A Few Years Needed to See "Significant" Changes of Energy Union
Natural Gas Europe had the pleasure to interview Baptiste Desbois, energy procurement consultant at E&C bvba, and author of the book "Panorama: Le Marché Du Gaz en France."
According to Desbois, it will take a few years to see significant changes in Europe, as a result of EU's efforts to react to the "worse gas crisis with Russia". Apart from the implementation difficulties, he sees splits in Europe, which indicate that a single voice could be replaced by different voices and divergent aspirations.
In your work, you stress the importance of geopolitical forces, and underline we went through four gas crisis in the last 10 years (2006, 2008, 2009, 2014). Do you see any differences between the four crisis? Which are the major developments over the years?
Even if the same ingredients are combined, I believe that we are currently experiencing the most important gas crisis. Not only because of the long-lasting supply disruption we witnessed under the Gazprom-Naftogaz contract but also in view of escalating tensions between Russia, Ukraine and the European Union. That’s the reason why this crisis is also a wake-up call to improve the design of the European gas market. On the other hand, we have to admit that the Western European gas market is much more robust compared to the previous years, a consequence of the 2009 crisis. There are other routes and other alternatives limiting the risks should a significant gas cut occur again.
How long will it take to see tangible results of this wake-up call? How long will it take to have drastic changes?
Some infrastructures are already in place. Given the low use rate of Western LNG terminals, it would be technically feasible to unload more tankers, although a regain of LNG deliveries in Europe has already been witnessed over the last couple of months due to the decreasing demand and prices in Asia. However, this is far from enough, especially in Central Europe where additional infrastructures have to be constructed, and it won’t happen overnight. That’s why a few years could be expected before seeing significant changes. Internal routes, cross-border and reverse flows capacities have to be drastically reinforced. The European gas market is still congested. The wheels are however set in motion, with different projects on the table. The European Commission has for example decided to allocate 295 million euro to the Construction of the Gas Interconnection Poland-Lithuania. Linking the European gas market to other external sources will also take a few years: the Southern Gas Corridor is expected to be operational by 2019-2020. However, when it comes to decreasing the dependence on Russian gas, we have to be reminded that European countries have signed long-term supply agreements and the expiry date has first to be reached. Hence the statement from the International Energy Agency: “The European Union will continue to depend on Russian pipeline gas imports for the foreseeable future”.
In the article, you give a panoramic view over the latest gas crisis, going through Russia’s decision to increase prices from $268.5 to $485 per thousand cubic meters, before going back to $385 per thousand cubic meters. But the winter package expires at the end of March. What’s your take on the eventual summer package? According to you, what would be a reasonable price and what could be the one agreed by Russia, Ukraine and the EU?
The debates have to be reopened. According to a note released on January, Alexey Miller stated that “Gazprom has cooperated and will go on cooperating with Ukraine in accordance with the existing contracts for gas supply and transit”. It could mean the end of the 100 dollar rebate. Looking at the fundamentals, the situation is now drastically different due to the collapse of the oil price. Russia’s national finances are linked to the energy exports and any gas sales could be welcomed, although the gas price is also indexed on the oil price. In addition, summer could be synonym of lower consumption and needs from Ukraine, which is buying more and more gas from Europe. I think that the outcome will be mostly influenced by the political situation as the European Union, Russia and Ukraine are really skating on thin ice with the fragile ceasefire.
A mild winter implied relatively low levels of consumption in Europe, which translated in reasonable withdrawals from UGS facilities. On the other hand, the decision of traders to wait for the summer to buy Russian gas at a lower price (given the 6-9 months lag for the oil-indexed gas contracts) had a negative effect on the amount of gas stored in UGS facilities in Europe. What does it mean for security of supply? Taking into consideration that there are many geopolitical uncertainties, are traders’ decisions too much based on economic reasons? Would higher storage levels give more bargaining power to European buyers?
The storage levels are indeed falling rapidly as some traders seem to wait to get the lowest price to refill the facilities in a context of lower temperatures and capped gas production in the Netherlands. I’m however not too worried in the short-term as the LNG supply is getting significantly healthier in Europe and given the fact that we are already at the end of February. But we still have to keep a good eye on this issue. It will depend on the short-term weather, on the economic situation and on the oil price, impossible to forecast. On the contrary, this phenomenon could boost the storage injection during the summer and help to get prepared for the next winter, as the low spread between summer and winter prices was an issue in the past years.
You referred to a convergence of Asian and European LNG spot prices. Do you see room for a similar convergence in the wholesale markets?
The LNG Asian spot price has indeed fallen and converged to the European level as the offer in Asia outweighed the demand. This has led shippers to optimize their short-term portfolios, should they have available volumes in the Atlantic basin without commitments with Asia. However, I would be careful before talking about a convergence in the wholesale markets. The three market places, namely Europe, Asia and America, are steered by different fundamentals. There are many parameters in Asia for which the outcomes are difficult to forecast: Will Japan restart more nuclear power plants? How fast will China close the coal-fired power plants? How will the unconventional gas production look like? How will the gas demand evolve? It’s however interesting to see how the LNG market is creating ties between markets. I’m also curious regarding the future impact of the LNG exports from the US.
In your work, you mention three reasons for the decline in gas prices in Western Europe despite the standoff over Ukraine. Basically, you mentioned alternative routes, mild winter and LNG capacity. Do you see any cumulative effect in case of new projects - Southern Gas Corridor for example?
The gas price went down quite significantly in 2014, due to a combination of several bearish factors: A mild 2013-2014 winter, hence high storage levels and a reduced demand, associated with substitution of gas by coal and renewables, and improvements in energy efficiency. On top of that, the positive LNG outlook and the fact that Russia hasn’t had the intention to disturb the gas supply to the European Union could have helped as well. Looking upfront, forward prices went down as well as I imagine that market players anticipated the development of new supply routes such as the Southern Gas Corridor, but also the development of significant liquefaction capacities around the world. Another parameter is related the shale gas, but this by far more controversial. Traders are indeed humans and every piece of news can influence their perception and positions and I do believe in cumulative effects. However, it’s important to keep in mind that low prices could delay or stop investments.
In your article, you also said that risks are always around the corner and that prices can oscillate as a reaction of unexpected events. So far we spoke about events that could push gas prices up. Are there any events that could push gas prices down?
The gas prices are unpredictable because everything can happen. We can think about thousands of potential risks to justify a price evolution in the future, in one way or in another. Fukushima is the best example. Japan had to compensate for the sudden closure of nuclear power plants with thermal gas plants. Both demand and gas prices had climbed very quickly. Any bad news could emerge from anywhere. In a nutshell, it could depends on – for example - political and regulatory decisions, economic factors, weather, technical issues, crisis, speculation…
According to a leaked document, ACER will be a key player of the Energy Union. Which are the major obstacles in this process?
Empowering ACER as pan-European supervisor is not a bad thing to speed-up the process of improving the market functioning. However, it is not an obstacle-free mission, especially when it comes to “unite our negotiating power with non EU countries”. One of the most important challenges could be to deal with different voices and aspirations. I am specifically referring to the position of Hungarian Prime Minister Viktor Orbán who made clear – after having signed a contract extension with Russia the same week - that he was opposed the Energy Union’s plan to involve the EU in bilateral relationships.
You mentioned common purchasing of gas. Keeping in mind the possible opposition of member states that export gas, and recalling the principles of the Third Energy Package, how likely is it to witness such a mechanism to buy gas as a group?
I don’t know if a binding mechanism to buy gas through a common purchasing body could easily see the light, as it could be in breach of EU competition laws. In addition, there could be some differences in terms of business models or approaches from the different parties involved. Let’s think about a producing country such as the Netherlands. It’s difficult to imagine how they could take part to the scheme given their different interests.
In your work, you also mentioned bio methane. On February 24, Members of the European parliament’s environment committee could pass more stringent rules for biofuels in relation to the indirect land-use change (ILUC). Do you think it could be another blow for energy security in Europe?
A small revolution in the world of networks began with injections of bio methane in fifteen European countries. It could pave the way towards a greener gas market and reinforce the energy security of Europe, already hampered by a rapid decline of the internal gas production levels. In addition, speaking about biofuels, I’m curious to see to what extent bio methane could be used in CNG vehicles.
What are the next events to take into consideration? Which are the next facts that could shape the gas industry in Europe?
We first have to keep track of the upcoming communication from the European Commission regarding the Energy Union on the 25th of February. In parallel, it’s important to keep an eye on the developments of the situation between Ukraine, Russia and the European Union. Last but not least, the LNG developments could reshape the gas market inside and outside Europe and interesting to be monitored, together with the debates around the TTIP.
Sergio Matalucci
Sergio Matalucci is an Associate Partner at Natural Gas Europe. Follow him on Twitter: @SergioMatalucci