LNG No Challenge to Piped Gas in Europe

Pipeline gas will remain dominant mode of entry into Europe, according to Leslie Palti-Guzman, Analyst, Eurasia Group, who explained that her organization's core expertise was political risk. She pledged to talk about LNG versus piped natural gas in Europe at the European Gas Conference in Vienna, Austria.

In contrast to piped gas imports, which she said remained dominant, she explained: "Increasingly, we see that LNG is being used as a convenient way to diversify supply, away from a dominant single supplier like Russia, in many cases in Eastern Europe. But also it is a convenient way to have an emergency supply for countries that want in a very timely fashion to bring another source of supply into their country," she said, adding that there were re gasification terminals that would soon be completed.

She mentioned the interest in Poland and Lithuania to cut their energy dependence upon Russia, as well as other examples in Europe, which made LNG imports an attractive option.

"From the suppliers' perspective, we tend to see that some from the LNG side are competing with those on the pipeline side, but sometimes we see that suppliers can do both, and some are doing this to play markets against each other," Ms. Palti-Guzman explained.

She said that for buyers in Europe there was a strong push for supply diversification, to multiply the number of entry points for gas, whether through pipeline with new suppliers, or via LNG with new re gasification terminals or new sources of supply.

"There's a huge push to promote gas on gas competition for security of supply, but also for pricing and in the hopes of bringing cheaper gas on the market."

This supply diversification, she said, could come at a certain cost.

Ms. Palti-Guzman noted that in Europe there were currently 23 re gasification terminals operating, which was about 144.5 million tons/year of LNG, including Israel and Turkey.

"When you look more closely at the utilization rate, some of those terminals are running only above 30 percent; it's nice to have, but if you can't attract the LNG your re gasification terminal is going to be idle," she explained, offering that there were four terminals under construction and many more that were under study or being proposed.

She commented: "Not all of them will be built, but it just shows that many countries are considering this option in terms of supply diversification."

In terms of supply into the EU, she noted there was only one liquefaction plant in Europe, in Norway, and it looked likely it would stay that way. Regarding suppliers, 50 percent of LNG was coming from Qatar, 18 percent from Algeria and 17 percent from Nigeria.

Ms. Palti-Guzman outlined the three major non European sources of piped gas: Russia, which was still dominant at 28 percent of market share; Norway; and North Africa.

"However, there is a new route that's taking shape - the Southern Gas Corridor - and eventually, by 2018, we'll see 10 bcm of Azerbaijan gas entering the EU," she said, adding that the total volume of non EU sourced gas transported by pipeline was 225 bcm, much greater than LNG capacity.

She explained that for Israel re gasification was a "stop and go" solution being caught between two sources of supply. Italy, she said, had huge environmental opposition to re gasification terminal offshore; Poland was trying to cut its dependence on Russia, partially through LNG re gasification.

Other projects in western Europe were also coming together like Dunkerque LNG and many others, even Turkey, which was growing, were pursuing both pipeline and LNG options.

She showed the "pipeline game" in Europe, noting that Nord Stream had been completed, bringing 55 bcm of gas into Europe. "South Stream is still on the table, and there was a FID taken in December for the offshore section; however, there are many unknowns like the final route, and the EU has not received the final environmental statements. And in terms of market and demand, European gas demand is down."

She noted that the Southern Gas Corridor was finally taking shape, mentioning the competition between TAP and Nabucco West to bring gas across Europe.

"These can coexist, and maybe the Shah Deniz Consortium could build both, as they have taken equity stakes of 50 percent in both, so they are kind of hedging their risk and supporting both routes.

"This is a strong commitment from the Shah Deniz Consortium. These two routes for the Southern Gas Corridor would be competing for the same markets, so there's kind of an urgency for new suppliers to lock in European market share for the future for when gas will rebound and the market will recover," she explained.

Nabucco West, which was originally proposed as a 31 bcm pipeline, but now 10 bcm would be for Europe and 6 bcm for Turkey: "So it's a huge scale down from the original project," she opined. "However, it's still nice to have in terms of diversification supply, but it's not going to reduce the dominance of Russia in Europe, at least for pipeline."

Ms. Palti-Guzman offered the supplier perspective of LNG versus piped gas.

"There are two main ways in which competition can be observed and the one is in pricing. While Russia divides the European market into three categories: 1) the UK, which is a liquid market, where Russia sells at NBP; 2) Western Europe, where there are renegotiations between the utilities and Gazprom, which are slow but the company has accepted some comprizes, even an element of spot indexation; 3) in Eastern Europe Gazprom has been reluctant and where the comprizes have been via a carrot and stick approach.

"If Russia receives something in return, Gazprom has been willing to give some kind of concessions on pricing," she added.

For Qatar, she said, the game was playing Europe off of Asia.

The future, she said, could be cooperation among suppliers.

Still, Europe would remain a challenging market, provoking Russian threats that it might look further east for selling its gas.

"Now this is becoming a reality," she observed. "President Vladimir Putin is pushing for an LNG strategy going east: the Vladivostok LNG project that will certainly go much faster than Schtokman or Yamal LNG. However, Russia will still face a lot of competition going east from already established Pacific LNG suppliers like Australia, Qatar and others."

She contended that Europe would remain Russia's core market.

As for the outlook for post 2020, Ms. Palti-Guzman concluded there would be a more liquid and transparent EU internal gas market more gas on gas competition, more powerful gas hubs and trading platforms.

She said: "Gas won't necessarily be cheaper, but there will be more short-term contracts along with spot purchase and fewer long term contracts."