The European Gas Markets

Over the last decade, decarbonization has become a key priority for the EU. However, on the contrary of renewable energy or energy efficiency, the role of gas in this process has never been clearly defined. This uncertainty opens a wide debate on the future role of gas in the EU energy system, particularly vis-à-vis the progressively stronger role of renewables in the EU energy mix. This paper tackles this issue with the aim to explore what role gas might play in making the EU decarbonization path more balanced and secure up to 2030 and beyond.

This chapter analyses a set of new scenarios for energy markets in Europe to evaluate the role of natural gas across a range of assumptions on climate policy (including the post-Copenhagen Pledges and the EU Roadmap). The goal is to identify whether current trend and policies are leading to an economically efficient and, at the same time, climate-friendly energy mix in Europe. Economic costs and environmental objectives are balanced to identify the welfare-maximizing development path, the related investment strategies in the energy sector and the resulting optimal energy mix. Our results show that a suitable and sustained carbon price is necessary to move energy markets in Europe closer to the optimal energy mix. An appropriate carbon pricing is also sufficient to achieve both the emission target and the renewable target. Policy costs are limited if climate policy is not too ambitious and/or it is internationally coordinated. Finally, our results show that natural gas is the key transitional fuel within the cost-effective achievement of a range of climate policy targets.

Gas demand expectations in Europe have been revised down since the early 2000s. The power sector is no longer synonym of certain additional gas demand and in a majority of countries, it will not be. Natural gas consumption in the region fell from 567 bcm in 2010 to just over 471 bcm in 2015. Nonetheless, even in a context of slow economic growth and decarbonisation of the energy sector, there is potential for natural gas in the energy mix, especially in the 2020s when lots of firm (coal and nuclear) capacity close down. Even in base case scenario with limited optimistic assumptions, gas demand could rise to 512 bcm in 2030, but actions must be taken soon to ensure at least a minimum role for gas in the future. If gas plants have been retired and no new ones have been built by then, it is likely that new and efficient coal plants (and eventually nuclear plants) will run for longer. This will limit the need for gas in the generation mix and also provide an even stronger case for additional renewable investments to decarbonise the power sector.

Germany—the 6th largest emitter of CO₂ worldwide—considers herself a front runner on climate protection. However, massive investments in renewable energy have not resulted in a visible reduction of GHG emissions since 2010/2011, whilst the potential of gas for climate protection remains largely neglected. An increasing political desire to heavily rely on (renewable) electricity also in the heating and mobility sector puts even more focus on renewable electricity and puts further pressure on gas demand already now. The gas industry cannot sit and wait for technical/commercial issues of an “all-electric economy” to surface. It needs to be vocal: gas must prove the point of delivering solutions for the low-carbon society. Proactive communication—postulating effective and affordable climate protection through the integration of renewables and gas—is required to make an impact on all relevant stakeholders, in particular at the political level. This includes involving the interest of other key stakeholders in this debate, e.g. other industries, consumer protection groups, trade unions and the like.

Genoese gives insight into the drivers of gas-fired power generation in today’s European electricity system to explain its potential future role. In his analysis of recent developments, he focuses on three elements: (1) the competition between coal and gas in power generation, (2) the policy push for renewables and (3) the mechanics of pricing power. Genoese then explores the possible implications for future gas consumption for generating power. He concludes with a critical comparison of existing gas consumption scenarios made by the industry and the European Commission.

Natural gas has been used as transport fuel in vehicles for many years though primarily in the form of compressed natural gas (CNG). Natural gas has a number of environmental and financial advantages over oil-based fuels in most markets though, with some minor exceptions, it has always struggled to gain significant market share in Europe against the more efficient and established fuels. Interest in the sector has been revived recently by the emergence of LNG as a fuel which has some additional cost and technical advantages over CNG, in particular, as a fuel for heavy road vehicles and ships. This chapter looks at the financial and environmental case for natural gas as a transport fuel. It considers these advantages in the main transport sectors of passenger cars, road haulage vehicles and marine shipping and the resulting levels of demand that might emerge. The analysis primarily focusses on the situation in EU countries though other nations are mentioned where relevant—for example, Norway is an important player in the marine shipping sector.

Europe plays the role of a shock absorber in global LNG markets. Its LNG imports depend on both the state of global LNG markets and the balance between Europe’s gas demand, production and pipeline imports. The respective volumes of pipeline gas and LNG imports are determined by total import needs, contractual commitments, the respective price of the different supply sources and supply developments in Europe’s pipeline suppliers. Geopolitics also plays an important role, as Europe is trying to diversify away from Russian pipeline gas. Looking forward, there could be a wide range for estimates of LNG imports. But there will likely be limits on how much LNG can be absorbed, particularly if large volumes of surplus LNG are stranded at low prices. Pipeline suppliers, notably Russia, are unlikely to see LNG reducing their market share without any reaction. Large volumes of stranded cheap LNG may also have unexpected consequences for the period beyond 2020, where new LNG supply will be required.

This chapter argues that five revolutions are currently reshaping the world’s energy balance: three of them on the supply side (US shale gas, US shale oil and worldwide renewable) and two of them on the demand side (efficiency gains—an ongoing revolution—and energy storage—the next revolution). It then provides an insightful discussion of how these revolutions are also impacting global LNG markets, the way LNG is priced and the overall impact on Europe under both economic and geopolitical perspectives.

Over the last couple of years, Russia has found itself in a completely new environment—a perfect storm of economic, market, domestic political, and foreign policy-related upheavals. These dramatic changes have serious consequences not only for the state budget and the macroeconomic stability, but for the gas industry as well. Fundamental shift in all major components of the country’s gas balance (stagnant domestic demand and exports, weak production, and imports) creates huge uncertainty. Low demand growth in Europe and increasing competition are the main factors, defining Russian gas export and production outlook (which is demand-driven). Nevertheless, Russia still has very strong positions in Europe both due to the existing huge portfolio of long-term contracts and also as a result of lower costs of its gas production and transportation, compared to many other producers. Most likely, Russia will remain the main player at the European gas market, but it will have to adapt to the changing European regulation as well as to the contractual transformations and consumers preferences for spot price indexation.

Widdershoven offers an in-depth analysis of the latest developments of the Groningen gas field production future. The growing concern of NW European gas importers, combined with the growing pressure of Dutch NGOs, political parties to end the Dutch gas adventure, presents the European gas market with a new security of supply issue in the future. The future of the Dutch gas roundabout is in doubt, while gas producers and society are in full confrontation. The Dutch Disease, based on a government budget policy based on hydrocarbon revenues, is now being substituted for green policies on a confrontation course with the economy. A Dutch Disease 2.O is being born.

Norway is the second supplier of natural gas to the European market, second only to Russia. For the past 40 years, Norway has proved to be a reliable supplier. It has the potential for decades, but incentives are required. Recent discoveries lead to upgrading reserve estimates, not the least in the Barents Sea. With lower oil and gas prices, the issue is whether to continue investing in the petroleum activities in spite of the price risk, or whether to scale down oil and gas investment. Security of supply requires security of demand because natural gas trade is a matter of reciprocity; for natural gas, sellers need reliable buyers. The declared ambition of the EU Commission to get out of all fossil fuels undermines investor confidence and discourages Norway. The UK decision to leave the European Union, Brexit, appears as an advantage for Norway insofar as the UK would retain more independence in energy policy. Outside the EU, the UK would be free to choose natural gas as the key fuel for power generation. Already in 2015, Norway supplied volumes to the UK market corresponding to 37% of consumption. With another major deal, the UK would be overwhelmingly dependent on Norway for natural gas supplies and indirectly for power generation stability. Price competition would be assured by domestic UK shale gas and especially imports of liquefied natural gas, LNG. Also in the continental market, Norway is a reliable long-term supplier. The prerequisite is that the EU Commission gives incentives in the form of market opening, inexpensive access to infrastructure and policy measures that welcome natural gas.

Obviously there are problems and risks for gas developments in North Africa but they often mask trends that are very favorable, such as Algeria’s increased production and exports after a period of stagnation or of slight decline, several gas developments in that country which will come on stream from 2017 onwards, the confirmation of the potential of the Zohr supergiant field in Egypt with 30,000 billion cubic feet of gas in place, significant gas discoveries offshore Mauritania and huge potential of unconventional gas. Moreover, Egypt, in addition to its own potential, could become a hub for the Eastern Mediterranean with gas deliveries from the Republic of Cyprus and Israel. The monetization of the gas potential of North Africa, however, encounters various obstacles, including political and security problems (Libya is obviously the case that immediately comes to mind) and, especially, the need to attract more foreign investment, which implies, besides security and political stability, to offer foreign oil companies a more exciting contractual framework.

The recent discoveries of huge gas reserves in the Eastern Mediterranean are redefining the geostrategic meaning of the “Southern Mediterranean category,” even heralding scenarios of regional cooperation in relation to the concept of creating a Mediterranean gas hub, with potential benefits in terms of stability, economic gains, energy security, and diversification. The challenges for the energy sector in the region will be to satisfy increasing internal demand with affordable and reliable supplies, to create conditions to efficiently export excess resources, and to craft a sustainable energy mix (i.e., more gas and renewables). Europe indeed needs to diversify energy supplies in order to increase its internal gas-market resilience and create a more competitive regional market. In this context, strengthening the south–north corridor could contribute to the relaunch of the Mediterranean and boost the security and the development of the whole region.

The Southern Gas Corridor (SGC) is a project that will start by shipping gas from Azerbaijan to Turkey and then to the EU, while aiming in the long run to serve as a major transit system for gas from multiple sources in Central Asia and the Middle East to reach Europe. This chapter starts by detailing the progress achieved to date in implementing the $39 bn set of projects that constitute the initial stages of the SGC’s development. The SGC’s expansion is then considered with particular regard to the intended doubling of its initial capacity to deliver 6 bcm/y of gas to Turkey and a further 10 bcm/y to south-eastern Europe and the EU to around 12 bcm/y and 20 bcm/y, respectively. The system’s ability to attract further input from a “Next Wave” of offshore Azerbaijani gasfields is addressed, as are the prospects that gas from producers such as Turkmenistan, Iran, northern Iraq and the Eastern Mediterranean might access the system. Finally, the chapter addresses the issue of whether Russia might seek to utilise part of the SGC system to enable it to use its planned Turkish Stream project for at least some deliveries to Italy and the question of whether unrest within Turkey might pose serious dangers to transit pipelines.

This chapter illustrates the progressive transition in European gas price formation from dominance of oil-related pricing to a situation in 2015 where nearly two-thirds of gas in European wholesale markets was sold at hub prices. It argues that the main gas hubs in Europe are already well integrated, and in general correlation is high and continues to improve. In this context, any buyer signing a new, or renewing an existing, contract must base the price in that contract on some form of hub price. Exactly which hub, or a combination of hubs, and whether an average of day-ahead or month-ahead prices and over what period, will be matters for negotiation, but the principle of hub price formation is established.

The story of gas in the European Union is a success story: starting from scratch in the sixties, it is representing today about 25% of the primary energy used in the European Union. In spite of a wide use in the EU and in the Energy Community countries and in spite of being the cleanest fossil fuel, gas seems to be a “mal aimé” by the national and European decision makers, at least according to the gas industry. The latter is indeed worried to see coal and lignite remaining favoured for various questionable reasons by several countries. Others may say that gas industry has missed opportunities, being overconfident about the strengths of its product. This chapter examines more in-depth the position of gas in the European energy mix today and in the future, the functioning of the internal gas market and finally the key challenges facing gas in the Energy Union which should lead the European Union towards a low carbon economy, in line with the Paris Agreement of December 2015.