“As 2016 progresses, Europe is set to take on an increasingly important role as the LNG market of last resort. The liquid NW European hubs at NBP and TTF will set the price benchmark for surplus cargoes as LNG export volumes ramp up from new Australian and U.S. liquefaction terminals,” Timera Energy
One of the great debates in the energy arena today is Europe’s future demand for natural gas, the world’s fastest growing major fuel for both use and trade. This is especially important for the U.S. LNG business looking to export more gas to Europe to buffer Russian influence. Gazprom delivers about 33% of Europe’s gas.
Europe uses 47-50 Bcf/day of gas, and imports almost half of that. Europe’s is the world’s biggest gas importer, and future demand is a really big deal because emerging U.S. LNG export potential could target Europe than more distant Asia. Gas prices have essentially converged all over, reducing arbitrage opportunities and explaining “Spain to receive 15 LNG cargoes in July, reload none.”
Gas demand in Europe was up 4-5% in 2015. Unwisely, some are using the recent decline in gas demand in Europe to insist that more efficiency and more renewables simply mean that Europe doesn’t need more gas infrastructure, like pipelines, inter-connectors, and LNG infrastructure, all especially vital to moving imported LNG into Spain/Portugal eastward to lower Russian dependence.
But, we know the truth: the International Energy Agency reports that Europe needs to invest $40 billion in natural gas supply each year. With the worst gas security rankings in the world (here), the European Commission knows the importance of more gas infrastructure: “Liquefied Natural Gas and gas storage will boost European Union’s energy security.”
The fact is that Russia will continue to thrive as Europe continues to enact unrealistic energy policies that ignore the physical, economical, and technical realities and limitations of renewables. Despite a concerted effort to reduce it, Europe’s reliance on Russia has “significantly increased,” although the dependence on Ukraine as a transit country has fallen.
This cannot be stressed enough to Western leaders: our energy demand patterns are STILL NOT normalized. Thanks to the financial crisis and subsequent recession, Europe’s real GDP/capita today is about the same as it was in 2007 (~$34,000). Such economic stagnation is obviously not a long-term goal, so gas demand should be expected to rise.
There’s an essential need to think deeper and longer-term: “Mothballed gas-fired power plant re-opened in UK effort to ensure capacity.” Over the next 15 years, Europe’s GDP/capita rates are expected to soar 30%.
The role of natural gas will continue to penetrate the energy portfolios of the Western nations. Gas has a low CO2 content, high flexibility in end-use, and lower costs. And quick ramp-up ability makes gas ideally suited as a complement to renewable energies like wind and solar. That’s why Europe’s gas demand increases under any projected scenario for the years ahead.
Natural gas will increasingly become more competitive. Carbon prices are low now, but much of Europe seeks to change that. UK introduced a “carbon price floor” in 2013 that will favor gas over coal, and France now wants the same. Per Bloomberg , “Europe’s Hooked on U.S. Coal, But That Can’t Last.” More gas use is on the horizon: “European Natural Gas Prices Collapse.”
Perhaps the most obvious sign why Europe’s gas demand can only increase is the fact that gas still only supplies 17% of electricity, compared to 33% in the U.S. Thus, the reality that much more gas has equaled much less CO2 in the U.S. power sector has given European leaders all the evidence they need to purposefully increase gas’ share in electricity. This is particularly true in today’s market because low gas prices encourage new uses, new markets, and new demand.
Moreover, while it’s assured that wind and solar will continue to add capacity, that doesn’t automatically translate into actual generation because of intermittency. In Europe today, wind is 13% of capacity, but just 7% of generation; solar is 9% of capacity, but 2% of generation. And it’s more reliable natural gas that will fill in as the required backup.
In the years ahead, 90% of Europe’s new gas demand will come from the power sector (other 10% coming from transport). Since 2005, Europe’s gas capacity has increased from 160 GW to 245 GW, and going forward it’s going to be rising by about 6 GW per year.
Turkey, which over the past decade has been 2nd to only China in terms of natural gas demand growth, accounts for about half of the gas plants being constructed in Europe. Highly reliable and “punching above its weight,” gas is just 29% of Turkey’s power capacity but leads at 40% of generation.
Europe is the world’s largest gas importer, at around 22 Bcf/day. And with few chances to increase domestic production, import dependence will increase from 45% today to 65% by 2025. Europe consumes about 15% of the world’s gas, but has just 2% of the world’s proven gas reserves. Shale gas production has some potential but continues to be blocked.
As new Asian demand for LNG is slowing, “Europe’s importance has been rising. Asian spot prices have now essentially converged with European hub prices around 4 $/mmbtu.” LNG enhances Europe’s gas diversification and can help displace imports from Russia. Closer to the U.S., Western Europe accounts for over 80% of Gazprom’s exports into the continent.
The EU’s Energy Union wants to ensure that all Member States have access to liquid gas markets. Today, significant volumes of LNG from Western Europe cannot move to the Central and Eastern part because of infrastructure bottlenecks that should ease over time.
Cesec, the Central/Southeast Europe gas connectivity working group, has proposed “seven or eight projects that, if built, could deliver three or four sources of gas to countries in southeast Europe” by 2020. For $33 billion a year, Europe can slice Russian gas imports by 5.6 Bcf/day.
“U.S. companies are ready to build floating terminals to receive and store LNG on the coasts of Croatia and Greece. The consumers of this gas would be the Balkan states and the Eastern European countries, the traditional consumers of Russian gas.“ Cheniere says that “U.S. can supply EU long term with LNG at $7-$8/MMBtu.”
The rise of the U.S. in the LNG export market will give Europe a critical and reliable supplier that isn’t under the precarious control of a government or national oil company. IHS estimates we have an astounding 800 Tcf of available supply that can be produced at $3/Mcf or less. And LNG from the U.S. is destination-free, so that will help make the entire system “more flexible, much more responsive, much more resilient.” Per EIA:
-Some “80% of U.S. LNG export volumes for projects currently under construction have been contracted on pricing terms directly linked to the Henry Hub price, or under a hybrid pricing mechanism with links to Henry Hub. The flexibility of destination clauses in U.S. LNG export contracts and the introduction of hub indexes are expected to promote greater liquidity in global LNG trading, shift pricing away from oil-based indexes, and contribute to the development of regional trading hubs and pricing indexes.”
In fact, having the U.S. as a supplier would in and of itself increase Europe’s natural gas demand. Our LNG supplies will enhance gas security and soothe the common fear of Europeans: “if we use more gas, we’ll have to rely more on Russia.” As stated by Total’s CEO: “The price of gas in Europe has dropped because of American LNG.”
Even more Australian LNG will also indirectly help Europe’s gas security because Aussie shipments to closer Asia will free up gas from other parts of the world to reach Europe. Once again, more supply sourcing lowering prices, encouraging use. At a rising 11% of all gas used today, more LNG is paving the way for a more liquid and integrated global gas market where more supply and pricing options triggers more use.
Europe’s main LNG supplier has been Qatar, which isn’t seeking to grow capacity, sends over 80% of its LNG to Asia, and has surging domestic demand. Europe’s LNG demand was up 16% last year and could nearly double to 10 Bcf/day by 2020, constituting 20% of its total gas consumption. Re-gasification capacity will increase 50% by then.
Europe’s greater LNG import potential is obvious: liquefaction utilization in recent years has been about 25-35% and more pipeline capacity are costly investments that are less flexible and more difficult in the short- and medium-term
Source: Hellenic Shipping News