LNG terminals coincided with the development of technology enabling flexible LNG bunkering direct from trucks to ships. This avoided the necessity of investing in fixed shore-to-ship bunkering infrastructure, which was perceived as more of a commercial risk in the early stages of market development.

As the availability of LNG as a bunker fuel increased, some owners/operators of ships began to choose LNG propulsion for their newbuild vessels. As the market developed further, and demand for LNG as a bunker fuel grew, commercial suppliers felt confident enough to invest in bunker vessels and shore-to-ship bunkering infrastructure. Thus, a virtuous circle began to develop, as more substantial bunkering infrastructure enabled the supply of LNG bunker fuel to a greater number of larger vessels.

“The bulk LNG infrastructure is largely built. What remains is the last mile, in which the industry is showing a growing appetite to invest.” – Chairman of SEA/LNG, Chris Keller

Policy push meets infrastructure’s pull

This virtuous circle has been helped along by the development of large-scale LNG import terminals, the ramp-up of small-scale Norwegian LNG exports and the launch of break-bulk facilities in the region’s large-scale LNG terminals to provide a supply of small-scale LNG deliveries to the growing number of small-scale regional LNG import terminals. Add to that the opening of LNG bunkering facilities in the region’s large and small-scale LNG terminals, and the launch of truck-loading facilities at these terminals (and the loading of new LNG bunker vessels), this has made it commercially feasible to deliver LNG to maritime ports near to those terminals, for provision to vessels as bunker fuel.

Existing LNG bunkering facilities in the North Sea/Baltic Sea ECAs. Note: LNG terminals with bunkering facilities are depicted as circles, while ports with LNG bunkering facilities are depicted as squares. The LNG terminals without LNG bunkering facilities are Dragon/South Hook, Isle of Grain, Dunkerque, and Nynäshamn.

LNG for new ships, but old ships are still using “scrubbers” or low-sulphur gasoil

The report also shows that while LNG propulsion is proving attractive to ship owners investing in newbuild vessels that will operate in the North Sea/Baltic Sea ECAs, owners of existing vessels are still investing in scrubbers or (more often) simply switching to the more expensive low-sulphur marine gasoil. “This latter option – with lower capex and higher opex costs – is essentially a ‘wait and see’ response,” says the report.

The rules may tighten further

But shipping sector environmental regulations can change several times during the life of a vessel, given that vessels have operating lifetimes of several decades. In the North Sea/Baltic Sea region, SOx emissions were introduced and then tightened twice between 2005 and 2015. Restrictions on NOx emissions for newbuild vessels were introduced in 2000, were tightened in 2010, and are set to tighten substantially in 2021. Further tightening of the rules will force ship owners to consider how to ‘future proof’ their vessels. “Therefore, when considering existing vessels, we may expect a surge in demand for low-sulphur marine gasoil and IMO-compliant low-sulphur fuel oil blends in 2020/21, as a result of the ‘wait and see’ approach adopted by many ship owners/operators. Then, over time, this may give way to a gradual uptake of LNG propulsion as new vessels are phased into the fleet,” the report predicts.

Globally the LNG fleet is still small, but growing steadily

Up until 2017 the global LNG fleet was under 100. In 2017-18, 47 more LNG-fuelled vessels were launched, bringing the total in operation to 143. They include a number of world firsts: two LNG-fuelled dredgers (for operation in Northern Europe), a retrofitted container ship (also for operation in Northern Europe), a cruise ship (the Aida Nova), a ferry to operate in the Mediterranean, and Asia’s first LNG-fuelled cargo vessel. 139 LNG vessels are on order.

Of the 143, 98 are ‘dual fuel’, 29 are ‘pure LNG’, and 15 are ‘pure gas + diesel’, leaving just one with ‘dual-fuel turbine’ propulsion. Ships that cross in and out of ECAs switch between the fuel types to keep within the rules.

These figures show that LNG propulsion remains a minority choice. However, they reveal two important observations: the potential for growth in alternative fuels, and the scale of adaptation necessary from January 2020 to comply with the new rules.

LNG definitely has a future, according to DNV GL, the global quality assurance and risk management company. According to their report Energy Transition Outlook 2018: Maritime Forecast to 2050 their model predicts that by 2050, 23% of global shipping energy will be from LNG.

LNG is not carbon free, but can smooth the transition

The caveat remains that LNG still emits carbon, though far less than traditional marine fuels. However, when combined with improvements in energy efficiency, it provides a pathway to compliance with CO2, SOx, and NOx emission rules. Given that marine vessels usually have working lives of two or three decades, the increasingly efficient LNG-fuelled vessels launched in the 2020s may remain in service until the late 2040s, at which point technological advances in alternative fuels may render zero (or near-zero) options for carbon shipping a realistic aim by 2050.

A global LNG shipping transition will be gradual

The global tightening of restrictions on SOx emissions will provide a further policy ‘push’ worldwide. The lessons of the North Sea/Baltic Sea ECAs suggests that LNG may be attractive for newbuild vessels, particularly if the cost of LNG is substantially below that of low-marine gasoil and low-sulphur fuel oil. But it will happen only if sufficient supplies of LNG bunker fuel are available. In other words, building up even more LNG infrastructure is key.

Creating a virtuous circle of infrastructure and LNG ships takes time. So it is unlikely that the substantial tightening of IMO restrictions on SOx emissions at a global level from 2020 will trigger a huge surge in LNG supply and ship owners racing to retrofit their vessels. However, demand for LNG bunkering may grow steadily over the coming decade, as the number of ship owners choosing LNG for their newbuild vessels rises, while at the same time bunkering services become more widely available. To achieve this, marine sectors across the world will be looking at the North Sea/Baltic Sea ECAs to learn important lessons.

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Germany looks at CCS again, promises to build LNG terminal to please Trump, launches first hydrogen train

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EXPRESS #4 - September 25, 2018

Germany looks at CCS again, promises to build LNG terminal to please Trump, launches first hydrogen train

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Peter Altmaier - LNG terminal as a gesture to US

Back in 2010, German environmental NGOs protested vehemently against any kind of CCS (carbon capture and storage) initiative.

However, times have changed, notes Clean Energy Wire, based on an article on Spiegel Online.

The German economy and energy ministry (BMWi) has commissioned a study of the country’s options for capturing and storing carbon dioxide emissions to lower its carbon footprint, Manuel Berkel writes on Spiegel Online.

According to the article, energy minister Peter Altmaier wants to find out “what kind of infrastructure we need”and at what point carbon capture and storage (CCS) technology would become practicable for the country.

Climate NGOs like WWF and Germanwatch now support a new attempt to use CCS to meet Germany’s emissions reduction obligations under the Paris Agreement, writes Berkel.

The article adds that “It is still uncertain how well the technology functions to that end and whether it causes environmental damage elsewhere. According to the article, the ministry will primarily research if CCS can be used to store industrial CO2 emissions, which are difficult to avoid and account for about 7 percent of Germany’s total carbon footprint.”

***

If this is an about-turn, the same could be said for a rather surprising announcement from the same minister, Altmaier, who said Germany will build an LNG terminal “as a gesture to the United States”, as Reuters puts it.

Germany will choose the location of the terminal by the end of 2018. “This is a gesture to our American friends,”Peter Altmaier said of plans to decide on one of three competing sites for the LNG terminal. “I have been sceptical in the past, but we have agreed to move on.”

The discussion about a possible LNG terminal in Germany received a new push when US President Donald Trump said the country relies too much on Russian energy resources and is “totally controlled”by the fossil fuel exporting giant.

According to Altmaier, a decision on an LNG terminal is “not directly related”to Nord Stream 2.

Trump pushed US LNG exports again recently as crucial to increasing European energy security during talks with Polish President Andrzej Duda while continuing his attacks on Nord Stream 2, reports S&P Global Platts.

***

In other significant news, Germany also recently launched the world’s first hydrogen-powered train, built, it should be added, by French train maker Alstom.

As we reported in Energy Posta short while ago, hydrogen is quickly moving up the energy agenda in the EU. Worldwide, initiatives around hydrogen are picking up.

The hydrogen train fits that picture. It signals “the start of a push to challenge the might of polluting diesel trains with costlier but more eco-friendly technology”, writes The Guardian.

“Two bright blue Coradia iLint trains, built by French TGV-maker Alstom, on Monday began running a 62 mile (100km) route between the towns and cities of Cuxhaven, Bremerhaven, Bremervoerde and Buxtehude in northern Germany –a stretch normally plied by diesel trains”, the Guardian adds.

“The world’s first hydrogen train is entering into commercial service and is ready for serial production,”Alstom CEO Henri Poupart-Lafarge said at an unveiling ceremony in Bremervoerde, the station where the trains will be refuelled with hydrogen.

Alstom has said it plans to deliver another 14 of the zero-emissions trains to Lower Saxony state by 2021, while other German states have also expressed an interest.

Hydrogen trains are equipped with fuel cells that produce electricity through a combination of hydrogen and oxygen, a process that leaves steam and water as the only emissions. Excess energy is stored in ion lithium batteries on board the train.

The Coradia iLint trains can run for about 600 miles (1,000km) on a single tank of hydrogen, similar to the range of diesel trains.

Alstom is betting on the technology as a greener, quieter alternative to diesel on non-electrified railway lines –an attractive prospect to many German cities scrambling to combat air pollution, writes The Guardian.

“Sure, buying a hydrogen train is somewhat more expensive than a diesel train, but it is cheaper to run,”Stefan Schrank, the project’s manager at Alstom, said.

Other countries are also looking into hydrogen trains, Alstom said, including Britain, the Netherlands, Denmark, Norway, Italy and Canada. In France, the government has already said it wants the first hydrogen train to be on the rails by 2022.

Will Nord Stream 2 make Germany more dependent on Russian gas?

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EXPRESS #3 - August 28, 2018

Will Nord Stream 2 make Germany more dependent on Russian gas?

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Putit and Merkel signal that Nord Steram 2 is on

The lobbying against Gazprom’s Nord Stream 2 pipeline project reached fever pitch in the past weeks, in particular in the run-up to the Putin-Merkel summit on 18 August.

The Trump administration has threatened to sanction European companies investing in the pipeline. The European Commission and East European countries are radically opposed to Nord Stream 2. And Merkel even faced pressure within her own party, from the likes of Manfred Weber, head of the center-right EPP group in the European Parliament and Norbert Röttgen, chairman of the German parliament’s foreign affairs committee.

But, as David Keating put it on Forbes.com, “the ‘iron chancellor’ would not be moved. “She stressed at her joint appearance with Putin that the project is still on, and Putin agreed. ‘Germany is one of our country’s leading economic partners,’ he said.”

However, Merkel did repeat her statement, first made in April, “that the new pipeline cannot be an excuse to bypass the existing gas route through Ukraine. Washington and Warsaw have said the purpose of Nord Stream is to punish Ukraine. ‘If Nord Stream 2 comes about, Ukraine must play a role in gas transit to Europe,’ Merkel said.”

Putin for his part “insisted that such gas transit should only be based on economic rather than political considerations, cleverly repeating phrasing used about Nord Stream 2 by Merkel herself a year ago. ‘I would like to stress, the main thing is that Ukrainian transit — which is traditional — meets economic demands,’ he said.”

Although I have argued many times on Energy Post that Nord Stream is not against the interests of the EU (though it is obviously against the financial interests of some EU member states, as well as Ukraine), another question that could be asked about the pipeline is whether it’s actually in the interest of Germany. Although it will make Germany the dominant gas hub in Europe, one could ask whether it will  make the country also more dependent on Russian gas.

Keating notes that “Russia delivered 53.4 billion cubic meters of gas to Germany last year, a figure Putin pointed out during the press conference with Merkel. This is up 13 percent from the year before, and makes Russia Germany’s largest gas provider.”

“While this might seem at first glance to make Germany ‘dependent’ on Russian gas, as Trump said at the NATO summit, the details are more nuanced”, Keating adds. “While Russia is Germany’s biggest gas supplier, it provides only marginally more than the other two main providers – Norway and the Netherlands. Until 2015, each contributed roughly one-third to German gas supply. Now Russia has pulled slightly ahead, but is not yet dominant.”

“More to the point, gas only accounts for 23% of Germany’s primary energy use – and only 13.5% of the electricity generated at power plants. That means Russian gas accounts for just 4.3% of German power generation.”

Nevertheless, “while Trump was wrong to say Germany ‘is dependent’ on Russian gas, he would not have been wrong to say the country is ‘becoming dependent’. Germany is phasing out both nuclear and coal power. Renewables are developing rapidly because of the country’s Energiewende policy, but not fast enough to fill the gap this decommissioning will cause. Many expect gas to quickly fill the gap. And if more Russian gas suddenly comes flowing in, the country could very quickly find itself dependent on Moscow for energy.”

Keating says that “the Nord Stream 2 pipeline, which would follow the route of an existing pipeline under the Baltic Sea, would more than double Germany’s Russian gas imports, from 53 billion to a maximum of 110 billion cubic metres.”

But that is obviously not correct. After all, the gas that now comes to Germany through Ukraine and Poland is also Russian gas. So Nord Stream 2 won’t make Germany more dependent on Russian gas. It’s possible that Germany’s overall energy policies will make it more dependent on gas – that depends on how it deals with coal power and renewables – but that’s a different argument. In fact, it is arguably more secure for Germany to have a direct pipeline than to be at the mercy of Ukraine and Poland – in addition to being dependent on Russia.

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Climate action has no leaders today

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ENERGY WATCH #2 - August 14, 2018

Climate action has no leaders today

by Karel Beckman

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Bye bye Paris Agreement

The discrepancy between the climate events going on around us and the “policy response” from the world’s political and economic leaders is becoming ever larger – and ever more difficult to justify.

There is no need to highlight the extreme weather events that have been boiling the planet over the northern hemisphere summer. You would think that in response climate action would steadily grow stronger, but the reverse seems to be happening.

There is the Trump administration of course which is doing all it can to recklessly hasten rather than hinder climate change, with such as measures as freezing car emission standards and more generally trying to become the world’s leading fossil fuel exporter.

But Trump is hardly alone. The EU likes to see itself as climate champion, but European Commission President Juncker, when he visited Washington recently, couldn’t wait to promise Trump that Europe just loves to import LNG from the US, the more the better.

On August 9, the European Commission followed up Juncker’s visit with a press release that went as far as to proudly proclaim “European Union imports of U.S. Liquefied Natural Gas (LNG) are on the rise”.

“Since the arrival of the first U.S. LNG carrier in the Portuguese port of Sines April 2016 and today, EU imports of liquefied natural gas from the U.S. have increased from zero to 2.8 billion cubic meters”, the Commission boasted. (Note, by the way, that 2.8 bcm is a tiny amount – the Nord Stream pipelines have a capacity of 55 bcm each.)

The EU “has co-financed or committed to co-finance LNG infrastructure projects worth over €638 million”, added the Commission, in an attempt apparently to ingratiate itself with Trump, with embarrassing lack of self-respect. “In addition to the existing 150 billion cubic meters of spare capacity in the EU, the EU is supporting 14 LNG infrastructure projects, which will increase capacity by another 15 bcm by 2021, which could welcome imports of liquefied natural gas from the U.S., if the market conditions are right and prices competitive.”

The Commission then goes on demand that the Trump administration remove regulatory restrictions from the export of U.S. LNG! Supreme irony: Brussels demanding less regulation from Donald Trump. You would think that they have better things to do in Brussels – like demanding more action from the U.S. to restrict fossil fuel exports?

But no, “the EU and the U.S. are working within the framework of this Executive Working Group [formed after the Trump-Juncker meeting] to increase U.S. exports of liquefied natural gas to Europe”, said the Commission.

I presume they know in Brussels that gas is a fossil fuel, but perhaps they have not heard yet that the latest exhaustive research shows that “the US natural gas industry is leaking way more methane than previously thought”. Yes, Mr Juncker, your precious U.S. LNG is contributing rather a lot to climate change. If the latest numbers on methane leakage are correct, there is in fact not much difference between coal and gas in their effect on climate. Would the Commission also promote US exports of coal to Europe?

As an aside, did anyone notice that perhaps 150 bcm of spare LNG import capacity is … well, perhaps enough? Who needs more LNG import terminals?

***

Unfortunately, the news from the world’s other two major emitters, India and China, is not much better. Perhaps inspired by Trump, India’s cabinet recently approved a policy to allow shale gas and oil drilling under the country’s existing production sharing contracts.

According to Oilprice.com, “the [new] uniform oil and gas exploration policy will encourage the current contractors in the licensed and/or leased areas to unlock the potential of unconventional hydrocarbons in the existing acreages, the government said in a statement. The policy is expected to bring in new investment in exploration and production (E&P) and raise the chances for new oil and gas discoveries that could potentially increase India’s domestic production.”

Unconventional oil and gas exploration under existing production sharing contracts (PSCs) “will provide a major boost towards ensuring energy security for India,” India’s Petroleum Minister Dharmendra Pradhan said on Twitter. “The new policy is a complete shift from the ‘one hydrocarbon resource type’ to ‘uniform licensing policy’ for simultaneous exploration and exploitation of oil and gas in an area of 72,027 square kilometers (27,810 square miles) under PSCs.”

China meanwhile has “quietly restarted many coal power projects that had been halted”, according to a report on China Dialogue (republished here on Energy Post). Coal consumption in China increased 3.1% in the first half of this year. The Chinese “peak coal demand” that the world was talking about not so long ago has obviously been put by the wayside.

Indeed, recent data from the China Energy Portal show that “growth in thermal generation continues to outpace renewables in China”.

Here are the figures for Q1 and Q2 of 2018, which speak for themselves:

***

Isn’t the Paris Agreement making any difference then?

It doesn’t look like it. A telling symptom of the current malaise is the situation around the UN Green Climate Fund. This fund, a key institution that needs to ensure that the developed world helps the developing world invest in climate change mitigation measures, is on the verge of collapse.

As Climate Home reported recently, “The future of the UN’s major climate fund hangs in the balance, with a looming cash shortfall and a boardroom locked in conflict.”

“Tensions between rich and poor country board members came to a head in July as they tried – and failed- to agree a process for raising fresh funds”, notes Climate Home.

Here are the numbers: “Governments promised $10.3 billion in start-up capital, but Donald Trump is refusing to deliver $2bn of the US pledge. The pot has lost another $1bn in value due to currency fluctuations. The board has committed $3.5bn to 74 projects worldwide. That leaves $2.8bn to play with. At the recent rate of approvals, that could be used up within a year. Drumming up a new round of pledges is expected to take at least that long. Last year just $144.7 million was disbursed. The target for 2018 was $900 million, but the fund has stopped reporting this metric on its portfolio dashboard. Instead, it publishes the more flattering value of projects ‘under implementation’, which stands at $1.4bn.”

If the world can’t even get this right, what hope is there for climate policy?

Clearly the problem is not lack of money. It is lack of credible initiatives – which is a failure on both sides – the donors and the recipients of the climate funds.

In this context, think about this: at the end of July, Shell bought back $25 billion of its own shares! Other oil companies are also massively buying up their own shares. These companies are drowning in money, thanks in part to cheap money policies from the central banks, but while the world is on fire, they apparently see no large-scale investment opportunities in low-carbon energy…

***

How long can this business-as-usual attitude of our political and economic leaders continue? That may depend on the number of droughts, wildfires and heatwaves coming our way.

The Economist reports that on 6 August Sarasin & Partners, an asset manager in London, published a study suggesting that “oil firms are assuming that decarbonisation will be limited”. The company warns that by doing this the companies are “overstating their assets”.

Sarasin notes that eight European oil companies used “price assumptions of $70-80 a barrel, rising by 2% per year with inflation to $127-145 by 2050, to price their assets.” But “that does not appear to assume any drop in demand. The International Energy Agency (IEA) predicts a price of just $60 by 2060…”

A report in the Financial Times notes that pension funds across Europe “are belatedly waking up to the threats to their investment portfolios posed by climate change“. According to this year’s survey by investment consultants Mercer, 17% of European pension funds consider the investment risks posed by climate change, up from just 5% in its 2017 survey.

Environmental law NGO ClientEarth has warned pension funds that they “risk legal action if they fail to consider the effects of climate change on their portfolios. … ClientEarth has written to funds – including the Tesco Pension Scheme, British Airways Pensions and the BP Pension Fund – urging them to consider how they manage and report on climate risk.”

‘We are concerned that you, as scheme trustees, may be failing to take sufficient steps to address climate risk and therefore failing to manage the scheme’s investments in a manner consistent with members’ best interests,’ the letter says. ‘In doing so, you are potentially putting members’ retirement outcomes at risk and exposing yourselves to the possibility of legal challenges for breach of your fiduciary duties’.”

***

Just possibly, effective climate action will in the end have to be enforced by the courts who might find ways to overrule political inaction.

In the U.S. the Supreme Court ruled on 30 July that a lawsuit filed by young activists who have accused the U.S. government of ignoring the perils of climate change can go ahead. It rejected a request from the Trump administration to block the case.

However, earlier in July, a federal judge dismissed the climate case brought by the city of New York against fossil fuel companies.

As the New York Times noted, “the 23-page decision is a second defeat for local and state governments seeking to use the judiciary to address problems caused by climate change. The first was in a case brought by San Francisco and Oakland that was thrown out last month by Judge William H. Alsup of Federal District Court in San Francisco.” Both New York City and San Francisco have said they will appeal the decisions.

In Europe, the European General Court has just accepted “the people’s climate case” brought in May 2018 by families from Portugal, Germany, France, Italy, Romania, Kenya, Fiji and the Swedish Saami Youth Association Sáminuorra against the European Parliament and the Council of the European Union for the inadequate climate target for 2030. This lawsuit claims that the Union’s climate target fails to protect their human rights. 

The European General Court has published the case in the Official Journal of the European Union on 13 August. “This is an important first step in the proceeding of the People’s Climate Case”, said Climate Action Network (CAN) Europe in a reaction. According to CAN, the European Parliament and the Council of the European Union are expected to provide their defence in two months.

Armando Carvalho, the Portuguese plaintiff who lost his tree plantations during the forest fires in 2017 said: “The wildfires destroyed my property in 2017. This year, we are once again struggling with massive heatwaves and wildfires in Europe. Since the beginning of this summer, many other people lost their lives and homes due to worsening impacts of climate change. We cannot remain silent to this. This case is about our common future and we are glad to be one step closer to be heard.”

The People’s Climate Case is supported by a broad range of NGOs, scientists and citizens who believe that the EU can and must increase its 2030 climate target. Wendel Trio, Director of Climate Action Network (CAN) Europe said: “The EU’s existing 2030 climate target is too low to protect people and their fundamental rights.”

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The Russian LNG revolution – and what it could mean for Europe

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ENERGY WATCH #4 - June 26, 2018

The Russian LNG revolution – and what it could mean for Europe

by Karel Beckman
LNG facilities at Yamal

“After false dawns galore, Russia is en route to becoming a world-class LNG exporter before the end of the decade – and one of the top four by 2025 – thanks to foreign investment, domestic technology and unconventional financing.”

That’s the conclusion of an in-depth analysis by energy journalist Alex Forbes in Natural Gas World, published on 19 June.

It’s a fascinating story and quite important from an EU energy policy perspective. It could be viewed in a positive light, because it shows that Russia is an increasingly active player on global and European gas markets.

As Forbes shows, the Russian LNG success is entirely due to the company Novatek, a rival of Gazprom, and an “independent gas producer” – although no gas producing company is truly “independent” of course in Russia.

Novatek is partially owned by CEO Leonid Michelson, who, according to Wikipedia, holds around 28% of the shares. Other shareholders are the Volga Group with 23%, Total with 16% and indeed Gazprom also has 9.4%.

But Russia as a major LNG player could also be viewed as a threat perhaps: LNG after all, which Russia hardly supplies at all at the moment, is supposed to be competitive with pipeline gas, in which Russia dominates the European market. If the Russian also become bigger in LNG, it might reduce competition.

In any case, the story itself is quite fascinating. Russia could become “one of the world’s top five exporters as soon as 2020 and one of the top four by 2025”, writes Forbes.

Russia now has three LNG trains in operation (two at Sakhalin, run by Gazprom and Shell, and one at Yamal, run by Novatek, Total and two Chinese partners: CNPC and Silk Road Fund) and three under construction (two at Yamal and one at Vysotsk).

Yamal in particular is an impressive story: it proves that U.S. sanctions are not stopping Russia from building a complex LNG project in highly difficult circumstances. “Sanctions imposed in 2014 by the US and the European Union after Russia’s annexation of Crimea meant that for a long time there were question marks over how the project sponsors would overcome financing obstacles”, writes Forbes. “In the end, they did so by sourcing finance from institutions in China, Russia, Japan and Europe.”

The first train of Yamal came online in December, writes Forbes, “on time and on budget. It has since performed impressively well. Indeed, the overall project is making such good progress that the construction schedule for train two has been brought forward by three months and for train three by six months. In the hostile environment of Sabetta on the east coast of the Yamal peninsula, 600 miles inside the Arctic Circle, it is nothing short of remarkable.”

But, as Forbes notes, “for Novatek, Yamal LNG is just the beginning. The company outlined its strategy ‘to build a formidable LNG platform’ at a presentation in December – led by chairman of the management board Leonid Mikhelson and CFO Mark Gyetvay – and confirmed it last month at a conference in Moscow.”

“Our big plan is to create a new LNG centre from Russia’s Arctic zone that will rival the main LNG export centres of Qatar, Australia and the US,” says Gyetvay. “We will achieve this goal by utilising technology and innovation to unlock our prolific hydrocarbon resource base on the Yamal and Gydan peninsulas.” 

“Key objectives include building an LNG project execution capability within Russia, at Murmansk, along with the establishment of a benchmark Russian FOB hub price at a proposed trans-shipment terminal at Kamchatka”, writes Forbes.

Nevertheless, Forbes does add that with regard to all the other LNG projects proposed in Russia, especially those involving Gazprom, “recent progress has been underwhelming. Gazprom and Shell have begun marketing a proposed third train at Sakhalin Energy but no date has yet been set for FID. Vladivostok LNG appears to be on indefinite hold. Baltic LNG is the subject of a joint feasibility study with Shell but there is little sense of urgency around the project. Shtokman was cancelled years ago, in response to the US shale gale: that project, also with Total’s involvement, was aimed at the US. Rosneft, meanwhile, says it is still pursuing Far Eastern LNG and Pechora LNG, but it too is vague about what might happen and when.”

So, Forbes concludes, “all eyes are on Novatek, not least those of Russia’s … president, Vladimir Putin, who launched Yamal LNG last December and has made big claims for Russia’s future place in the LNG exporters’ community.”

***

Nord Stream 2, meanwhile, is making steady progress, with only one major permit to go (from Denmark).

So can it still be stopped? For example, by Angela Merkel? Assuming that she is inclined to do so of course.

Judy Dempsey, a non-resident senior fellow at think tank Carnegie Europe, asked “a selection of experts” to comment on these questions: “Should Germany dump Nord Stream 2? Can it?”

Unfortunately, the selection of experts turns out to be rather one-sided, as 10 of them believe that Germany definitely can and should dump Nord Stream 2, with only 3 opposed and 2 neutral.

Some of the experts are also not too well-informed about EU decision-making processes, it seems.

For example, Margarita Assenova, Director of programs at the Jamestown Foundation and associated scholar at the Center for European Policy Analysis, writes that “Germany will have to comply with a decision by the European Parliament affirming that offshore pipelines are subject to EU competition rules as they pass through EU territorial waters and exclusive economic zone.” This is not true of course: the European Parliament did support a proposal by the European Commission to extend the Third Package rules to “import pipelines”, but that does not turn it into law yet. The European Council still has to weigh in on this.

Let me just quote one expert who believes Nord Stream 2 should be stopped and can be stopped – and one that doesn’t.

Réka Szemerkényi, Executive vice president of the Center for European Policy Analysis, writes: “Yes, she should, and one hopes she still can. Germany has to dump Nord Stream 2 if she wants to maintain and continue to lead a sovereign EU based on a free market. Nord Stream 2 is presented as a business project serving the interest of German consumers. But the fact is Germany’s access to the quantity of natural gas it needs is already ensured by Nord Stream 1, which works under capacity, so excess volumes are also available. While Nord Stream 2 is said to offer a solution to a range of issues—from EU natural gas production and consumption to Ukraine’s transit infrastructure and reliability—but reality paints a very different picture. As this recent CEPA report shows, much of the discourse about Nord Steam 2 is seriously distorted and leads to the conclusion of supporting it.”

“In parallel to serious fact checking, the strategic consequences of the project also need to be clearly understood. Nord Stream 2 has the potential to derail the EU’s common energy policy and free market competition in the natural gas sector, cementing dependence on a single import source for an indefinite period of time, ultimately making a wide range of European decisions dependent on Russia. Nord Stream 2 will mark the beginning of a new era of external dependence yet unknown to the Western part of the continent. If Germany is serious about European values, it should not only profess but also practice them. Nord Stream 2 is the moment of truth for Europe.”

Jonathan Stern, Distinguished Research Fellow and Founder of the Natural Gas Research Programme at the Oxford Institute for Energy Studies, writes: “My answers are no, and probably not without some companies losing a great deal of money. Nord Stream 2 will be needed soon, even if not at the end of 2019, because of the supply problem emerging in northwestern Europe caused by the demise of Dutch gas production. LNG (including American LNG, which is what the U.S. administration is proposing instead of Russian pipeline gas) will have to compete with Russian gas everywhere except Poland, Ukraine, and (possibly) Lithuania, which are willing to pay higher prices to avoid buying from Gazprom. Everybody else will buy the cheapest gas which, up to now, has been from Russia.”

“The remaining important question is whether an agreement can be reached that will allow Nord Stream 2 to go ahead while maintaining significant transit flows of Russian gas across Ukraine. My answer is yes, but volumes will probably be limited to 30 Bcm/year, which is around one third of recent annual flows. But, even supposing that solution is acceptable, it is going to be very difficult to reach a new contractual agreement given the current political relationship between Kiev and Moscow.

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