In times of trouble, do not dispair, Russia’s Gazprom will be there.
If you then ask, help will be swift, with Nordstream 2 your fortunes shift.
In this article, we aim to analyze the natural gas market in Europe and provide the reader with new insights into what the future may hold for natural gas. In this article, we will also go into more detail about what the implications are and what impact natural gas developments have on the long-term prospects for renewable energy in the European context. We will focus on specific regions in Europe and roughly divide the European regions into Northern Europe, Western Europe, Southwestern Europe, Northeastern Europe, and Southeastern Europe.
For Western Europe, the main problem is to maintain a continuous supply of natural gas, as there are very few domestic supplies that can provide a base load for industry. There are gas supplies in the UK and Norway, but they are limited in scope and will continue to decline in the coming years. Northern Europe seems to be in a better situation, because the countries are able to compensate for fossil fuels with hydroelectricity which can provide a good base load in terms of EROI (Energy returned on energy invested).
The prospects for southwestern Europe are even more limited, as there is currently virtually no commercially viable gas supply and the best option for them is to import gas in the form of LNG. South-Eastern Europe could find new supplies of natural gas. Northeast Europe is likely to remain dependent on Russian natural gas supplies. Nevertheless, they will try to find alternatives, especially LNG supplies. It will be difficult to imagine that this will work for decades, as shale gas reserves in the US are in long-term decline. Poland, in particular, had hoped to become independent of gas supplies from Russia. This wish has not been fulfilled, as it turned out that shale gas is not available in sufficient quantities to produce it economically in Poland.
2. Russia’s natural gas reserves
Russia’s proven natural gas reserves are mainly in Siberia. Enormous efforts have been made to explore the Arctic for natural gas deposits. There has been strong interest from the Chinese and Saudi Arabia, for different reasons.
3. Natural gas reserves in the EEA and the UK
The remaining natural gas reserves are mainly located in the North Sea. They include Norway and the United Kingdom. A very small amount is produced by Denmark and the Netherlands. Natural gas reserves are often located near oil reserves. The UK is expected to become a natural gas importer soon and has already become a net importer of oil in 2013.
4. Natural gas prices remain quite volatile
In recent years, the price of natural gas has fallen significantly. This has had a negative impact on Russia’s state finances. Normally, gas prices are seasonal. The price of natural gas tends to fluctuate along with the price of crude oil. In recent years, the correlation between the price of natural gas and the price of crude oil has continued to weaken. The price of natural gas has risen recently, in part due to a harsh winter, coinciding with increased interest in LNG, although too little of it is available. High coal prices may also lead consumers to switch from coal to gas. This is another input factor.
5. Future of liquefied natural gas (LNG) imports in northeastern Europe
The import of LNG into Europe, which has risen sharply in recent years, is of great importance. What we can observe is that there is much stronger demand for LNG in Eastern Europe, especially in Poland. In the case of Poland, the increasing demand is driven by the fear of dependence on Russian gas imports. Import terminals for natural gas are being built in many port cities to meet the demand for LNG.
The sanctions imposed on Russia may have affected natural gas imports from Russia to Europe. They have also undermined further progress on the NordStream project from the St. Petersburg area to near Greifswald in Mecklenburg-Western Pomerania. This would have the effect of bypassing Poland as an important gas transit nation and diverting gas flows. This is because gas pipelines can exert more pressure underwater, which means increased throughput. The sea-to-land throughput ratio can even be more than twice the volume.
6. The construction of new LNG import terminals
LNG import terminals fulfill a specific need, namely to provide European nations with some flexibility in energy supply and to ensure that prices remain relatively stable. This requires that foreign sources of natural gas be relatively abundant and inexpensive. The growth of LNG has been enabled by the exploration and production of shale gas in the United States. We have seen a lot of investment in LNG import terminals, for example at the port of Rostock. This reflects a broader trend where large LNG import terminals have been built across the EU.
7. China’s growing demand for natural gas competing with the EU
Russia’s Far East is a veritable gold mine; it is also a region of great power conflict. China’s problem is that it needs the mineral resources that are abundant in Siberia. China needs these resources to keep the Chinese economy going. Russia can supply natural gas to the huge Chinese market, and China’s economic growth is coming at just the right time. Because of Western sanctions imposed on Russia, natural gas suppliers have been looking for other countries with which to trade.
China is on Russia’s doorstep and provides a convenient market for importing natural gas. Pricing, however, remains a sensitive issue. Russian gas suppliers may need higher gas prices for their long-term contracts, which Gazprom can obtain by supplying more gas to Germany. Hence Russia’s strong interest in implementing NordStream 2.
8. The NordStream 2 pipeline and the future prospects for natural gas in Europe
As we have previously elaborated on, a significant decrease of North Sea oil and natural gas supplies force Europeans to turn to Russia in order to find reliable, long-term partner with the added advantage of having lower logistics costs, reducing costs for end users then would be the case with U.S. LNG supplies. Although there are tensions to increase the export market for LNG, Russia appears to be in the game for the long term, competing on the basis of cheaper pipeline gas.
Finland and Sweden have allowed Nordstream to run through their territorial waters, but Denmark is unlikely to do so. Germany has given the green light to build NordStream 2, and some insiders suggest Russia and Germany will eventually move forward and build NordStream 3 and Nordstream 4, to the detriment of existing pipelines running through Belarus, Poland and Ukraine.
9. Future demand for natural gas
Demand for natural gas is expected to increase significantly as oil becomes more expensive as a fuel. Natural gas gains momentum in part because of the LNG revolution that has taken place in the developed world. But it’s unlikely that the U.S. will be a major player in the LNG market 20 or 30 years from now. When you build a new import terminal, it’s important to look at the long horizon.
For example, the shipping industry is quickly adapting to an expansion of LNG supply in the ports here. This includes cruise ships looking to use LNG instead of heavy fuel oil in the future, primarily related to fuel emissions. The Port of Rostock is now producing LNG engines for shipping and is in a major expansion phase to ramp up operations in response to high demand.