Natural Gas: Ups and Downs in Europe

Natural gas is seen in a better light today in Europe, compared to a few years ago when it was only seen as a balance for renewables, according to Anne-Sophie Corbeau, Senior Energy Expert at International Energy Agency, who offered an exclusive interview the Natural Gas Europe at the Unconventional Gas Forum in Barcelona, Spain.

That didn’t mean things had been easy for natural gas in Europe.

“Last year, gas was a victim of mild weather, low GDP growth and relatively high gas prices at $8-10 MmBtu. I don’t have the final numbers for 2011, but we are looking at a European gas demand that’s as low as that for 2009, which was a record. Then, we had relatively normal weather; here we have the weather component.

“The question is,” she continued, “is to what extent European gas demand is going to return? Because when you look at the residential sector the main variable is weather; for industry, the outlook doesn’t look particularly rosy, with low GDP and the problem of competitiveness.”

In terms of power generation, she said low GDP growth usually translated to low electricity demand growth. “You would not only have to compete with renewables, but also against coal-fired generation because CO2 prices are not high enough to favor gas versus coal,” she said

“So it’s going to be quite tough for gas in the next few years in Europe. We’re not even talking about policy developments – just market conditions make the life of gas tough,” added Ms. Corbeau, who said there were two elephants in the room concerning global natural gas markets: China and the US.

She explained: “We are looking at one really big market, the US, and one market which has the potential to grow at an exponential pace, China.

“If we look at the US, the production is defying gravity: for the past few years, everybody has been looking at production and thinking ‘at some point, it’s going to slow down.’ Gas prices were at $4-5 MmBtu in 2009 are too low – that’s not sustainable. Leases are for three years, so people stop drilling.”

While a reduction of rigs had been witnessed in the US, gas production was not going down, she said.

“Right now, people are moving to wet plays and they are producing oil; gas is just a bi-product. This is even better illustrated by the increase in flaring in the US. It’s really extraordinary what’s happening on the production side.”

According to her, interesting things were also apparent on the demand side for natural gas.

“Why isn’t gas making more inroads to the power generation sector? What are the obstacles for gas to take a bigger share versus coal? What are the constraints and where is the turning point? That’s something that we’re looking into at the IEA.”

She said the gap between natural gas and oil prices also had repercussions for the chemical, fertilizer and transport sectors.

As for China, she said the country was very much constrained by supply.

Corbeau explained: “Their demand depends on how much supply they can attract and at what price. The Chinese gas market can absorb a lot of gas, which would be in their interest if they want to reduce local air pollution – this is why in the next five-year plan China has decided to double the share of natural gas in the primary energy mix. According to this plan, in 2015 China should consume 260 bcm – that’s probably extremely challenging. It shows that China wants to give a greater role to gas, even if gas represents only 8% of China’s energy mix, it’s still a huge number, higher than any European country.”

Relatively speaking, she said the UK and Germany consumed roughly 90-100 bcm.

“So China is increasingly becoming a very important import market. In 2010 they imported about 4 bcm of Turkmen gas and 13 bcm of LNG; in 2011, they imported 14 bcm of Turkmen gas and 17 bcm of LNG. So the gap between demand and production is increasing and it’s really unlikely that production can keep growing at the same pace as demand, so China will need increasing amounts of imports.”

She said China’s emphasis on this imported natural gas was on the price.

For Europe, Asia’s thirst for energy has made for great competition for hydrocarbon resources, for example for natural gas from the Caspian Sea region.

“For the moment, China has the advantage,” explained Ms. Corbeau. “Europe has been discussing in committees how to get a pipeline for the Caspian Sea; how to get gas from Turkmenistan. They’ve proposed the Caspian Development Cooperation, which has not made a lot of progress and in the meantime China came to Turkmenistan, signed an agreement, managed to get onshore – quite a remarkable feat in Turkmenistan – and managed to sign a transit agreement with Kakakhstan-Uzbekistan, and in a couple of years they’ve built a pipeline from the border of Turkmenistan to the final market in Beijing and Shanghai.

“So that’s the difference between China and Europe,” she concluded.

Ms. Corbeau offered what she believed could address some of Europe’s potential concerns regarding security of supply.

“Europe must sign long-term agreements and look at what the new sources of gas are,” she explained. “If we’re looking at the next development in terms of LNG, I have to say almost everything is now in Asia, because of Australia – it’s quite unlikely that all this Australian gas is going to end up in Europe.

“After that, this is a balance between the various LNG producers and the market. There are suppliers which are located in the middle, between Asia and Europe – Qatar, for example – which is right now the main LNG producer.”

Exactly where does unconventional gas sit now? What will its role be going forward in Europe?

“Two years ago, it was a game changer because we had a combination of very low gas demand – because of the economic crisis. All of this gas emerged in the US so it didn’t need LNG at all, that from Qatar, Indonesia, etc. For Europe, this meant gas prices were low, at $4-5 MmBtu, so it was a game changer.

“At that time companies were saying to their favorite supplier, ‘Hey, guys, you have to change your price, because our competitors are getting gas at $4 MmBtu. You’re making us pay $10 MmBtu – this is not sustainable.’”

Corbeau said that customers were not willing to buy the high priced gas, so suppliers would get stuck with it.

“They managed to get some renegotiation of their contracts, in terms of volumes and in terms of prices,” she reported. “So it was a game changer.”

She said that Poland would definitely be the showcase for production of unconventional gas in Europe.

“It’s far far ahead in terms of the number of companies attracted, numbers of concessions, and some drilling already having been done. If there is success in Poland, maybe some countries will reconsider, and if there are no environmental problems.

“If there are some issues, then it’s going to be extremely challenging for Europe,” said Ms. Corbeau.

Meanwhile, she reported that the IEA was now busy preparing its Medium Term Gas Market report which would be released in June. “It will show supply and demand trends to 2017, trying to answer some key questions, such as ‘Is the US going to export LNG?’, the actual impact of nuclear decommissioning in Japan and Germany, and perspectives for European gas demand.”