European Gas Landscape: Continuity and Change

At Flame in Amsterdam, the Netherlands, Prof. Jonathan Stern of the Oxford Institute for Energy Studies waxed nostalgically on the natural gas happenings when the first such natural gas conference had been held in 1995. He commented, “There are some elements of great change and also of some continuity.”

At that time, according to a BP report, natural gas prices had fallen – Europe was importing gas at $2.40. Professor Stern also offered a tidbit he said he considered topical: "Turkmenistan had just resumed deliveries to Ukraine after a 4-month cut due to non payment.”

These phenomena, he suggested, showed both the continuity and change in the European gas industry. And these days were not the happiest times Europe's natural gas industry had faced; he mentioned the challenge of an impending Russian supply cut of supplies to Ukraine. Meanwhile, he noted that European hub prices were low.

As the first speaker of the overview, Rune Bjornson, Senior Vice President, Statoil, said that members of the gas community were living in many different worlds, so it was unclear how things would pan out for industry players Europe. In this context, he pointed out how crucial predictability was considering gas was a long-term industry with huge, upfront investments, not to mention that Europe was still pulling itself from the financial crisis and the Ukraine crisis was casting a long shadow.

He explained, “It is precisely in those situations that predictability is of vital importance to our industry.”

Admitting that the industry was used to handling risk and external shocks, this still pointed to the need for Europe establishing an energy policy and regulatory framework. “It should be a framework that reduces rather than adds to the risk,” said Mr. Bjornson. “And are we there today? In my mind, far from it.”

He observed that Europe seemed to be moving in the wrong direction - “increasingly interventionist” - multiple layers of regulation creating complexity and uncertainty for investors. Despite this, there was hope, according to him.

“This can be turned around with less interventionism as a result. To achieve this our industry should speak in a clear and uniform voice,” he said, especially regarding the EU's 2030 framework.

Regulatory predictability, he said, was essential for building the gas value chain.

He provided examples, like Statoil and its partners investing US$ 28 billion in the Shah Deniz field development offshore Azerbaijan; Statoil, he said, continued to develop new gas fields on the Norwegian continental shelf, which required new infrastructure. All of this mandated long-term predictability.

Regarding European policy and the role of natural gas, Mr. Bjornson said the uncertainty could especially be felt in the power sector, which was important for gas demand. He reported that gas demand for power had fallen for 3 consecutive years; in the UK gas demand was barely half what it was 3 years ago, while German gas to power was also slumping.

This affected Statoil as a supplier, but also those investing in new gas turbines. “Now we are seeing these gas plants being mothballed one by one. More than 20% of total gas power gas capacity has been taken out of the market just in the last couple of years,” he remarked.

Europe would need to make such investments in the future, but this would only happen if the regulatory framework were strengthened, said Mr. Bjornson, who said the problems were increasing with the increase of market intervention. “This is very clearly seen in Germany, where the Energiewende has created a very costly system and, in the long term, actually fail to deliver energy security. The climate benefit of more renewables is basically offset by increased use of coal,” he explained.

The UK, he added, used to be a frontrunner in market liberalization but was becoming a highly regulated system.

“Each technology in the power sector seems to be equipped with its own subsidy scheme,” he observed, like a scheme for new nuclear plants that guaranteed a price; the same could be said for renewables.

The subsidies, said Mr. Bjornson, were affecting the power market, because they were squeezing the profits of conventional power plants, which often resulted in the introduction of capacity mechanisms, which acted as a kind of correction. This meant investments were put on hold.

“As a commercial player,” he said of Statoil, “we would like to be exposed to real competition, fair and open markets. In that way we can expend our efforts on delivery, a cost efficient product rather than lobbying to get a piece of the subsidy pie.”

In contrast, he said, the European gas market, with its increasing liquidity and the breaking up of old monopolies, was showing what could be achieved. Price convergence could be observed, too, as well as 3rd party access to transportation capacity, enabling increased interconnectivity.

He said, “In sum, this has led to a more efficient and predictable market, to the benefit of both consumers and suppliers.”

Mr. Bjornson said he was concerned by the EU's joint purchasing model for gas, which he said was not a system that belonged to a free market and would skew the competition and affect the liquidity of gas sellers, leading to greater uncertainty and hindering the ability of the market to correct itself. Even more political measures would be necessary in a “vicious circle of intervention.”

“We believe that the 2030 Framework provides an excellent opportunity and can be an important tool to fix what has been broken in European energy policy. Reading the proposal for the Framework, I'm cautiously optimistic. Policy makers seemed to have learned from the mistakes of setting the policy targets for 2020.”

Measures in different countries should be better coordinated, he said, and diverging national policies would cause harm to the internal market, but member states were deeply divided on that.

He continued, “It is understandable that different countries have different priorities and therefore different policies, however to restore this important predictability a robust and consistent European Framework needs to be in place as soon as possible.

“In light of the current debate on energy security, we do not want politicians to resort to short-term fixes that would further undermine the energy markets,” he said, which meant the industry needed to send a strong message to keep the 2030 timetable to start investing and avoid reducing the role of gas in the EU's drive to diversify its energy sources.

Strengthening the ETS price was crucial, as was cutting subsidies to renewables to enable power sources to compete on an even playing field, which in turn was the key to attracting investment.

RWE's Stefan Judisch, CEO, RWE Supply & Trading, offered the midstream perspective of Europe's gas business, pondering whether or not it had turned a corner – were markets recovering?

Mr. Judisch recalled some of the predictions he had made over his years in the business, with a view to the future. He said his final production was that the industry would face even more structural change and should not believe that what was being seen in Europe was an isolated event.

He explained, “Gas will gradually take over the role of oil, while the growth in oil demand will stop and then, first the liquid and then the solid fuel market will be exposed to declining consumption caused by renewables. So what the message is, basically, is what we see here in Europe, driven by Germans' obedience for implementing frameworks that are spreading into Europe, is now spreading in the world and this is a fundamental structural change of our understanding of the energy market.”

As evidence, he pointed out the growing role of gas in the transport sector, away from diesel and petrol, with LNG the biggest winner.

Still, according to him, it was renewables that were squeezing natural gas. Mr. Judish showed an IEA chart that showed the role of natural gas in power generation was on the decline.

“It's not happening solely because of interventions and subsidies,” he said. “It's happening because it's simply economically sensible.”

In a comparison of levelized costs for various sources of electricity in Germany, he showed that photovoltaics were competitive with combined-cycle generation, even without subsidies.

RWE, he said, had made the wrong call about solar, because the company had overestimated the costs for solar and hadn't considered the competitive dynamics. The next black swan to be dealt with, concluded Mr. Judisch, was the battery, whose price would drop in a few years. So while gas was replacing fuels, renewables were replacing gas.

Drew Leifheit is Natural Gas Europe's New Media Specialist.