[NGW Magazine] Editorial: Europe's place in the LNG world
LNG imports were always going to dominate the discourse in the European gas market round about now, if only because the interest aroused by the expected arrival of the US into a region so well supplied by Russia.
Despite the start-up of Yamal LNG and the ramp-up in Sabine Pass, however, Europe has been drawing down as much cheap, pipeline gas as it can from Russia and indeed Norway, while not so much LNG has been used in Europe – particularly in the competitive markets north of the Pyrenees.
A Yamal LNG cargo, picked up by Engie from UK storage, was at time of press heading to Everett, Boston, in response to a bitterly cold spell in the US northeast and lack of pipeline capacity to deliver gas from the Henry Hub market. Round one then – physically if not contractually – to a Russian project, one moreover hit by US sanctions law.
Some US LNG has arrived in Europe; but mostly to Spain or Portugal. The deliveries to Lithuania and Poland – and from there, into Ukraine – have been accompanied by more ceremony than a simple commercial transaction would normally merit.
Of course simple, commercial transactions within an ex-ante, predictable regulatory framework, should be the norm: otherwise all kinds of distortions come into play, with unwelcome consequences for gas consumers. Having fought so long to demolish the old cartels of Gaz de France, Ruhrgas, Eni and others, the European Commission (EC) now seems to be less sure that competition is the way forward, introducing an element of political uncertainty with its attempt to include the interests of eastern European countries with an understandably large axe to grind.
There is no doubt, for example, that gas is going to be essential if coal is to be kicked out of the generation mix – the renewable technology is not there yet to deliver baseload, and nuclear is not acceptable everywhere. Commercial carbon capture and storage is still a pipe dream, and it is the often ignored particulate matter that poses the real threat to the environment and human health.
However, the lengths that senior officials at the EC have gone to in their efforts to complicate Nord Stream 2 show little interest in low-priced gas for their industry and citizens, compared with their desire for political point-scoring against the Kremlin. Denied their request for a mandate to negotiate operating terms by their own legal department last October, they are now rushing through consultation a series of radical amendments to the Gas Directive, that among other things arrogate more power to the EC at the expense of member states.
This has particularly angered Italian members of parliament, their country being the landing-point for a number of gas pipelines from external countries. They wrote a letter dated January 10 accusing the EC of bad regulation in this regard. Industry group Eurogas has also published a detailed paper, challenging the amendments in greater detail and calling for a longer consultation period to allow for thorough analysis.
The paradox is that there are far better reasons for not importing Russian gas than the strained geo-politics: Europe still has some left, and the focus needs to be on producing that and importing less. But with the exception of the UK, where Cuadrilla has found far better results than the nay-sayers had predicted, and Poland where it is a busted flush, shale production is outlawed in most countries.
A similar story is unfolding on the other side of the globe, where Australian states have imposed bans on unconventional onshore gas production, bowing to environmental pressure that is without more than emotional clout. Consequently, Australian LNG may be shipped around the coast to states in the country’s southeast that are too cautious to produce their own.
Although it has largely escaped having to outbid Asia for LNG, Europe's future is not looking that bright. Norway, like Russia, had record exports in 2016 and 2017, but while Gazprom can keep going and going, there is little evidence of Norway doing the same for more than another few years.
The Netherlands is definitely in decline, as the seismic damage to housing – there was another strong tremor this year – is leading to calls for an accelerated end to production from the Groningen field. However the government decides to respond, the current ceiling is not going to go up. There is also little hope from the small fields, as their production costs go up.
True, there are other hopeful prospects for new gas: the Romanian sector of the Black Sea is thought to be the most prospective for gas, which would take the pressure off some of the other projects such as the long-mooted Croatian LNG import terminal, dependent on public funds.
The introspection of the Europeans and Australians may look quaint to global players, as they watch the rise of gas demand in China and India. It looks as though China overtook South Korea to become the world’s largest LNG market after Japan for the first time last year. Despite Beijing’s scramble to restrain LNG buying during this winter’s peak demand period, it is opening up more to gas as the cleanest fossil fuel. It is quite possible that its demand for LNG, which helped push prices up so much in the last six months, will continue to grow.
In that context, Europe’s policy-makers need to decide whether they should not be doing more to encourage domestic production and pipeline imports.