A new E3G Briefing Paper
calls into question official EU projections regarding EU gas demand,
which raises important questions about the economic viability of new gas
import infrastructure – both pipelines and especially LNG terminals –
and, by extension, about gas supply diversification efforts to enhance
overall EU energy security. The following chart shows that projecting
future gas demand has become an exercise in downward revisions. E3G points out:
“Projections of what gas demand will be in 2015
have decreased by 23% over the past 10 years – and the Commission is
still forecasting 2015 gas demand to be more than 20% higher than the
actual 2014 levels.”
European Commission: EU27 Gas Demand Forecasts (Mtoe)
Source: E3G
EU gas demand is actually now 23 percent below its 2010 peak and threatening to revisit the 1995 lows.
EU Gas Demand (Mtoe)
Source: Eurostat, Eurogas, Sandbag, E3G via E3G
E3G views
the changes in the gas demand picture as a result of “structural shifts
to the European economy, changing consumption patterns and significant
progress on energy efficiency.” What makes the underlying study
particularly interesting is that it distinguishes between countries in
which gas demand occurs. Unsurprisingly, not all countries are equal:
“Gas demand is not evenly spread across the EU. Germany, the UK
and Italy consume more than half the EU’s gas demand, and three quarters
of the EU’s total gas consumption comes from only six western European
countries: Germany, UK, Italy, France, Netherlands and Spain.
(…) Only 7% of gas demand comes from countries highly exposed to Russian
imports (i.e. Share of Russian imports as in total gas consumption is
more than two thirds: Bulgaria, Estonia, Czech Republic, Greece,
Finland, Hungary, Latvia, Lithuania, Slovakia, Slovenia). (…) Just 12%
of gas demand comes from seven Central and Eastern European countries
(Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovakia,
Slovenia).”
Importantly, the first category of importing countries
– in Western Europe – features common policies that emphasize the
widespread deployment of renewables as well as, to various degrees,
energy efficiency programs. That allows for the study’s authors to
conclude that EU gas demand on aggregate is likely to further decrease
in the future. Here, it is important to note that gas demand is falling
and is seen to fall further across major sectors of the respective
economies such as power, industry and residential.
All this will have significant implications for infrastructure projects. In this respect, the E3G study warns
specifically of the “risk of misevaluating future gas demand”: “The
wrong diagnosis on EU energy security will lead to the wrong cure. An
expectation of rising demand has led the EU’s energy security strategy
to focus on accessing new sources of gas, rather than on alternative
approaches such as demand reduction or strengthening internal
connections. (…) Overinvestment in gas infrastructure can also create
‘lock in’ to levels of gas consumption that are in conflict with the
EU’s decarbonisation goals.”
This warning is very telling indeed.
While the study nicely identifies the good long-term structural reasons
for the downwardly revised EU gas demand picture, at the same time it
appears to display a bias against natural gas as integral for getting to
a low carbon economy. The E3G report
also seems to de-emphasize the fact that the most vulnerable – in terms
of energy supply security – countries, which depend heavily on Russian
natural gas for heating are located in Central and Eastern Europe. In
fact, a Climate Action Network (CAN) Europe position paper from April 2015
pointed out just that: “ The current security of supply concern, (…) is
first and foremost a heating issue. Indeed, 61% of EU imported gas is
used in buildings.” The problem here is not Western Europe but Eastern
Europe with its old inventory of buildings – often severely lacking
Western energy efficiency standards. To fix this reality will require
substantial investments in an often budget-constrained environment.
Thus,
Europe viewed ideally as a community based on solidarity put in place a
EU energy security strategy focusing on the diversification of the gas
supply away from one monopolistic supply center in addition to enhancing
interconnections (EU Energy Union) between countries in multiple
respects. Note, diversification often just means to substitute old
supply corridors for new supply corridors without necessarily replacing
supply volumes one-to-one let alone increase said supply volumes.
However,
the E3G study raises issues for potential infrastructure projects like
new LNG import terminals intended to serve – from an energy security
perspective – Southeastern Europe. In this context, there is no shortage
of politicians calling on the US to allow future LNG exports in order
to support US allies in the region – a region, which has traditionally
been ‘underserved’ in terms of its energy needs. Obviously, the US
government will have no say in this matter. These decisions will be made
exclusively by the private sector based on pure economic considerations
and ‘animal spirits’.
Lastly, to make an overarching point with
regard to US LNG exports, LNG exports may turn out not to be the
‘jackpot’ for most exporters as previously anticipated. Consider the
latest IEA Medium-Term Gas Market Report,
which suggests in its five-year projections of natural gas demand,
supply and trade developments with respect to the high-priced and
therefore most desirable Asian natural gas (LNG) market that overall
“weaker gas demand in Asia, where persistently high gas prices until
very recently caused consumers to switch to other options”, is cutting
into global demand.
IEA Executive Director Maria van der Hoeven expanded in her remarks
on that: “One of the key – and largely unexpected – developments of
2014 was weak Asian demand. (…) Indeed, the belief that Asia will take
whatever quantity of gas at whatever price is no longer a given. The
experience of the past two years has opened the gas industry’s eyes to a harsh reality: in a world of very cheap coal and falling costs for renewables, it was difficult for gas to compete.”
Consequently, according to the IEA
the long-term outlook for gas has become more uncertain – especially in
Asia where “a few Asian countries have decided to move ahead with plans
to expand coal-fired power generation instead of gas-fired generation.”
Interestingly, the IEA Medium-Term Gas Market Report – seemingly diametrically opposed to the E3G study
– views Europe as an important outlet for global LNG supplies citing a
declining trend in domestic production and “a moderate recovery in
demand.” “As a result, European gas import requirements are set to
increase by almost one-third between 2014 and 2020,” the IEA report says.
Source: IEA
Russia,
however, has already started proactively pursuing a strategy of ‘gas
infrastructure divestment’ from Ukraine by rearranging its future
portfolio of ‘transit countries’. Russia’s state-controlled energy giant
Gazprom is taking first steps to expand the Nord Stream gas pipeline beneath the Baltic Sea and to add a new outlet for Russian natural gas with a new Turkish Stream pipeline through the Black Sea.
Both
projects have to be perceived as not primarily intended to increase the
supply of natural gas to the EU but rather following in Saudi Arabia’s
footsteps in the oil market to maintain market share in the crucial
European gas market as the traditionally only low marginal cost natural
gas producer/supplier next door. Note, Russia could meet a future
increase in EU gas demand pretty handily provided that by that time
enough pipeline capacity is available. But in the meantime, Russia will
comfortably price more expensive global LNG supplies – due to seaborne
transportation costs – out of its core European market.
In sum, US
LNG exports may only end up on the European market as likely more
expensive spot cargoes and/or from Asia diverted LNG, or only if
European governments make a conscious decision to opt for US or global
LNG supplies instead of piped Russian natural gas out of energy security
considerations trumping the pure economics of the trade – as long as
there is no other piped alternative from the immediate neighborhood
around the Eastern Mediterranean or the Caspian basin. An indication
that this is the direction into which European governments are moving
would be the sprouting of LNG import terminals along the Southern flank
of Europe (for more information on the prospects for that and LNG
terminals in Europe, read Breaking Energy here). US energy special envoy Amos Hochstein has repeatedly urged Southeastern European governments “to build new gas links and focus on smaller projects (…) rather than blockbuster pipeline deals,” as reported by Reuters. Back in January 2015, Hochstein outlined at an event at the Atlantic Council’s Global Energy Center the US energy diplomacy priorities for 2015. On this occasion, he stressed the criticality of a LNG facility in Croatia on the Adriatic Sea.
As
outlined above, Russia is not going to stand idly by while the EU is
openly pursuing the marginalization of Russia as main gas supplier to
Europe. Thus, Russia/Gazprom is actively taking steps to reposition
itself by trying to preserve its European gas market share for the
future. Overall, the European gas market is poised to become a
fascinating battleground – a tug of war between geopolitics, the
transition to a low carbon economy, and gas market price signals.
http://www.theenergycollective.com/roman-kilisek/2243241/where-future-eu-gas-demand-going-implications-russian-and-us-lng-exports-europ