WoodMac: European gas import dependency to rise to 60% by 2015

Feb. 20, 2003
Europe's dependency on natural gas imports spotlights a current need to arrange for more-remote gas sources such as Russian reserves, said Wood Mackenzie Consultants Ltd. in a recent report.

By OGJ editors

HOUSTON, Feb. 20 -- Europe's dependency on natural gas imports—projected to rise to more than 60% by 2015 from 40% today—spotlights a current need to arrange for more-remote gas sources such as Russian reserves, said Wood Mackenzie Consultants Ltd. in a recent report.

The Edinburgh-based analyst evaluated future gas supply fundamentals and the likely impact of liberalization in the European gas markets to determine the outlook for wholesale gas prices across that market. The resulting report, based on a detailed modeling of future gas trade flows across that market, uncovered a potential contractual supply deficit of some 300 billion cu m/year (bcm/y) by 2015.

The biggest projected shortfall, 95 bcm/y, will be in the UK, where indigenous production is forecast to decline significantly from 2004 onward, WoodMac said. Norway and Algeria, on the other hand, will continue to enjoy strong export growth into their core northern and southern European markets respectively until 2010. In this same timeframe, LNG will become increasingly more important, with market share rising to 12% (80 bcm/y), compared with 7% in 2000.

"However, beyond 2015 the potential call on more-remote sources such as Russian or even Middle Eastern volumes is considerable; Russian volumes in 2015 could amount to as much as 300 bcm/y, equivalent to 40% of European demand, compared with 160 bcm at present," commented Neil Thomas, WoodMac's head of European energy research. "The challenge for all stakeholders is to ensure that the necessary environment, both within and outside Russia, is created to develop Russia's world-class reserve potential for the European market. In this timeframe, there may also be a requirement to develop new sources of supply, such as Iranian gas, for delivery into Europe," he said. Even so, the European gas market is characterized by high levels of supply concentration, a situation unlikely to change and one upon which European regulatory authorities have limited influence, WoodMac said.

While the analysis of the physical fundamentals indicates an increasing import dependency, EU policymakers are attempting to liberalize gas markets and introduce competition in gas supply to consumers. However, the study indicates that the outlook for competition remains limited, and therefore gas consumers are not likely to have the benefits of lower gas prices, WoodMac said. Deregulation in France has illustrated this (OGJ Online, Feb. 7, 2003). Although the EU has introduced liberalization measures, which in some cases have improved competitive pressures—the UK has been highly competitive in Spain and the Netherlands for more than 10 years, for example—the proposed second Gas Directive may nonetheless be insufficient to open all markets effectively to sustainable competition, WoodMac contends. "The signals in the market reflect this with low levels of liquidity in continental European short-term trading and more-limited new entry," as many US utilities have withdrawn.

"However, the process of unbundling, beyond that called for by the second EU Gas Directive, is being pursued by some (corporations), or their shareholders, as they reassess the merits of bundled transport and supply companies," Thomas added. "But the combination of regional consolidation with the lack of new entry (either due to limited appetite or barriers to entry) continues to restricts competitive forces," he said. Consequently, WoodMac concluded that wholesale gas prices would remain linked to the oil price in the short to medium term. At current oil price levels, this implies annual average wholesale gas prices of $3.50-$4.00/MMbtu.

"Instead of introducing competition in all aspects of the chain with the consequent pressure on margins, we are, in fact, witnessing an advanced stage of consolidation and refocus," Thomas said. "The challenge for policymakers is whether customers will see any benefit from liberalization in the form of lower prices."