Weekly Overview: LNG, Pipelines and Europe

Exports of LNG from the US began in earnest this week, the giant project on the Gulf coast dwarfing the little plant at Kenai, Alaska, which has been serving a few percent of the Japanese market for many decades.

Few events in the gas industry can have been written about so much, and with such anticipatory delight, the political and commercial implications for Europe in particular being so minutely dissected, as the US exporting serious volumes of LNG. 

Another event of similar magnitude is the one that gave rise to it: the famous “game-changer” – the dramatic fall in the cost of US shale gas production – that has for the last decade or so driven away millions of cubic metres of Qatari LNG, originally destined for the US, to higher-priced markets in Asia and Europe. But despite the mouth-watering rewards of gas self-sufficiency, this achievement has not been replicated anywhere else in the world.

At time of writing, the first, commissioning, cargo from Cheniere’s Sabine Pass terminal was due to go to Brazil, with Petrobras the buyer. That is something of an anti-climax for those Europeans – and Americans – who had thought it would go to Lithuania’s leased floating storage and regasification Independence tanker, moored at Klaipeda.

Still, there is plenty more LNG where that came from; this is only a commissioning cargo; and no doubt the price in the Baltics will prove most attractive to sellers at some point over the next 20 years.

Announcing the news of the loading – certainly a highlight of IHS Cera Week – Cheniere said that the US has more than 800 trillion ft³ of gas reserves that could be produced at less than $3/mn Btu, equivalent to about 25 years of supply at 2015 production levels. Even if the price rises with demand, energy-intensive industries in the US will still have the competitive edge over much of the rest of the world as their gas comes with lower transportation costs.

With some 60mn mt/yr of flexible US LNG that will come on the market in the coming decade, Cheniere expects that by 2020 the industry will sell 50% of its volumes on a short-term basis, compared with only 30% today.

Carving out a role for gas in Europe

But all the LNG in the world won’t matter that much if coal is still cheaper. Power generation is the primary market where gas must expand its share if producers are to find a home for their gas. As a transportation fuel, most agree that it will only be marginal, compared with the scope for gas as a complement for the intermittency of wind and sunshine. So somehow coal must be priced or regulated out of the market.

In that regard, speaking at a much younger event than Cera Week, the CEO of French nuclear giant EDF, Jean-Bernard Levy, told the second EU Energy Summit in Brussels, an event that brought together all major players in the energy sector, that Europe’s electricity market model needed rapid and radical reform if it was to face up to the challenges of the energy transition.

While the more extreme wing of the environmental lobby regards everything that is not renewable as a problem, there is a strong case to be made for the substitution of the worst with the better, as Statoil and others point out, and gas is only half as bad as coal in power generation with regard to greenhouse gas emissions. And it is free from coal’s distribution of airborne particulates, which do actual damage today.

EDF – much of whose electricity output is nuclear – is calling for a minimum price of carbon of €30-40/mt, and emissions auctions this week for Phase 3 allowances fetched under €5.00/mt, indicating the scale of the task that politicians must take if EDF’s far from controversial demand is to be met.

Taking action that will lead to the forcible closure of coalmines is too deadly a nettle for most, and so watering down of measures and prevarication in implementation will probably continue.

Levy said that “COP21 showed that electricity is meant to play a critical role to tackle climate change. Through its energy mix and its significant investment efforts, EDF actively supports the work undertaken by the European Commission in the energy sector, and calls for a redefinition of the European electricity market model in order to reconcile consumers’ interests with the transition to a low carbon world.”

History almost repeats itself

Seeking then some light relief from more intervention in the market, one finds it in the revival of Gazprom’s South Stream project.Together with French-owned, Italian based Edison, and Depa of Greece, it plans to bring gas through "third countries" to Greece and from Greece to Italy under the Black Sea, although in smaller quantities than the original 63bn m³/yr line.

It has the potential to revive last decade's long-running rivalry with the European Commission-favoured Southern Corridor, represented by the Tanap-TAP lines to bring gas from Shah Deniz 2 in the Caspian, to Italy.

Like Nord Stream 2, South Stream will be painted as something far more sinister than simply a steel tube in the ground to bring cheap gas to regions otherwise vulnerable to problems in transit countries, while recovering time and money that would otherwise have been to no purpose.

Eni subsidiary Saipem, which had to down tools at Russia's behest just when laying South Stream/Turk Stream was reaching the marine part, could be brought back onside, perhaps in return for a stand-by payment instead of it suing Gazprom for breach of contract. These are tough times for the services sector.

And all the feasibility studies done for related pipelines across Greece, into Bulgaria and under the Adriatic, can be dusted down and updated where needed, as another cost-saving measure.

But if the idea actually proceeds, it will be represented as a Russian attempt to drive a wedge between EU member states, financially crippled Greece being perhaps bought off by the promise of cheap gas and transit fees, while other companies or countries prefer to buy gas from the EC-championed Shah Deniz project and some, like Italy, keeping a foot in both camps.

True, the trio have only signed a memorandum of understanding, so a final investment decision is as far away as ever, and Gazprom, it is argued, has no money to meet the costs of that, and of Nord Stream and the demands of the Russian budget, and yet….

The humour of the situation is that it has to be Bulgaria – always one of the Soviet Union’s allies in the bloc – that will be the landfall. Pounced on by the EC over illegal tendering for engineering works related to South Stream, which led to the project's cancellation and replacement with Turk Stream, the country knows what to expect if the new pipeline takes its intended course. The MoU signatories declined to say exactly where they had in mind with “third countries.”

William Powell