Weekly Overview: Mixed Messages on Gas

Executives at two European gas merchants, Centrica and Wingas, have made clear their views on regulation – national, or at EU level. Rather than creating a fertile environment where the risks and rewards are vaguely known, they say that regulators and well-intentioned governments appear to have devised schemes capable of reducing the hardiest investor to a state of analysis paralysis. 

The CEO of Centrica Iain Conn told stakeholders in Brussels May 25 that unpredictable rules were making investors wary; while the head of sales of Wingas Ludwig Mohring, in an interview with NGE, rhetorically asked whether the rush to build publicly-funded pipelines was not going to result in stranded assets, whose cost would be borne by consumers. Meanwhile the privately-funded Nord Stream 2 pipeline project – which predates the EC's Energy Union that might have been conceived with the sole aim of frustrating it – remains in a regulatory void, bitterly resented by states in eastern Europe.

Centrica CEO Iain Conn 

The executives made many other points too, regarding the failure of the carbons emission trading scheme and the resulting need for subsidies for renewables in the pursuit of notional goals.

As the Oxford University energy economist Dieter Helm points out, the much-heralded COP21 agreement to limit temperature rises to 1.5 deg C is a fantasy given that the signatories could not even agree earlier to stick to a 2 deg C rise; and he said COP21's lack of enforcement measures to limit a country's carbon dioxide emissions to what it had committed to, proved the point.

This capacity to hold two conflicting beliefs allows governments to plough on in pursuit of publicly-stated targets, yet knowing they are unachievable for all kinds of reasons: practical, economic, or legal.

This widening credibility gap is creating tensions between utilities in some member states and the European Commission or their own governments, and this feeds down into tensions between private investors and the transmission system operators in their markets.

And yet despite the manifest failings, there must be successes too, as Europe’s deep, liquid and tradeable markets with hubs dotted about it are seen as the ideal destination for all that surplus cheap LNG.

One of Europe’s oldest LNG suppliers, Algeria, was told this week that the old way of doing business will no longer suffice if it is to continue as a major gas producer. Energy Commissioner Miguel Aria Canete told an EU-Algeria forum in Algiers May 22-23 that the country had to attract new investments to maintain its exports to the EU in the long term. 

A month ago, Algeria and its state oil and gas producer Sonatrach and state energy distributor Sonelgaz signaled they are open to international financing, as the country’s oil and gas export revenues halve. Recent licensing rounds have not been successful and if this goes on, then Algeria’s position as a key gas supplier could be compromised, Canete said. "The gas market is always evolving and that is why I welcome the minister’s changing of exploration and production terms."

Algeria is in a weak position. Its gas production has stagnated, with more consumed by the domestic market, and this – together with the fall in oil and gas prices – has accelerated the decline in export revenues. Gross exports by pipe from Algeria to Italy in 2012 were 20.82bn m^3, making Italy Sonatrach’s biggest gas export market; but by 2014 these slumped to 6.77bn m³ and grew only slightly in 2015 to 7.24bn m³ in 2015, according to Italian gas grid operator Snam. Only a fraction of that decline was offset by Algerian LNG exports to places like Asia and South America.

Energy minister Salah Khebri told the forum that the country's export capacity was almost 90bn m³/yr, of which about 50bn m³ went through pipelines to Europe and the rest was sold as LNG.

Against this bleak background, Canete said that Algeria was a reliable partner the EU could count on, and its LNG was a good fit with the EU’s security of supply strategy. “It is perfectly logical therefore that we have chosen Algeria to hold our very first Business Forum with one of our international partners,” he said. “It is very important that Algeria keeps this privileged position,” he said, noting that the construction of the Midcat line between France and Spain would open new markets for Algerian gas.

Midcat’s timetable however is slipping further into the future as gas demand is weak, and the job of moving gas from Spain to France or vice-versa might be more cheaply done with LNG tankers than an inflexible pipeline carrying uncertain volumes.

Canete also said that just as the EU needed security of supply, so Algeria needed security of demand to justify new investment. He said the EU would make its needs more transparent so that its suppliers had solid facts on which to base their investment decisions. “We will continue to make progress in this area,” he said, apparently aware that the EC has been sending mixed messages about gas demand. It is a fossil fuel and therefore on the way out of Europe; but nevertheless it is essential until something better comes along.

And finally a word about shale: Canete said Algeria’s potential is evident: it is tenth in terms of its proven gas reserves and also extremely well placed in terms of accessible shale gas. These reserves remain unproduced although some licences have been awarded to international oil companies.

And the reasons for the inactivity are similar to those elsewhere in the world where shale gas remains locked away underground: public opposition; the lack of water; not enough rigs; and now, low oil prices rendering it uneconomic.

However, a crack has appeared in the UK: North Yorkshire County Council this week awarded a producer, Third Energy, the country’s first permit for hydraulic fracturing since the moratorium was imposed some five years ago. Keen to dampen excitement, Third Energy was careful to point out that this was just the first step in a long road that might ultimately lead nowhere. It was impossible to tell if the investment would be commercial until wells had flowed gas. Nevertheless it is a start; and could be followed by others.

Cuadrilla is set to find out by July 4 if its appeal against the controversial negative decision by Lancashire County Council – it overruled its planning committee, forcing Cuadrilla into a lengthy appeal process – has been successful.

And at rival onshore producer Igas, CEO Stephen Bowler said this week he was “delighted that Third Energy were granted planning permission to hydraulically fracture their existing KM8 well… There is a pressing need to deliver lower carbon energy that is home grown, provides important energy security for the future alongside economic benefits to the local communities as well as the country as a whole.” Igas too has ambitions for shale gas production, and has farmed out acreage to a number of companies, including Centrica and Total. The French major cannot hydraulically frack at home.

William Powell

How long before the first well is fracked in the UK? This week's dev in our weekly overview: https://t.co/y4ZL1K2jlC

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