More collaborative thinking needed on European gas markets

MEHMET ÖĞÜTÇÜ - CHRISTIAN SCHWARCK

There is a Chinese character that equates crisis with opportunity. We face such a situation as the energy market turbulence, created by the oil price collapse, declining investments and geopolitical tensions, is in full swing. The process of adjustment in the energy market is far from over.

The European Union’s political leaders and mandarins in Brussels have grasped the opportunity to move forward with a series of new initiatives including the Energy Union. Some observers have described these as merely a consolidation of existing initiatives under a new umbrella. Others see in them a bold new effort to adapt Europe to the changing dynamics of world energy in the 21st century.
The Energy Union, despite the focus on security of gas supply, reflects to some extent the approach of the German Energiewende, with its commitment to move away from “outdated business models” toward community-based energy supply. That model has been largely bad news for gas.

Changes in the global gas market

The commission’s plans do not come in a vacuum. They respond to the dynamics in world gas markets, which have seen profound changes over the past decade, with the rise of shale gas in North America, problems with Gazprom’s supply and politicization, new technologies, growth in the LNG supply, trading, falls in demand and a decline of available investment finance.

Remarkably, in early 2015, Europe was the most attractive destination for LNG shippers. Additional gas volumes continue to appear in the global market in the form of new Australian LNG, and there is the prospect of U.S. and East African LNG to come. There are also many new gas projects around Europe – in the North Sea, the Black Sea, the Caspian and the eastern Mediterranean, including offshore Israel – but some may struggle to be economic with the current price and squeeze on capital expenditure budgets, in addition to geological and geopolitical challenges.

For Europe, developing Algeria’s onshore shale gas – believed to hold a massive 700 trillion cubic feet of recoverable reserves – as well as constructing the $45 billion Southern Gas Corridor, the first part of which is slated to supply 10 billion cubic meters (bcm) of Azeri gas to Europe via TAP by 2020, need high levels of capex. Both Algeria and the Southern Gas Corridor feature prominently in the Energy Union strategy, in addition to LNG and Norway supplies.

Gas demand signals in Europe

After the dramatic halving of the oil price since June 2014, there is now every chance that natural gas will follow suit. Indeed the fall has already begun. Gas demand will also fall. The commission believes 1 trillion euros will need to be invested in the EU energy sector over the next five years alone. Whether such a colossal sum can be mobilized by energy companies, particularly in the absence of robust gas demand signals from the commission, is another question.

Between 2011 and 2014, gas lost 30 percent of its share in the EU power generation mix to coal. Gas demand declined to around 420 bcm last year. And in the absence of policy reforms European demand is likely to stay weak for almost two decades. That matters for investors because demand security is a key determinant of their decisions.

How should European gas players respond?

The ambition of becoming “the world leader in renewable energy” is of prime importance to Brussels – with 27 percent of the EU’s energy planned from renewables by 2030. Also, gas projects in the Caspian, North Africa, eastern Mediterranean and Norway can count on a much higher level of political support compared to the last commission.

Turkey is a critical partner in the new gas equation for all the key players: the EU, other gas producers in its neighborhood and Russia. It remains to be seen how the EU will respond to the proposed 63 bcm “Turkish Stream” pipeline opening a new line via Turkey to European markets and whether it will adversely affect the future of the Southern Gas Corridor. Ankara also aims for a 30 percent share of renewables in its energy mix. Any nuclear “renaissance” will further complicate the gas supply and demand picture.

More collaborative thinking, depoliticized dialogue and business engagement will be needed with major players if we are to develop win-win propositions for all parties and avoid confrontations.

Mehmet Öğütçü is the chairman of Global Resources Partnership, while Christian Schwarck is a Brussels-based energy expert.