European Natural Gas and LNG Market – Energy Review 2018

In times of trouble, do not dispair, Russian Gazprom will be there.

If you then ask, help will be swift, with Nordstream 2 your fortunes shift.

1. Introduction

In this post, I want to analyze the natural gas market in Europe, and provide the reader with fresh insights into what the future might hold for natural gas, as an energy resource. In this paper I will also go into greater detail what the implications are, and what impact natural gas developments have on long-term prospects of renewable energy within a European context.I will focus on specific regions in Europe and will broadly delineate European regions into Northern Europe, Western Europe, Southwest Europe, Northeastern Europe and Southeast Europe. For Western Europe, the main issue is to acquire a continuous supply of natural gas, because there are very few indigenous supplies available which can provide a base load for industry. There are gas supplies in the UK and Norway, but they are limited in scale and will decline further 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 Southwest Europe are even more limited as there are virtually no commercially-viable supplies of natural gas at the moment, and the best option for them is to import natural gas in the form of LNG.Southeast Europe could see new supplies of natural gas come online. Northeastern Europe will probably continue to be dependent on Russian natural gas supplies. Nevertheless, they will try to find alternatives, in particular LNG supplies. It will be difficult to imagine that this is going to work, because shale gas supplies in the United States are already declining. Poland in particular had hoped it would become independent of gas supplies from Russia, these wishes remained unfulfilled as it has been found that shale gas is not abundant enough to make it commercially-viable to exploit it in Poland.

2. Russia’s natural gas reserves

Russia’s proven natural gas reserves are mostly located in Siberia. Enormous efforts have been made to explore the Arctic for natural gas reserves and there has been strong interest from the Chinese and Saudi Arabia, for differing reasons.

3. Natural gas reserves in the EEA and the UK.

Remaining natural gas reserves are primarily located in the North Sea. They encompass Norway and the UK. A very small amount is extracted by Denmark and the Netherlands. Natural gas reserves are often found close to oil reserves. It is expected that the UK will soon become an importer of natural gas and has already become a net importer of petroleum in 2013.

4. Price of natural gas

In the last few years, the price of natural gas has fallen significantly. That has negatively impacted upon Russia’s public finances. Usually, gas prices are seasonal. The price of natural gas tends to fluctuate along with the price for crude oil. In the last few years, the correlation between the price of natural gas and the crude oil price has weakened further.The price of natural gas, partly due to a harsh winter, has increased as of late and this coincides with increased interest in LNG, although there is too little available. This has been confirmed by (The Business Times Energy & Commodities, 2018) stating that high coal prices have increased the trigger point between coal and gas switching.

5. Liquefied natural gas (LNG) imports

Of particular importance is the import of LNG into Europe which has greatly increased in the last years. What we can observe is that there is a much stronger demand for LNG in Eastern Europe, especially Poland. In Poland’s case, increasing demand is being driven by the fear of dependency on Russian gas imports. Import terminals for natural gas are being constructed in many port cities to meet the demand for LNG. Sanctions imposed on Russia by Western nations and geopolitical strife resulting from NATO’s continued expansion toward Russia’s border has clearly affected natural gas imports into Europe from Russia. It also has undermined continued progress on the NordStream project from the area of St. Petersburg to near Greifswald in Mecklenburg-Pomerania. The effect this would have is to circumvent Poland as a major gas transit nation and it would redirect gas flows. This is because gas pipelines under water can exert more pressure, which means there is increased throughput. The throughput ratio of sea to land is more or less 2:1.

6. Investment in LNG import terminals

LNG import terminals fulfill a specific need, which is to provide European nations with a certain flexibility of their energy supplies and to ensure that prices remain relatively stable. That implies foreign sources of natural gas are relatively abundant, and cost-effective. The growth of LNG was actually made possible by exploration and extraction of shale gas in the United States. We have seen a lot of investment in LNG import terminals, for example in the port of Rostock. Gazprom Germania has already commenced its first bunker-supply operation in 2016 according to LNG World Shipping, 2016).

7. China’s growing demand for natural gas competing with the EU

In geopolitical terms, Russia’s Far East is a true gold mine; it is also a region of great power conflict. China’s problem is that it needs the mineral wealth which is abundant in Siberia. It needs it to keep the Chinese economy floating along. Russia, while suffering from a declining population, can provide natural gas as an energy resource to the huge Chinese market.China’s economic growth comes just at the right time. Due to the Western sanctions imposed on Russia, natural gas suppliers have looked to other countries to trade with. China is on Russia’s door step and provided a convenient outlet, although pricing remains a delicate issue. Russian natural gas suppliers need much higher gas prices on its long-term contracts, which more gas deliveries to Germany can provide Gazprom with. Hence Russia’s strong interest to bring NordStream 2 to fruition. A major issue is that Russia’s geopolitical objectives are on some occasions not well enough interlinked with energy interests.

8. NordStream 2

As I 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 has been tension building up resulting from competing U.S. geopolitical interests to grow the export market for LNG, Russia appears to be in the game for the long-run. 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 NordStream2, 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

It is expected that demand for natural gas will pick up significantly as oil becomes more costly to use as fuel and partly because of the LNG revolution that has occurred in the industrialized world is gathering pace. But it is unlikely that the U.S. will continue to play a major role in the LNG market in 10 to 15 years from now. For example, the shipping industry is adapting rapidly to an expansion of available LNG in local ports, that includes cruise ships which aim to use LNG instead of heavy oil in the future, which mostly has to do with fuel emissions. The port of Rostock now produces LNG motors for the shipping industry and is in a major expansion phase to ramp up operations due to high demand.

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