Editorial: Signal distortions [NGW Magazine]

News that Egypt’s 5mn mt/yr liquefaction facility at Damietta could restart operations as soon as this summer will have been met with anguish from the upstream. Why reopen precisely then, after eight years’ closure? True, it might take some time to cool down and recommission the plant and it will be for Eni to decide the offtake arrangements. But it is another weight on a low-priced market.

Eni however also needs an escape route for its Egyptian gas production: even as expensive gas flows into the country through a pipeline from Israel as part of a larger political deal involving a third party. Its own output from Zohr, which ramped up ahead of schedule, has been curtailed repeatedly. Are the two related? The solution of the eight-year-old problem, which was in Cairo’s gift, does seem to have come at a good time for Eni.

It used to be the case that unlike oil, for example, gas was a long-term business: the time it takes to reach agreements on annual volume and price; to build the transport routes; and to negotiate the terms of political treaties in the case of cross-border pipelines.

But now LNG is fully mobile, even on shore thanks to ISO containers and rail. Long-term contracts are shortening and pricing clauses rely more on local gas market conditions. Companies are now financing projects off their balance sheet. Its only significant problem, relative to oil, is the cost of transport and storage per unit of energy.

Now gas is becoming like oil in another way: as its share of the fuel mix grows in greener economies and its reach extends, thanks to LNG, it has become another tool in the political shed: a means of exerting political pressure – as well as assisting Eni to escape it.

Years ago, the best that the US could hope to achieve was to lobby for alternative pipeline routes, such as the now-functioning but not yet complete Southern Gas Corridor (SGC), if it wanted to weaken Russia’s influence in Europe.

Only Russia seems able at the moment to offer enough gas to justify expanding the SGC. In Q4 2019, the price at the relatively expensive Italian gas hub was €158/’000 m³, down 40% on the same period of 2018. It is likely to have fallen still further by the time the SGC starts flowing on the home stretch under the Adriatic. So a project that was built to avoid Russia might itself need Russian gas in order to expand and so turn some kind of profit. The highly political EastMed pipeline looks even worse.

But thanks to LNG, the US can go directly to the buyer and offer cheap gas to win allies. Using sanctions to delay Nord Stream 2 would have recklessly endangered European security of supply, but for the promise of its own LNG that can replace it.

Gazprom is mostly owned by the Russian government, while the US LNG off-takers are not yet US-backed entities. But Washington may decide to assist buyers to make bids the off-takers find attractive. Last year, Turkey turned down its Russian gas imports and hoovered up LNG instead, much of which came from the US. Again these sales arose between distressed private sellers and an opportunistic state entity: they were not part of an explicit intergovernmental agreement.

How the US strategy will pan out is unknowable: Belarus, for example, has managed very well to retain its independence by playing off the West against Russia, but the president is not immortal and the economy depends on cheap oil and gas. A reunion with Moscow would suit Russia’s president very well: Vladimir Putin’s term as the president of Russia expires in a few years. If he pulled that off it would bolster his popularity at home, and in a zero-sum world, that would weaken the US.

Gas is undergoing a slow but perceptible metamorphosis in the European Union too. Electrons, coming from everywhere, including coal-fired generation, have in this narrow sense a positive political charge, while gas is negative, despite its obvious attractions: a fossil fuel that is sustainable if abated – but still better than most coal if not – it is now more affordable and secure in its supply than ever. But it comes with political strings attached.

On the supply side, its future seems safe: it is a key part of producing companies’ portfolios. Although far apart in terms of market value, both Eni and Kosmos spoke late February about more gas production and cleaner but shorter-term and faster-return oil production. Eni predicts that gas will be 85% of its total barrels of oil equivalent.

But how much of that gas will go where, if not Asia and Africa, is not so easy to answer: the European Union has a Green Deal, and a ‘Just Transition’ to work out. The horse-trading that will be required to close down mines and perhaps some heavy industry while imposing a carbon tax on imports that does not violate rules on protectionism, and simultaneously keeping prices low for consumers, will see highly complex and politically charged decisions. But gas could win if the playing field is level.

Analysis by Frontier Economics into market coupling, where the advantages of decarbonised gas over electricity – storability, flexibility, energy density and so on – are fully exploited thanks to market mechanisms, is to be welcomed. Even if not the last word on the matter, it has at least thrown down the gauntlet. It is down to policy-makers now to accept its plea for a credible, harmonised EU-wide carbon pricing scheme and the rejection of subsidies, levies and taxes as the solution.