[NGW Magazine] Editorial: All in it together

Co-operation in all its many forms was the biggest theme running through the European Gas Conference in Vienna at the end of January. In most of its forms it yields greater welfare benefits than out-and-out competition, although the very nature of the industry tends to attract and then reward individuals who enjoy thwarting their rivals – even if the net result is worse for consumers.

That used to be the case especially in the ultra-high return province of the UK North Sea, where producers would be denied economic access to other infrastructure for no better reason than they could be, leaving assets in the ground and no government revenue; but that sort of obstruction is now at last being frowned upon.

There is co-operation between energy sources: the absolutism of the electricity-only lobby can be contrasted with the gas industry’s determination to be part of a low-carbon future, rather than attempt to monopolise it. “You will always hear renewable energy mentioned at a gas conference, but never hear gas mentioned at a renewables conference,” said a delegate.

Natural gas is the quickest and easiest way to decarbonise, by using it instead of coal, but the fact it contains carbon is too much for the renewables industry to tolerate. That means taking all possible steps to block investment on grounds of emissions, but infrastructure built now to improve transportation within Europe may also be used later to move biogas and hydrogen around when they become cheaper.

Gazprom’s deputy CEO Alexander Medvedev pointed out the absurdity of branding gas as the fuel of the past: that should be coal’s fate, in Europe at least. Gas is an environmentally-friendly and affordable energy source: renewables should not replace gas when the two can work together without an enormous investment, he said.

Agreeing was RWE Supply & Trading’s chief commercial officer Andree Stracke: Germany’s gas demand is rising fast with the closure of lignite, coal and nuclear plants, with seven in all going last year and this. A lot more gas was also needed last year for heating. Security of supply must come from gas, he said. And many industries could not function without it.

Then there is co-operation between suppliers, where the US administration – although notably not the president himself – has been keen to hit Russia where it hurts: in Europe. But that is not always the sensible approach either, especially when Russian LNG ends up in the US, proving that pipeline or LNG, it doesn’t matter how the gas arrives, there is need for both at economically sensible prices. At the moment, Europe’s consumers benefit from pipeline deliveries, as they are presently cheaper, but that might not hold indefinitely.

And then there is co-operation between the different transmission system operators within Europe itself, where every country’s pride appears to depend on having a hub, or an LNG terminal, or some other physical symbol of potency.

Why, when the existing LNG import infrastructure is so woefully under-used –about 15% last year according to some estimates – does Germany also want to have one of its own? When capacity holders in other terminals such as Gate just a short distance away in Rotterdam are writing off hundreds of millions of dollars in wasted investments, there seems to be no real answer beyond national pride. The open season for Brunsbuttel will be an interesting one to watch.

National law too can stand in the way of co-operation: otherwise Gasunie’s adjoining German and Dutch hub operations – the Dutch Title Transfer Facility and Gaspool – could have merged long ago. But taking the idea a little further, and admitting it will probably never happen, if all transmission system operators were to merge, the savings would be colossal as there would not be endless pancaking oftariffs, calculated and set by subtly different rules in different grids with their own favoured contractors carrying out the work. These savings could contribute to a compensation fund for the TSOs.

Decisions would be taken faster, measurements and definitions standardised, redundancies managed, and costs would come down and gas become cheaper. This was among the solutions proposed in response to the European Commission’s Quo Vadis? examination of the pan-European gas market.

However given that the network codes are not all in place, it is too early to draw any conclusions from today’s observations, said the European Commission’s internal energy markets director Klaus-Dieter Borchardt. “We need more experience before we profoundly rewrite the rules,” he said, although it is time to fix a single tariff for the whole pipeline system. He said the EC’s main finding from the market study was that more co-operation, including sharing benefits with external suppliers, would give the largest annual EU welfare increase.

Co-operation needs though to be balanced against commercial interests, rather taken as the default option. Financing is one area where the interests of the two sides may clash. As nothing has been officially announced, the reasons for Chinese banks withdrawing from the Fortuna LNG project remain confidential. But it is possible that in exchange for the money, the demands for investment and procurement from Chinese companies would have reduced the project’s value, in the eyes of the operator.

Taking a new approach to co-operation is Tellurian, which is not seeking customers to underpin financing, so much as upstream and midstream partners for its US LNG project. If it can convince enough of them, FID will happen early next year. $3/mn Btu for LNG in the US Gulf, anyone?