European Gas Industry: Sad Songs Say So Much

The European natural gas industry may be singing a sad tune, but whether investors will react to its call is another question.

Chairman of the European Autumn Gas Conference, James Ball, who is also Director of Gas Strategies, began the event with some sappy pop song lyrics which reflected that sentiment as speakers at the event in Vienna, Austria mostly expressed doom and gloom to the several hundred representatives of the gas industry who were in attendance.

"If we're going to do more than whisper a little prayer, we're going to have to attract this elusive lover back," Mr. Ball said, referencing the wooing of investors back to European gas.

"Witness the chairman of VW who said he would like to be sourcing his parts from as far away from his home country as he can because of the price of energy," he noted, countering that there could be some light at the end of the tunnel for the industry.

According to him, while investments may not be pouring in, they certainly did exist.

"Fortunately though, financial pressures are forcing policymakers to re visit their love affairs with subsidies," he said, alluding to government subsidies for renewables in Europe. Growing signs of liquidity at European gas hubs wasn't a bad thing either.

The first session of the EAGC dealt with the question of a sustainable long-term demand for gas in Europe, pondering whether Europe's subsidized renewables agenda had killed that off.

"The historical experience of demand over the last few years has been somewhat less than encouraging," observed panel moderator, Professor Jonathan Stern, Director of Gas Research at Oxford Institute for Energy Studies.

He swiftly introduced the International Energy Agency's Senior Gas Analyst, Anne-Sophie Corbeau, who grappled with the question of whether Europe was entering a dark age of gas. "This is something that is only happening in Europe, unfortunately," she noted, adding that natural gas was abundant and acceptable compared to coal; whether it was affordable compared to coal was a key question depending on the geography in question.

"We all know that 2011 was a pretty bad year in Europe, which was the only region in the world where gas demand declined." That decline she said was 3%.

She distinguished however, Turkey and Southeastern Europe, from the rest of Europe in that demand for natural gas in those places actually did grow. Milder weather and industry slowdowns, she said, were responsible for less demand for gas in Western Europe.

Referring to a graph of natural gas demand up to mid 2012, she said that European natural gas had lost a decade. She explained: "As soon as the crisis was almost over, the combination of economic growth and lower gas prices produced an interesting effect; but since the middle of 2010, gas prices have been increasing and the trend is a decline, now at it's lowest point."

As for the future outlook of gas demand, she said, "It seems the economy is definitely not improving, so I think European gas demand will probably reach 2010 levels - 570 bcm by 2020 - based on a lower economic forecast and also the fact that the pricing conditions are definitely not favorable for gas."

Ms. Corbeau explained that this was because gas was competing with coal, where it was no longer competitive. "Coal prices have been declining thanks to the US which is sending cheap coal. In the US, you have coal to gas switching; in Europe, gas to coal.

"Are we going to see a dark age of gas and a golden age of coal?" she asked.

One solution she mentioned was the possible raising of the price of CO2 emissions.

Lots of LNG would be coming on the market, but she said it would not be cheap and would have no effect on lowering the price of other gas sources.

Shell Upstream's Thierry Grauweis, Manager, Gas Market Development Europe, noted the massive change in the European Commission's stance on natural gas.

"Our perspective is that gas will be a backbone of a sustainable energy system and not only a backup," he stated. "There is a huge task ahead of us, if we want to make the European objective of a competitive, secure and sustainable energy system.

"Natural gas supplies are increasingly abundant and diverse, which means greater security of supply. The European pipeline network has been developed in the last 50 years, a network of over 200,000 kilometers delivering 500 bcm in 2012."

This was enhanced by 75 bcm of LNG, according to Grauweiss.

He said he believed that huge areas of Europe could not solely rely upon electricity for their energy needs. More fuel cell development needed to be done.

"Gas is the most efficient way to convert energy into electricity from small scale to large scale," he added.

He noted the abundance of natural gas in the US, saying that by bringing it to power generation and displacing coal, it would lead to a reemergence of the industrial base.

"The IEA has reported that CO2 emissions there have actually fallen by 430 million ppm since 2006 - a drastic reduction," said Mr. Grauweis, who noted the stalled investment in gas powered generation and that now coal was starting to compete with renewables.

"This is definitely not the most cost effective way to reduce CO2 emissions," he opined, saying of renewables versus gas: "We believe that we need to move towards a level playing field."

For one, a stronger CO2 price was necessary.