Europe Looks to LNG
By 2015, Europe plans to double its infrastructure capacity to receive liquefied natural gas, to hedge concerns over its future supplies.
By 2020, natural gas consumption in the E.U. will increase 22 percent to 26.5 trillion cubic feet per year, as it relies more on its preferred source to meet its energy needs while reigning in its carbon dioxide emissions. But indigenous deposits in the North Sea and the Netherlands have peaked, and are expected to contribute only about one-sixth of expected demand by 2030, compared to the current 50 percent. That will leave Europe dependent on foreign producers for 85 percent of its gas by then, according to E.U. Commission estimates.
A massive expansion of the pipeline infrastructure is planned or under construction to connect the E.U. to Russia, Norway, Algeria, and Libya, as well as several Caspian nations. However, there is increased skepticism about Russia as the E.U.’s main foreign supplier, especially after a standoff between Ukraine and Moscow in 2006 led to supply cuts and price spikes.
To help assure future gas supplies, Europe plans to more than double its current LNG regasification infrastructure by 2015 to around 25 billion cubic feet per day from its current 11 bcf/d, according to Wood Mackenzie. The expansions, mostly in the U.K., France, Spain, Italy, and Germany, will improve Europe’s gas provisioning ability and buy time to finish pipelines connecting it to Euroasian and Middle Eastern suppliers. They will also improve its bargaining margin with Russian counterparts, analysts said. “Basically, nobody wants all their eggs in one basket and LNG is a backup supply,” said Leigh Bolton, principal and managing director of Holmwood Consulting, which specializes in LNG and natural gas.
A third of Europe’s planned regasification capacity is destined for the U.K. That country is particularly pressed after becoming a net importer in 2004 and losing about 10 percent of production annually from its peaked North Sea deposits. France intends to double its capacity to 3.5 bcf/d, while Italy will increase to 3 bcf/d from 300 million cubic feet per day. Spain, Europe’s most mature LNG market with little connection to the continent’s northern supplies, will further increase its capacity to 7 bcf/d from 5.5 bcf/d. Germany is also planning its first regasification terminal by 2011, with a 400 MMcf/d capacity.
Another reason for Europe’s ambitious regasification plans are its costs, which account for about 15 percent of the LNG value chain’s expense. However, analysts warn there is little guarantee the planned regasification capacity will be completed. According to Washington-based PFC Energy, only 5 bcf/d of the additional capacity is currently under construction. The rest will depend on whether supplies can be secured.
“We’re entering an extremely tight supply market, and unless you have long-term supply contracts, it’s unlikely you’ll get much,” Bolton said. Of at least a dozen new terminals either in advanced planning or under construction, half have been delayed because they can’t get firm agreements on supply deals. The reason? LNG prices have increased 180 percent since 2003, thanks in part to soaring gas demand in Asia. Supplies are expected to remain tight until 2015 when new liquefaction capacity, delayed throughout due to high costs, comes online in source countries, according to PFC Energy.
“When you look at the supply-demand balance around the world, I would question Europe’s strategy. It’s a great idea, but where is LNG going to come from?” asks Washington-based Garry Howell, head of PFC Energy’s global gas team. “Even in 2015 a lot of these projects won’t have the gas.”
LNG shipments currently account for less than 10 percent of Europe’s gas demand. It’s uncertain how much that will increase as global LNG prices and supplies evolve, analysts said, but estimates range between 12 and 18 percent by 2020.
The new capacity became ever more pressing after Gazprom signed key strategic agreements that will allow it to build a pipeline to supply southern Europe, ahead of the U.S. and European-backed pipeline to Caspian countries. The South Stream pipeline that Gazprom and Italy’s Enel hope to finish by 2013 (with a potential annual capacity of 1.1 tcf) has gained the key backing of Bulgaria, Romania, and Serbia. In the meantime, the Nabucco pipeline connecting southern Europe to Caspian and Middle Eastern sources through Turkey will likely be delayed until enough gas supplies are secured.
Indeed, the European response to Gazprom’s gas dominance looks more like a pipedream entangled in geopolitical concerns. And that alone explains why LNG is gaining so much attention.