Clear Policy Framework Only Way to Avoid Underinvestment and Public Financing

The gas market is experiencing a tricky mismatch. On the one hand, gas producers are increasingly called to commit to long-term and risky investments. On the other hand, Europe is rapidly moving toward spot markets.

In this context, the different time frames characterising supply and demand bring along coordination needs - states and market participants are called to find cooperation mechanisms to avoid the underinvestment trap. A lack of coordination among gas companies and countries could then translate into power generation problems and/or a simultaneous revival of nuclear power.  

This was a view emerging from a recent conference about the role of gas in the future energy mix in Belgium and North-West Europe.

NORWEGIAN MINISTRY: INVESTMENTS REQUIRE SIGNALS ON DEMAND SIDE 

“Norway has resources and infrastructures. However, huge investments are required,” Erik Dugstad, Deputy Director General of the Norwegian Ministry of Petroleum and Energy, commented on Thursday.  

According to Dugstad, security of supply requires long-term investments, which are contingent upon clear information. That is why, European countries are called to shed light on their energy strategies, as the policy framework is an essential element providing investors with certainties required to commit to long-term investments, argued the Deputy Director General of the Norwegian Ministry. 

“In order to have such an investment to be undertaken, you have to have signals on the demand side,” Dugstad said, mentioning the Aasta Hansteed project, the first deep-water development in the Norwegian Sea. 

SOME ROOM FOR OPTIMISM 

Despite farming down in Aasta Hansteen, Asterix and Polarled earlier this year, Statoil manifested optimism for prospects of gas, also in Europe.  

“In the longer term Europe’s climate ambitions will likely drive gas demand” Olav Aamlid Syversen, Head of regulatory affairs at Statoil, commented during the conference.  

Syversen and other panellists agreed on some positive signals stemming from the 2030 framework for climate and energy policies agreed on 23 October 2014. However, despite some room for optimism, there are some good reasons to think that prospects are not that bright.

CHALLENGE 1: GENERATION ADEQUACY PROBLEM 

Belgium is an example of the possible negative externalities mentioned by Dugstad. Its energy security urgently requires further intervention.

“Due to steep rise of RES, the mothballing of existing power plants an the nuclear phase out Belgium currently faces a generation adequacy problem,” Nancy Mahieu, Acting Director General for Energy of the Belgian Federal Public Service for Economy and Energy. 

After saying that nuclear could come back into the picture, Mahieu added that Belgian authorities expect to draw their energy vision by the end of 2015. In the while, the government is trying to support measures to push innovation and research into sustainable energy technologies. 

“We have an action plan to promote alternative transport fuels like CNG and LPG” Mahieu commented.

Despite this attempts, though, power shortages over the winter are still possible.

CHALLENGE 2: COORDINATION 

The Belgian expert and politician also confirmed that authorities are called to coordinate and promote an exchange of information amongst the different stakeholders. Coordination matters, especially during periods of transition. 

For instance, Fluxys’ Rudy Van Beurden explained the Belgian conundrum related to the conversion of the low-calorific natural gas network into a high-calorific natural gas network. 

The Fluxys grid consists of two separate grids: one for the transmission of low-calorific natural gas from the Netherlands, and the other for the transmission of high-calorific natural gas from the North Sea, Russia and LNG sources. Against this backdrop, the fact that Dutch supplies are expected to come to an end by 2030 adds pressure on Fluxys, which is forced to cooperate with distribution system operators, natural gas suppliers and authorities to avoid possible troubles in the future.

“The switch requires a lot of coordination” confirmed Van Beurden, not disclosing the timing or other details of the conversion.

ANY LESSONS?

In a moment of falling oil and gas prices, the lack of certainties is the main threat for gas investments. Companies willing to commit to long-term investments might not find any reason to remain focused on European markets, and this lack of incentives might lead to overly conservative positions.  

“We have been quite prudent so far” confirmed Van Beurden, explaining that the mismatch between long-term investments and a "shorter market" does not make the case for investments.

In this context, there is a clear need for coordination and clarity. Countries are called to decide their energy strategies as soon as possible, conveying the enthusiasm lost over the last years. This is the only chance to avoid an underinvestment problem that could then force Brussels to increase its budget for the so-called projects of common interest. 

Sergio Matalucci  

Sergio Matalucci is an Associate Partner at Natural Gas Europe. Follow him on Twitter: @SergioMatalucci