The current LNG glut has seen regasification rates rising to record highs this year as Europe plays a key role in balancing the global market. Europe is able to benefit from such oversupplied global market conditions due to a healthy level of available LNG import capacity, deep market liquidity and the significant price elasticity of demand; gas generation loads can be increased through coal-to-gas switching when gas prices drop lower.
Over the medium term, it is likely that European demand for gas will rise. Due to environmental concerns, a significant volume of coal and lignite capacity will be phased out in the next decade. Recent measures to tighten the European Emissions Trading Scheme have helped create structural support for EUA prices and will accelerate the future switch towards cleaner-burning fuels. The market will need clear, ongoing economic incentives in the form of permanently higher carbon prices, to help guarantee sustained momentum in the transition away from coal and eventually from fossil fuels. We support government initiatives designed to accelerate the transition to cleaner energy.
Balancing European electricity markets
Sharply falling solar and wind installation costs are likely to ensure a bright future for renewables across Europe. However, the intermittency of renewable generation and the growing strain that these generation sources can place on parts of the existing high voltage power networks, are likely to ensure that increased gas-fired power generation will be required to balance European electricity markets over the next 5-10 years.
Growing momentum towards electrification in the transport sector in the years ahead could also provide a marginal boost to power demand, especially in overnight periods when overall renewable availability will naturally be lower. The closure of multiple ageing nuclear units will further increase the requirement for gas plants to fill the medium-term gap. Over the longer term, these effects might be cushioned by a growing use of batteries and other technologies alongside energy efficiency measures, enabling renewable output to expanded more quickly, though these developments will take a longer time to fully develop.
Regional gas supply outlook
In terms of gas supply, European domestic production is expected to move further lower in the coming years as the pace of North Sea output decline increases, whilst output from the Groningen gas field will ramp down sharply ahead of its eventual closure in 2030. Pipeline supplies from Norway are expected to have limited scope to increase, with production hovering at a plateau until the mid-2020s and entering a shallow decline thereafter. The outlook for Algerian pipeline flows remains uncertain, with domestic gas demand continuing to cut into overall export availability and legacy fields set to suffer from steep decline rates in the future.
Diversifying supply options
New pipeline capacities starting next year will enable gas imports from Azerbaijan (via the TANAP pipeline) and incremental supplies from Russia (via the Nordstream 2 and Turkstream pipelines). However, in to order to diversify its supply options and to guarantee its security of supply without too much dependence upon a single supplier, Europe will need to position itself to import more LNG volumes across the Continent. Adding regasification infrastructure in EU countries that currently have limited or zero access to global LNG markets will help to boost regional supply options and avoid emerging regional bottlenecks or constraints as gas grid flows change direction in response to the altered supply mix.
Ultimately, Europe is well-positioned geographically to benefit both from a surplus of low-cost shale gas in the US and from a growing low-cost supply base in the Russian Arctic region that can be exported in the form of LNG to the global market. Given the longer shipping times required for LNG supply sources to access markets in Asia, it is likely that Asian buyers will continue to pay a premium above European prices for LNG spot imports. Europe should be able to benefit from increased LNG import availability during periods when Asian demand is softer, but will also have spare capacity and storage availability to turn towards increased Russian and Caspian pipeline supplies at times when Asian markets tighten. These dynamics suggest that global LNG fundamentals will play an important and growing role in influencing European gas market pricing over the long term.
Image courtesy of Vitol
The Gastech 2019 Power and Energy programme is now in partnership with the EAGC taking place on Thursday 19th September alongside the main conference. Book your delegate pass for Gastech 2019 in Houston, 17-19 September now!
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