European Energy Contest: Pipeline Gas Competes with LNG



As hydrocarbon reserves in the North Sea are dwindling, European countries are looking for alternative sources of energy.

Pipeline gas is still an option, but LNG should not be ignored as a viable alternative.



1. THE FACT OF THE MATTER REMAINS: THE NORTH SEA’S OIL AND GAS RESERVES ARE RAPIDLY DIMINISHING. 


Peak Oil is a geological concept based on solid scientific and statistical foundations. It is the theory that as we deplete our oil reserves, it will become increasingly difficult to extract oil from the ground. This will lead to a rise in oil prices. At the same time, it will become more difficult for us to discover new sources of oil that are worth exploiting. We will find more unconventional recoverable oil deposits and less conventional oil deposits.

Currently there is a lively discussion about future gas imports from Russia and to Europe. At the center of this debate is the new European pipeline Nord Stream 2, which will supply natural gas from the St. Petersburg oblast to Mecklenburg-Vorpommern.

To understand why some European nations have embarked on this energy project, we have to grasp the energy situation in Europe. Nord Stream 1 and Nord Stream 2 might replace natural gas deliveries from Norway and to a lesser extent replace oil and gas deliveries from the UK. Denmark is longer an important producer of oil and gas in the North Sea. Why is that? Because of peak oil and peak gas.

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2. PEAK OIL IS THE REASON WHY EUROPE IS LOOKING FOR ALTERNATIVE ENERGY SUPPLIES. 


Peak oil means that we have a peak production level for oil and gas (and other fossil fuels). This theory was introduced by Marion Hubbert and became known as peak oil theory. Statistically, oil production looks like a standard normal deviation (SND) and production of a well follows the outline of a curve. If we combine many wells what we get a nicely shaped curve of all of these individual wells. Their production gradually increases and reaches a peak.

Up to this point, we have exploited oil and gas that could be achieved with less technical know-how, less investment and less effort. Once we have reached the production maximum of oil and gas, we have to produce crude oil that is difficult to reach, that lies deep underground, that requires offshore platforms and a chemical mixture to pump it out of the ground.

In earlier times we would not have produced this crude oil. We only produce shale oil and shale gas because we have no other alternatives. However, this leads to additional costs. We pay for the price increases at the gas station. With the time the price increases. So consumers have to make a decision whether they want to buy more expensive fuels.

The oil industry has to decide whether to promote unconventional oil reserves. The oil industry has to calculate exactly which costs are incurred in the downstream business to produce refined oil derivatives such as diesel and kerosene.


There is a certain price limit (how much can you afford?), and how much are consumers willing to pay for diesel or kerosene. Gradually, the demand for such fuels is decreasing and investments in new projects are drying up. So oil and gas production is declining because projects become less profitable and new crude oil is more difficult to produce because there is no more easily obtainable crude oil.

This in turn means that we have to resort to oil and gas imports to meet our demand for cheap energy. This is the current situation for European countries. More and more capital investments are flowing into the production of oil, which increases the share of the energy industry in the gross national product.

This stiffles innovation and development in other productive economic sectors. Economically speaking, there is a limit to how much we can spend on fuel. However, this reduces the willingness of oil production companies to make new investments. Capital would have to be invested in oil and gas exploration and production. Ideally, new investments should be made in locations where investors can expect a reasonable return on investment (ROI).


3.  WHAT ABOUT OIL AND GAS WE HAVE FOUND IN THE ARCTIC? 


Greenland’s oil and natural gas reserves are enormous. Nevertheless, the Arctic oil and gas reserves are difficult to extract. The oil and gas reserves are partly under the sea. Offshore oil platforms are needed to exploit these resources, which is an expensive undertaking. The stormy sea and rough weather make oil production particularly difficult. Denmark would play a leading role in oil production on Greenland.


I have written an article on the energy geopolitics of the Arctic region, which specifically focused on Russia’s pivot to the Arctic. Russia is the leading country in the Arctic region, and is the only country that is able to explore the Arctic Ocean. If Europeans want to explore the Far North, they will have to make huge investments and set up the infrastructure. Only then would they be able to exploit these resources. But the Arctic Ocean is a fragile, rough, wild terrain and the environmental bill is beyond the pale.


Taking all that into account including the logistical challenges, it is hard to see how oil and gas reserves could possibly compete with reliable alternative investments such as hydropower or geothermal energy that we can use to generate electricity on a constant basis.


4. LNG COMES FROM DIVERSE SOURCES BUT ENTAILS GEOPOLITICAL RISKS AND TECHNICAL CHALLENGES:


  • Some regions where LNG is sourced from are geopolitically unstable. To transport LNG from these locations, private security is needed to protect ships. Navies are patrolling arteries of global energy trade. This incurs significant economic costs which burdens international shipping companies that have to bear these costs. They pass these costs onto consumers. At the end of the day, the cost is borne by the importer, and the buyer of the liquid.
  • The solution is to choose different LNG suppliers and apportion delivery volumes. The goal is to balance supplies between different countries, regions and suppliers.
  • The main suppliers of LNG are the United States and Gulf Countries such as Qatar. The problem is that these countries are located on the other side of the world.
  • For LNG deliveries to work we first have to build the port infrastructure which will allow us to transport LNG from the ship to the truck. This is a costly undertaking and it will take many years to build the logistics infrastructure that allows us to do just that.

5. PIPELINE GAS HAS MANY ADVANTAGES 


Undersea gas pipelines can transport more natural gas, because of the pressure that is being exerted on the pipeline. The gas is compressed which improves the flow rate of the gas in the gas pipeline.


We should also keep in mind that Russia has an abundance of natural gas in the Far North, some of these reserves have been added recently and processing facilities have been build. Some of these resources can be extracted on land. 


6. CONCLUSION: THE ADVANTAGE OF PIPELINE GAS – AND WHY IT MATTERS 


Europe cannot afford to pay too much for LNG deliveries. Many European nation-states have been ravaged by economic crisis. As we have entered the renewable energy age, Europe cannot allow more volatility on energy markets. The goal should be avoid scaring off industry and in particular the steel industry. What is needed is a reliable and safe gas supplier.


If Europe finds itself in a position where it is unable to secure alternative energy supplies, it risks its economic prospects. More then everything else, Europe risks a decline of industrial production as a share of GDP. It would make Europe more dependent on other countries for the import of manufactured goods and for value-added services. This would lead to stagnation and further decline of Europe’s economy.


There are many energy experts that think Europe’s energy future needs more detailed planning, and this entails more in-depth discussions on the future suitability of LNG and pipeline gas to meet Europe’s energy needs.


Many thanks for the shared interest in the energy world!



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