Three Key Numbers for European Natural Gas

When it comes to the natural gas market in Europe, lookout for some numbers - "60, 9, 60" - according to Carmen López-Contreras González, Strategy and Commercial Planning at Stream Repsol-Gas Natural LNG.

At her presentation at the European Gas Conference in Vienna, Austria, she promised to outline what was happening today with the natural gas demand in Europe. "We are at a level that we haven't seen since 2002," she remarked. "Europe has destroyed about 60 bcm of demand - that's my first number."

She explained that demand was driven by three main sectors: power generation, residential demand and industry. "Residential demand is about 40% and is the only one that has not dropped dramatically.

"But if you look at power generation and industry demand, they have dropped significantly: by 84 bcm for industry demand and by more than 100 bcm for power generation. Why is this happening?" she asked, explaining that industry demand had a lot to do with the economic downturn in Europe.

In terms of power generation, she said that other fuels were competing in the power sector. Renewables, she noted, were increasing because of Europe's leadership in global climate change and green power.

"Renewables is growing and is replacing gas also because of prices," she said, offering a graph that depicted that phenomenon. "It doesn't matter if you take spot prices for gas or oil-indexed gas prices - both of them have huge spreads. Up until 2011 the correlation between generating costs was quite high - 79% - by now they are widening their spreads and burning coal is cheaper than burning gas in Europe."

It was not only CO2 prices, but that what happened in one part of the world deeply affected other regions. Much coal was coming into Europe from the US, which was now using more gas-fired power generation than coal because of the low gas prices there. "All of this coal is now coming to Europe and we are buying more coal because most gas prices are high; the CO2 emissions price is also very low - it used to be around EUR 15/ton, but is now around EUR 5-6."

Ms. López-Contreras González said that Europe was attempting to counter this through some measures, considering the bundling of emissions, as the original carbon price had been set in 2005. Something, she said, needed to be done.

She went on to show the two biggest energy markets in Europe: the UK and Spain, both locations where gas was being replaced by coal.

López-Contreras González said that the market was supplied by three sources: indigenous production (51%), which was decreasing; pipeline gas (37%), which was going up; and a small proportion of LNG, which was increasing.

She commented: "LNG is very relevant, not for the whole of Europe, but for some markets. Without it, we could not balance some of the gas markets in Europe."

Still, there were many Europe's - it wasn't one single country or market.

If one looked at the dependency path for LNG, southern countries like Spain relied on LNG to cover 50% of its natural gas. But other factors were also at play.

According to Ms. López-Contreras González, by looking at purchasing power parity, some countries in Europe were five times poorer than others; this was figure was never greater than two in the US among the states.

This was evident, she said in LNG markets, where countries had both different characteristics and different needs.

LNG's main characteristic, she said, was flexibility. She said Europe had diversified its LNG sources, but still had a certain reliance on LNG from Qatar, but that it was a reliable source.

Comparing 2011 to 2012, Ms. López-Contreras González explained that much of the LNG that Asia had attracted was the exact same LNG that Europe was incapable of attracting. "LNG is flexible and takes the path to places that have the greatest necessity," she commented."Most of LNG that used to come to the UK is now going to Japan - it's because of prices.

"$9/MMBtu is the spread," she said, referring to the second number in her series, "the highest spread we have seen in the spot prices between Europe and Asia, because Asia is giving price signals to attract LNG; Europe is not doing so."

Qatar, she noted, was the main player in this dynamic, increasing supplies to Asia.

This resulted in a domino effect, which was also affecting the LNG sector.

"The shale gas and oil revolution in the US is making prices go down to 1.9 last year. The market there is burning more gas than coal, and this coal is being imported to Europe at a very good price. So Europe wants more coal than gas. And then LNG flows went to Asia, because they're able to pay for it, taking LNG from Europe."

Where would this end? She said she didn't know, but offered Repsol's long term vision for LNG.

Ms. López-Contreras González referred to her third figure: 60 bcm/a, commenting if we look at forecasts for 2020, we have to cover a gap of 60 bcm, which will come from demand growth, production decline and contract expiration.

Covering the gap, she explained, would involve an optimal combination of pipeline gas and LNG. "Should we consider buying more Russian gas, Norwegian gas, or should we look at the Caspian basin? Or maybe drill for unconventionals in Poland? Or should we buy more from Qatar? Or buy LNG from the US? Or perhaps from Australia...

"The decision," she continued, "will have two main considerations: security of supply, which is very relevant for Europe, and pricing."

In terms of LNG for Europe, she noted that Europe had not signed any agreements. Volumes were down, and Europe couldn't compete with Asia, which was paying more.

"To cover that gap of 60 bcm we can remain as we are today and stick to the traditional model, which is a high dependence on piped gas; renewable or long-term contracts for pipeline gas or LNG, which makes it difficult for price negotiations, and link those prices to oil."

She contrasted that traditional model to an alternative that had a balance between LNG and piped gas, "because we need both. Flexible LNG is not reliable, it's just enough to attract it when we need it. So maybe this will increase competition, giving Europe a chance to compete on the same terms with other markets.

"Europe has to integrate its markets. We're going to continue in many spot leader markets; we have to interconnect ourselves," concluded Ms. López-Contreras González, who explained that her "60 - 9 - 60" numbers represented demand destruction, Asia-Europe spreads and the market gap for 2020.