GAS FOR EUROPE: SIGNIFICANT STRENGTHS
Things are not any easier for the natural gas business in Europe at the beginning of 2015, but in a session dedicated to new customers and new markets, industry representatives gathered in Vienna, Austria at the European Gas Conference offered their views on how gas might regain its position amid the numerous challenges.
In his remarks, Marco Alvera, Chief Midstream Officer, Eni, said he would try to shine some light on the opportunities for the natural gas industry in Europe, outlining four areas he said he believes can have an impact on it.
The first, he said, is to be explicit on the "right energy mix," explaining, "Too often this is left at the country level, with targets that are not very clear and have competition between different fuels. There should be a realization that gas has significant strengths, a big role to play in the energy mix."
The industry, he added, has not been vocal enough.
Secondly, he named physical interconnectors, specifically four projects that could have a major impact if achieved quickly, according to Mr. Alvera: the France-Spain interconnector, a north-south link in France, reverse flow to the north out of Italy, and interconnection in Eastern Europe.
The third area he named is improved market design, "as short-term and long-term capacities are being held at different operators, which is impeding the free flow of gas.
"There should be a design and work in place to harmonize the market access rules, clean up the network codes and really allow those who have the capacity to either give them back of be more open about how those come into the liquid markets to help the market integrate, become more liquid and attractive for consumers, for security of supply," he explained.
Mr. Alvera's fourth pillar, he said, was constructive dialogue with producers.
"Europe is in a very privileged position – right at the center of all the big gas reserves; it should have open dialogue with whoever holds the gas to make sure it flows freely and abundantly."
There is an opportunity, he noted, to create a big hub in southern Europe, interconnecting the region to a pipeline coming from the Caspian region into Italy, creating physical and strategic connections.
He commented: "We need to be very rational by what we mean by energy union and there can be adjustments to these four pillars, but everything we need is within Europe and within our remit, so we have no excuses."
The politicization of the gas market and the lack of predictability that goes with that was pointed out by, SVP Marketing & Trading, Statoil. It has not improved, he noted.
"On the one side, in many ways we're seeing ongoing deregulation to make the internal energy market work in Europe; at the same time, member states are now working on re regulating and doctoring the energy markets down to the very last detail," he offered.
He said the UK provided an example of this, as it had recently held a capacity auction: "The amount wasn't derived through the market; it was set by the regulator. This means that investments are not based on pricing signals anymore, but on government schemes and subsidies."
This, he said, is a challenging way of designing European energy policy.
Mr. Bjornson observed that Germany is trying to fix its regulation because of some some unwanted results. "They see coal increasing at the expense of natural gas, CO2 emissions at best being constant over the last years."
Utility prices are also high there and the necessary power sector infrastructure is missing, he added. It is happening this way in several member states, which he said are "queueing up for subsidies."
Meanwhile, he said, the rhetoric out of Brussels had changed from cost and prices of energy to security of supply. Of the climate talks later this year, he added, "Paris is coming up and we're back on the climate issue."
Statoil, he said, is looking at the entire issue within a more holistic and robust framework view of the market. He explained, "On the one hand, we are asked to be ready for a Europe that uses less gas than earlier. At the same time, upstream/midstream players are expected to invest to secure future energy supply."
One solution, cited Mr. Bjornson, is that some enterprises are moving their business out of Europe. The low price of oil, he said, is an additional challenge, given the assumption of increasing oil and gas prices.
He commented, "An important assumption was that the increase in these prices will make renewable technologies competitive over time. The chances of that happening with the price levels we're seeing now are pretty slim I would say."
This, he said, makes for the urgent need to redesign energy policy, leaving judgments to the markets to renew the confidence of customers and investors.
Stephen Asplin, Chief Commercial officer, E.ON Global Commodities, said he found it interesting that everyone is still talking about ensuring security of supply for Europe in 2015, when new supply lanes form the Southern Corridor and a wave of LNG from North America is forthcoming.
He offered, "We're not sure of supply options, but what we are sure of is growth in demand."
Despite the EU 28's overall demand decrease of 9%, he said that all forward projections go upward.
At the same time, according to him the EU economy is not growing but in deflation, getting older, and, considering planned cuts in CO2 emissions, gas would not grow in perpetuity.
"Yes, we are burning more coal than we have done for 20 years," he quipped of Europe. "Yes, we are struggling to decrease CO2 emissions because of that – we all understand the reasons for that."
Mr. Asplin cited the 55% drop in oil prices, 60% drop in the price of coal and 25% in the price of gas. "Gas is still expensive relative to its competition in Europe," he noted, adding that despite the positive outlook for gas in power generation, the spreads continue to widen.
Structural reform of the Emissions Trading System is necessary, he contended, admitting it is a delicate subject. "Clearly, it is not providing a switchable price in the power industry to convert from coal to gas."
Technology-wise, noted Mr. Asplin, things are moving rapidly for natural gas. Of E.ON, he said: "Our company has made a profound decision to make a split in the recognition of the technological advancements in the market and the changes in the market base in terms of managing the customer and conventional energy.
"Like the advent of wind and solar, these things have a tendency to occur somewhat faster than the industry believes they may do – we've already seen evidence of that," he said, citing grid demand destruction in the German market, where heat pumps and batteries are impacting power generation.
"I think we need to make gas more competitive related to alternative fuels, not only for the power industry," said Mr. Asplin. "And we need to promote gas as a fuel, as difficult as it may be."
He observed that small businesses are beginning to embrace CNG/LNG for light and heavy trucks – something, for example, the industry can promote.
"We have a great product," remarked Edouard Sauvage Director of Strategy, Gdf Suez, noting that the outlook for gas was only hopeless in Europe. "All over the world, everyone's betting on gas – China, the US, Latin America..."
Gas consumption in France, he cited, is down 16% year-on-year, partly due to the weather, but last winter was a long one. Meanwhile, according to him, gas to power in France is down 60%.
He observed, "We have been pouring EUR 100 billion in subsidies into renewable power with the effect of the collapse of the carbon markets."
Mr. Sauvage said that to revive it, clear signals are needed. "The current environment of prices should be an opportunity for the industry to bounce back and explain that with the carbon markets gas should start again, replacing coal power," he said.
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