[NGW Magazine] Editorial: Building on growth

Last year was an encouraging one for the gas industry, with upstream decisions taken only a few years ago now bearing fruit and new kinds of technology advancing. The Zohr and Khazzan fields were just two of the highest profile start-ups in the last few months, both capable of transforming their respective national economies.

This year, the focus is likely to be tighter, on what is proven to work, but gas will become more important than ever as the majors seek cleaner energy. Wood Mackenzie expects  fewer explorers, focusing on fewer plays. Most analysts also agree that if the Brent crude contract remains stable at around $60/barrel, there is likely to be less disagreement on asset values, meaning more trade and so more development.

Looking downstream, existing or potential gas importing countries are spoilt for choice as the range of approaches is widening all the time and becoming simpler, cheaper and shorter-term. For example, a trio of Norwegian firms, Skangas, ConnectLNG and Dreifa, are all securing or have approvals for their technology for offloading LNG, enabling cleaner, despatchable power generation than diesel or other alternatives; and heating for coastal regions at low financial and environmental cost. 

Small-scale technology allows governments to trial gas without needing lengthy gas sales contracts tied to upstream projects, and if the location or scale is wrong, to amend or cancel altogether without much loss of political face. Bangladesh is a case in point. This also fits with the greater timidity of banks, where lending is concerned: even China, the saviour of Yamal LNG, can have second thoughts, delaying Ophir's Fortuna FLNG. Only one LNG export project, Coral FLNG in Mozambique, secured financing in 2017.

Given competition from renewables and declining demand at home, Gazprom has embarked on an ambitious plan to distribute large amounts of gas through countless very small outlets dotted over Russia, acting as a tool of government to cut air pollution from road and river traffic by converting to gas. China has been doing the same for longer, using imported LNG.

This is a phenomenon happening all over Europe, extending from trucking of LNG in the Baltics, to experimental diesel replacement in railway transport in Spain, lowering the costs of LNG import terminal operation by increasing the throughput. For those who said that oil faced no competition in transport, that appears to be true now only for aviation.

It is not all good news. In Europe, the politics surrounding gas will make themselves heard, for reasons going back to the Cold War: Russia will always be the biggest supplier of cheap gas, and much of Europe resents this. For it to be more widely acceptable in the eastern half of the European Union, Russian gas needs to be exported by private companies as well as by Gazprom. In that regard, the BP/Rosneft plan to export to Europe does not go far enough. Until there is a free-for-all trading platform that only a truly independent exchange can create, there will be a major risk for Russia and – and by association, for gas too – as the Kremlin is too closely identified with a major source of its revenue.

But for now and thanks to factors beyond its control, Russia will be able to claim its policy of market share is successful. It has just broken another record for the volume exported to Europe, although prices were low.

This year will see challenges, as the Danes are now equipped legally, should its foreign ministry so decide, to push the route of Nord Stream 2 (NS2) further away from their coastline and so increase the construction costs and no doubt delay the completion date. 

And there are grounds for doubting the continued determination of the project's backers. As NGW has said before, most of the NS2 gas is destined not for northwest Europe, where output is falling, but for central Europe, which does not have much in the first place, weakening the case for security. LNG exports from Yamal are one option – although so far it seems that Asia is losing the price war – but there are also small-scale LNG plants springing up in Russia’s northwest that could also serve the same purpose but less obtrusively and with more mobility than a fixed steel pipe to Germany allows.

Gazprom’s TurkStream project seems to be an attempt to hedge against the worst outcome for NS2, but that project does depend on long-term good relations with Turkey, tested now by the war in Syria, and by Ankara’s push to promote domestic coal at the expense of imported gas. At some point too perhaps the French and Greek companies in talks with Gazprom – both Edison and Depa are government owned – will need to explain exactly what their vision for the new Gazprom -backed pipeline route is, and how it will be operated in a liberalized EU market. 

Another area troubled by politics of a different nature is the eastern Mediterranean, where the heads of three states, egged on by the European Commission, are still toying with a plan to build a giant pipeline to take East Med gas to the Adriatic, where presumably it will compete with gas from the Caspian – another plan that arguably would not have got so far as it has without EC support. The Southern Gas Corridor is due to deliver first gas to Italy at some point in 2020, possibly also carrying some gas originating from the second TurkStream line.

NGW