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Europe’s gas supply dilemma

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Security of supply was once the sacred and inviolable wisdom that stood as a cornerstone of energy policy at a national level. But a confluence of geopolitical interests and stringent measures aimed at mitigating climate change threatens to tip the balance in Europe. Could a new ‘dash for gas’ be the answer, or merely add to a destabilizing dependency on imports?

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Chris Webb

Combined-cycle gas turbine power plants such as the 680 MW Little Barford plant in Cambridgeshire, UK are set to remain the new build power plant of choice in many European nations

In March, the European Commission (EC) announced it was setting aside €1.4 billion ($1.9 billion) to kick-start 31 major gas projects in the European Union (EU) zone. It said this ‘smart investment’ award under the Economic Recovery Package, the largest amount the EU has ever spent on energy infrastructure, would give a much needed stimulus to projects under threat of delay or mothballing in the current economic malaise.

The move, said the EC’s edict, would significantly contribute to economic recovery in the EU, increase security of energy supply by creating cross-border infrastructure and target specific long-term goals.

Jose Manuel Barroso, the EC president, said the investment was needed to give a push to the economy and employment, and ensure that citizens’ homes had heating and electricity in the event of supply disruptions.

“We have learnt the lessons of the recent gas crisis, which is one of the reasons why we decided to allocate major financial assistance to new energy infrastructure projects”. He was referring of course to Russia’s threat just over a year ago to cut off supplies of gas after Ukraine failed to pay its bills.

Gàƒ¼nther Oettinger, the EC energy commissioner, said the money would go to key projects to help create “a more integrated energy network in Europe ensuring flexible energy flows across member states’ borders”. Europe’s energy and climate objectives required, he said, large and risky infrastructure investments with long pay-back times. By co-financing parts of these major gas projects the EU contribution would help to lever up to €22 billion ($29 billion) of private sector investment.

Moreover, Oettinger said, the infrastructure projects selected reflected the EU’s energy priorities, including the need to better interconnect all EU member states and to reduce the isolation of remoter regions such as the three Baltic countries of Estonia, Latvia and Lithuania, as well as Ireland and Malta, and confirmed the need for greater security of gas supplies. Support would include the Nabucco and Galsi projects to diversify gas imports.

In a single move, the EC’s decision highlighted one of the most pressing energy conundrums facing Europe ” and it is compound in its nature. While struggling to reduce their carbon footprints, many nations find themselves having to invest in ‘climate friendly’ programmes that are failing to deliver what they promised, at the expense of better established means of producing electricity, such as coal and nuclear power plants. As a result, there is growing concern in Europe that future decades could suffer a yawning gap in supplies.

But a new ‘dash for gas’ could precipitate problems of its own. The dynamics of gas supply to Europe represent one of the most critical issues facing the energy market today. Where will the gas come from? Britain alone faces the prospect of having to source a massive 80 per cent of its gas from overseas by 2015. And much of it will come from oil and gas producing regions whose political and economic stability has been called into question. The geopolitical issues have been laid bare.

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Gas supplies reach a tipping point

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Natural gas is the third biggest energy resource on Earth, after coal and oil. The biggest sources of natural gas are to be found in the United States, the Middle East and, crucially for Europe, in Russia. Yet its utilization was relatively late in coming. The original ‘dash for gas’ marked a significant shift by the newly privatized electric companies in the UK, and later much more of Europe, during the 1990s. The development of North Sea gas fields, along with high interest rates at the time, favoured quick-to-build gas turbine power plants over the larger but slower-to-build coal and nuclear power stations.

The UK experience characterized a move to gas that was to roll out across Europe, as advances in generation technology ” i.e. combined-cycle gas turbine (CCGT), higher relative efficiency, lower CCGT hardware costs, a decline in wholesale gas prices and a desire by the generators to diversify their sources of electricity ” took hold. Soon, baseload CCGT plants were displacing existing coal fired generation. And technology continues to improve, with all the major gas turbine makers chasing the elusive 60 per cent efficiency prize.

Projected routes of Nord Stream, Nabucco and South Stream pipelines Source: BBC

A similar urgency is facing Europe today. With the closure of ageing nuclear generating capacity comes the requirement for new builds to ensure security of supply. Carbon dioxide emissions trading adds greater costs to coal than to gas and market conditions mean that gas will almost certainly be the fuel of choice for most new plants. But new builds across Europe are generally failing to address demand, even in these recession-hit times, as older plants are decommissioned.

Declining indigenous supply combined with post-recessionary demand recovery mean that Europe’s gas market has reached an important tipping point. Central to this is a need to diversify existing supply sources. On the brighter side, there are some gas hot-spots with south-eastern Europe, in particular, emerging as an important new transit route for Central Asian and North African gas, as well as a major demand hub in its own right.

In its March 2010 report, ‘The Future of the South Eastern Europe Natural Gas Market,’ Bharat Book Bureau points out that European gas consumption is reaching maximum production capacity. Its eight per cent buffer of supply over demand is not sufficient to ensure continued security of supply, particularly given that demand will rise as economic growth gains ground.

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Russia’s gas supply dominance

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It is against this background that Russia is accelerating efforts to supply gas to much of Europe. In February, it was announced that construction of Nord Stream and South Stream, two major natural gas pipelines from Russia to the EU, will begin this year.

Gazprom, Russia’s state-owned gas company, expects to start construction of South Stream, which will deliver gas via the Black Sea and Bulgaria to Austria and Italy, in December after gaining approval from Turkey.

The two pipelines form the pillars of Russia’s policy to reduce its dependency on Ukraine and Belarus as transit states by redirecting the gas it already sells to Europe through routes less prone to interruption. Germany and Italy, Russia’s partners in the projects, see the pipelines as a way to secure their future gas supplies.

Italy’s largest industrial group, Eni, is a partner in the South Stream consortium, and is expected to be joined by EDF of France. Gazprom’s partners in Nord Stream are BASF/Wintershall, with a 20 per cent share, E.ON Ruhrgas, with 20 per cent, and Gasunie with 9 per cent. Gazprom has the 51 per cent major shareholding.

Last month, Russian president Dmitry Medvedev and EU energy commissioner Gàƒ¼nther Oettinger hosted celebrations to mark the beginning of construction of the Nord Stream pipeline, along with Gazprom management committee chairman Alexey Miller.

Gazprom says that the move brings together the gas pipeline systems of Russia and Europe in a fundamentally new approach to ensuring the continent’s energy security. The Nord Stream pipeline through the Baltic Sea offers the tantalising promise of making it possible to continue to meet Europe’s insatiable demand for natural gas.

Miller hailed the collaboration on the project, with major European energy companies, as a “model of international co-operation for other large-scale gas transmission projects”.

E.ON Ruhrgas chairman, Bernhard Reutersberg, said the project would create a direct link between gas fields in Russia and sales markets in Western Europe, and would be able to provide transmission capacity for a significant part of the additional gas import needs anticipated by the EU.

“There is a decisive reason for the E.ON Ruhrgas commitment to Nord Stream. Germany and Europe need the pipeline as an element of a diversified transmission infrastructure so that deliveries from Russia can be placed on a broad foundation,” said Wintershall’s chief executive, Dr Rainer Seele. He added that natural gas was the “climate-friendly energy source of the 21st century”.

The new route is an important step for Russian gas exports to Europe, passing through the waters of the Baltic Sea from the Portovaya Bay to the German coast and stretching approximately 1200 km. The first Nord Stream line, with a capacity of 27.5 billion m3 per year (bcm/y), is projected to be commissioned next year. The construction of the second line of the gas pipeline will increase gas capacity to 55 bcm/y.

It is one of two major Russian projects, the second being South Stream, which is a planned natural gas pipeline bypassing Ukraine, running under the Black Sea to Bulgaria. One branch will go to Greece and Italy, and another one to Serbia, Hungary, Slovenia and Austria. Russia recently announced that it would more than double its planned capacity from 31 bcm/y to 63 bcm/y. Gazprom and Eni are equal partners in the project.

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Dash for gas: europe’s best bet?

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Not everyone is comfortable with Russia’s growing dominance in the European gas market, however, and it could be argued, with good reason.

In March 2009, Russia’s prime minister, Vladimir Putin, raised the spectre of a gas war in Europe, warning his country could cut off supplies to European consumers unless Ukraine paid its gas bill. His words sent a chill through much of the EU following an earlier suspension of supplies, in January, which saw much of Europe shivering without Russian gas.

But one man who remains unconcerned about Russia’s control over gas supplies is none other than the chief of one of the world’s biggest oil and gas companies, BP. Tony Hayward, speaking to London’s Guardian newspaper earlier this year, said a dash for gas was Europe’s best bet. Controversially, he derided wind power ambitions which, he said, may not be met and that he favoured a scaling down of green energy programmes.

The 400 MW Great Yarmouth combined cycle gas turbine power plant was commissioned in 2002 and has a dedicated pipeline connecting it to the national gas transportation system just outside the Bacton gas terminal in Norfolk

Instead, Hayward said, there should be a much greater emphasis put on gas. Hayward said Europe should drop what he called its “paranoid” concerns about gas imports from Russia and accept that piped and liquefied natural gas (LNG) from overseas sources offered a better solution to help beat global warming and energy insecurity in the short-term.

He told the newspaper: “There is a lot of gas in the world. There are a lot of diverse sources of gas in the world. The paranoia has been about Russia, but it is misplaced. We have approximately zero Russian gas [currently imported] in the UK and if you look at Europe, the imports of Russian gas into Europe have halved since 1980.”

Hayward, whose Russian TNK-BP joint venture is a major part of the company’s business, said the fear of Russia using energy as a political weapon was “massively exaggerated”. Speaking specifically about Britain, he said he believed the UK should not be concerned even if Siberian gas accounted for 10 per cent of imports, as long as 90 per cent came from a diverse group of suppliers such as Norway, Qatar and Algeria, as they already did. Ironically, the BP boss was speaking on the day the UK energy regulator said the power sector needed a massive shake-up. Ofgem raised concerns about an undue reliance on gas imports and raised the possibility of higher subsidies for wind and other renewables.

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Sources of gas supply are the answer

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Yet Russia faces other challenges to its perceived dominance. In its report, Bharat points out that Western Europe cannot rely on Russia for its natural gas if it intends to weather future price spikes or gas shortages. At the same time, Gazprom is facing the challenges of Qatari LNG arriving in Europe and US shale gas applying significant downward pressure on prices. The region will face further problems when Russian production fails to meet demand growth, says the report.

Another pipeline, proposed by Nabucco Gas Pipeline International, will compete with the new Russian routes. Nabucco will bring Central Asian gas from Azerbaijan, Kazakhstan and Turkmenistan to Western Europe via Turkey and the Balkans, bypassing Russia altogether. The EU-backed 3300 km pipeline is expected to cost €7.9 billion ($10.4 billion). Nabucco managing director, Reinhard Mitschek, says construction will begin at the end of next year, with first gas due to flow in 2014, reaching a maximum capacity of 31 bcm/y by 2018.

The Nabucco consortium comprises leading European energy companies: OMV of Austria, MOL of Hungary, RWE of Germany, Bulgargaz of Bulgaria, Transgaz of Romania and Botas of Turkey. But three consortium members ” OMV, MOL and Bulgargaz ” have already signed up to Gazprom’s South Stream pipeline, which some industry observers say raises serious questions about conflicts of interest or, some believe, their commitment to Nabucco.

Paolo Scaroni, Eni’s chief executive, surprised some industry observers recently when he was reported as saying that South Stream and Nabucco, in effect two competing gas pipeline projects, should combine efforts in a joint cost-cutting drive. He added that Europe may need to import an extra 180 bcm of natural gas annually by 2020, stretching available supplies as China, India and Pacific member states of the Organization for Economic Co-operation and Development seek more fuel. In comparison, Russia currently provides about 300 billion cubic feet of gas to Europe annually.

In its long-term outlook, to 2030, Eurogas expects the largest increase in gas consumption to come from power generation, from 123 million tonnes of oil equivalent (Mtoe) in 2005, the base year, to 239 Mtoe in 2030. The annual growth rate during this period is expected to be 2.7 per cent, which means that power generation would increase its share from 28 per cent in 2005 to 38 per cent of total gas demand in 2030.

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Alternative gas resources coming to the fore

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The LNG business has been growing at a fast pace since the first commercial overseas shipment in September 1964, according to RNCOS, a market research and information analysis company.

It accounts for more than seven per cent of the world’s natural gas demand. Although the Asia-Pacific region is the largest LNG market, accounting for more than 68 per cent of global trade, LNG is becoming an important complementary source of gas supply in Continental Europe and the Americas, where the market has long been dominated by pipeline gas supplies.

According to RNCOS’ new report ‘Global LNG Market Analysis’, much of this surge in growth is down to countries around the world converting their power plants based on coal and other fossil fuels into natural gas powered thermal plants. Soaring crude oil and coal prices in the international market, coupled with clean power development pressure, are responsible for driving this trend. As a result, LNG is rapidly becoming the most internationally traded commodity in the world, with global demand expected to grow to 435 million metric tonnes by 2030. Qatar, the world’s largest exporter of LNG, is expected to reach production of 77 million metric tonnes this year.

The successful extraction of gas from unconventional sources such as shale is also due to play a greater part in the European gas equation. Writing in the latest edition of Foreign Affairs, Christof Ruhl, BP’s chief economist, said tight supplies and rising prices, technological advances, such as horizontal drilling and hydraulic fracturing make unconventional gas resources such as tight gas, shale gas, and coal bed methane, accessible on a large-scale.

As a result, production from unconventional gas deposits in the United States has almost doubled over the past decade, and the share of these deposits in total US gas production has reached about 50 per cent.

“Unconventional gas resources may become increasingly available, including in the large consumer regions of Asia and Europe. These still untapped resources have the potential to become game-changers in global energy,” said Ruhl.

Eurogas said the proportion of additional gas supplies needed will gradually widen from 10 per cent in 2015 to 22 per cent in 2020 and to some 39 per cent in 2030. Consequently, the European gas industry is now focusing its gas procurement, especially on the period after 2015. Taking into account the growing gas demand worldwide and the decreasing indigenous production in Europe, it will require a huge effort and substantial investments of the suppliers to mobilize this gas in time.

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