Europe & LNG: Go with the Flow
Three different roundtables were assembled at the European Gas Conference 2014 to discuss aspects of how new LNG flows were affecting the geopolitics of European natural gas.
Tasked with moderating a “piped gas versus LNG for Europe” discussion, Andree Stracke, Head of Global Gas and LNG Origination, RWE, noted that despite all of the bigger natural gas companies in the EU having long-term contracts in place, oil-indexed contracts were disappearing. He said, “My opinion is that, those contracts, being oil-indexed, for Europe this story is dead.”
But would that situation be sustained? Might long-term contracts come back?
The latter question, said Mr. Stracke, was crucial for those looking to export gas to Europe who would be searching for a price benchmark. Also, there just wasn't high enough natural gas demand in Europe.
This, the group concurred, had implications for LNG terminal construction, like in Italy, where plans for three facilities a decade ago were now uncertain.
He offered, “If the pricing signals are not there and the LNG's not competitive at some point in time, it will be very difficult for someone to invest; it can't be justified in Italy at this point and time nor potentially for others. The question is, 'when do pricing signals come?' And 'when does LNG come again to Europe in order to invest again?' I think it's a matter of time before we'll see a new wave of investments into LNG terminals.”
As natural gas demand had gone down, coal had taken over, noted Mr. Stracke, who asked how Europe might increase demand. One spark of hope, he said, could be seen in the development of small-scale LNG for use as a bunkering fuel, for one, although the pace of that had not been progressing as anticipated. Demand could also be driven by CCGTs.
Regarding European supply availability in a tight LNG market, Guy Broggi, Senior Advisor LNG Division, Total Gas & Power, exclaimed that LNG was no different than pipeline gas, just in a different form. His discussion group, he explained, decided to consider a timeline up to 2020. “In 2020, will Europe import more LNG than today? The answer is, 'yes, and a lot.'
“Will Europe need more gas? The answer is, 'no.' LNG will replace declining North Sea, Algeria or Libya production.”
As for LNG terminals being built at that time, he opined that there were too many places that already had them. It would be useful to use LNG for transportation in the Baltic states, where we would likely see a flurry of terminals, according to Mr. Broggi, who added that the Mediterranean would see bunkering stations.
“The battle,” he explained, “is the battle between Russia, US, Qatar/Iran and Israel. There is plenty of gas in Russia in the waiting for markets and with the Yamal decision we will have proof that there will be some LNG coming in and it will not all go to Asia, but some for Europe.”
The Russians, he said, already had a market in piped gas – now they wanted it in LNG.
What Russia's role would be in the European and the global LNG equation was the topic grappled with by a group led by Alexey Gromov, Director on Energy Studies, Head of Energy Department, Institute for Energy and Finance.
Regarding questions of whether Russian gas would be competitive, which direction it would go and under what contracts it would be sold, he said it all depended on the future situation of the European gas market as well as Russia's long-term gas pricing.
Of his group's discussion, he commented: “We don't see a really big place for additional Russian energy supply to European markets, because in 5-7 years the level of competitiveness in the LNG industry will strongly increase.”
Moderator David Ledesma, Independent Consultant and Senior Fellow, Oxford Institute for Energy Studies, suggested that the future price of North American LNG would be USD 10/MM Btu, meaning that Gazprom would have to sell its gas at a lower margin or not sell any gas at all. Andree Stracke agreed, while Mr. Gromov predicted a price of USD 11-12 was necessary for suppliers.
Mr. Broggi said price was not an issue for taking decisions and it was possible to foresee what prices might be today. “That's why all of the big decisions are not made according to pure economics,” he explained. “They make strategic decisions. If I want a market I take the risk to lower my price, take the market.
“You never attract people with high prices,” he added.