EUROPE'S CROSS-BORDER GAS TRADE ON THE RISE

Europe is poised for more growth in the gas industry that is certain to expand international gas trade into the next century.

In the affluent societies of western Europe, gas growth will be fueled by an increasing public perception that it is the least environmentally harmful of fossil fuels. That factor is helping boost natural gas and LNG trade in many parts of the world (OGJ, July 1, p. 21).

Gas will continue to penetrate the European residential market, but the biggest growth will occur in industrial use, particularly for electrical power generation.

The European Community has belatedly lifted restrictions on the use of gas as a fuel for power generation. That, combined with the greater efficiency of cogeneration systems, is likely to set off a 100% increase in Europe's gas fueled power generation capacity in the first 5 years of 1990s.

EASTERN EUROPE

The excellent environmental reputation of gas is behind a resurgence of interest in the fuel in eastern Europe. Successors to Communism are trying to increase use of gas to offset the environmental ravages caused by years of burning high sulfur coals and liquids.

Gas has a foothold in eastern European markets, mainly based on imports from the Soviet Union acquired as part of complex barter deals at prices well below international levels. The Soviets now want international prices and payment in hard currency, which is leading the former eastern bloc countries to consider other sources for increased gas supplies.

Soviet gas exports last year were one of the few bright spots in the U.S.S.R.'s generally dismal energy industry picture.

Gas sales to other countries by the world's No. 1 gas producer and consumer continued to grow when other Soviet energy exports-crude oil, refined products, coal, and electrical power-slumped badly. The U.S.S.R.'s 1990 gas exports reached a record high, and the nation further enhanced its long time world leadership in foreign sales of the fuel.

Eastern Germany is being integrated into the pipeline network of western Germany. Eastern Germany also will acquire gas from other European sources as the major names in the European gas industry buy into the former state owned gas transmission and distribution companies.

Poland, where pollution problems are particularly acute, has held tentative talks with Norway about supplies from the North Sea, which probably will be delivered through a pipeline link with the German network. A more grandiose scheme has been discussed that would require a large diameter pipeline through Sweden across the Baltic Sea into Poland and continuing into Czechoslovakia and Hungary.

DEMAND OUTLOOK

In 1990 total European demand for gas was about 32 bcfd.

The Royal Dutch/Shell Group recently suggested that by 2010 demand in western Europe could increase by 15% if gas maintains its traditional share of the energy market. But this could rise to 55% in a "green" world where energy demand flattens out and there is substantial substitution of gas for oil and particularly coal.

Ruhrgas AG of Germany, another major force in the European gas industry, said total demand by 2005 could rise to 42.85 bcfd.

Only two major European countries will be able to handle a surge in gas demand without resorting to imports. Netherlands, with its massive Groningen reserves, will not only be able to handle an increase in domestic demand but will be able to allocate more reserves for export. During the next 20 years it will increase export volumes by 7.06 tcf.

Britain could meet short term increases in demand for indigenous sources. However, the U.K.'s first new gas import contract with Norway has been signaled, and others are on the way.

Not all North Sea operators are happy with the idea of competing with Norwegian gas. They have warned the U.K. government that imports could disrupt development of gas/condensate prospects in the Central North Sea. The last time operators lobbled against Norwegian imports in the mid-1980s, the U.K. government vetoed imports of gas from Norway's Sleipner field.

The U.K. gas market has changed sharply during the last 5 years. British Gas plc has been privatized and lost its monopoly, the transmission network has been opened to third party business, and the first independent gas marketers are starting to launch into sales to the industrial sector.

Industry sources feel that in these circumstances, the government is unlikely to veto Norwegian imports and will encourage U.K. operators to break into the export business.

NORWAY A BENEFICIARY

One of the major beneficiaries of the European, boom will be Norway.

Two worldscale offshore gas developments, Troll and Sleipner fields, are in progress to meet sale contract requirements starting in 1993. In addition, offshore operators and the Norwegian government are considering small field projects in the North Sea to boost gas production even further.

Not all operators see the North Sea as the main short term source of gas.

Detailed negotiations are in progress to sell LNG to Italy's state electrical power company based on gas reserves in arctic waters off northern Norway.

And in the Haltenbanken area off mid-Norway the first major gas field development is being promoted. This would require the first pipeline link between mid-Norway and the growing infrastructure in the North Sea where work started this year on the Zeepipe project. Zeepipe eventually will link Troll and Sleipner to the European distribution system through a landfall in Belgium.

The Norwegian government also has approved a third pipeline link to Northwest Europe, which is to be operational by the middle of the decade.

Onshore in Europe, international gas trade was encouraged by the European Community's decision to prevent pipeline owners from denying access to their systems for gas moving from one country to another. The EC also is considering mandatory third party access to pipeline system to encourage competition in the gas industry.

U.S.S.R. SITUATION

Consumers of Soviet gas are watching political and economic developments in the U.S.S.R. and the progressive crumbling of the country's infrastructure, including pipeline systems, and telling themselves the Soviets have been extremely reliable suppliers in the past.

The Soviet Union currently supplies 18.9% of EC gas requirements. With the world's largest gas reserves, the U.S.S.R. will remain of interest to European gas companies as a long term source of supply. But whether any company will want to make a new commitment to Soviet gas supply until the problems of reserve ownership, financing, and transportation have been solved is open to debate.

In the longer term these companies could be attracted to supplies from joint ventures between Soviet and western companies.

A group lead by Norsk Hydro AS and Conoco Inc. is evaluating development of reserves in the Soviet share of the Barents Sea. Similar ventures could follow.

SOVIET EXPORTS RISE

Soviet gas export volumes rose from 101 billion cu m in 1989 to 109 billion cu m in 1990. Revenue from gas exports climbed from 6.13 billion rubles in 1989 to nearly 6.5 billion rubles last year.

Income from gas sales represented nearly 10.7% of total Soviet export revenue in 1990 vs. 8.9% in 1989 and 8.8% in 1988. Meanwhile, revenue from crude and products sales fell from 29.4% of the U.S.S.R.'s total export revenue in 1988 to 27.1% in 1989 and to less than 25.9% in 1990.

About 13.4% of the Soviet Union's gas production was exported last year. That compares with less than 12.7% in 1989. Destination of the U.S.S.R.'s 1990 gas exports was divided almost equally between eastern Europe, including Yugoslavia, and western Europe, including Turkey.

But the Soviet gas export picture is not as bright as it appears at first glance.

The U.S.S.R. earned considerably less revenue from foreign gas sales in 1990 than it did in 1984, 1985, and 1986, although the gas export volume was much higher last year.

Official data show that Moscow's income from foreign gas sales peaked at nearly 7.7 billion rubles in 1985 even though gas export volume that year was less than 69 billion cu m. Whereas the U.S.S.R. received about 11.6 million rubles/billion cu m from gas exports in 1985, that figure plummeted to less than 60.7 million rubles/billion cu m in 1989 and to 59.5 million rubles/billion cu m in 1990.

SOVIET GAS FLOW

The U.S.S.R.'s annual gas production gains have nose-dived at an accelerated pace since 1988. During the first quarter of 1991, the increase was only 0.3% over flow for the same 1990 period.

Some Soviet authorities have predicted that the U.S.S.R.'s gas production this year will fall for the first time since the end of World War 11. Reports of gas shortages in some Soviet areas appeared in the Moscow press last winter, and appeals were made to the population to use less of the fuel.

With Soviet gas flow likely to show a very small gain at best during 1991, prospects for hiking gas exports at the same pace as in 1989 and 1990 appear dim. Either domestic gas supplies will have to be squeezed further or the U.S.S.R. will be forced to cut deliveries to some foreign customers, most likely in eastern Europe.

The Soviet Union has agreed to increase gas exports to new markets such as Turkey and to deliver growing volumes to Greece.

EXPORTS OUTLOOK

Writing in the official monthly gas industry magazine Gazovaya Promyshlennost early this year, A.A. Chichkin, an economist with the U.S.S.R.'s State Planning Committee (Gosplan) predicted that Soviet gas exports to eastern Europe will fall quite sharply in 1991-95 from 1989-90 levels.

Chichkin presented tables showing that the only eastern European countries likely to receive increased Soviet gas deliveries in 1995 vs. the recent past are Czechoslovakia and Poland. He forecast sharp cuts in exports to Bulgaria and Romania and smaller declines in deliveries to the former East Germany and Hungary.

Overall, the Soviet economist believes the U.S.S.R.'s 1995 gas exports to these eastern European destinations could drop by as much as 9 billion cu m from recent annual levels. He made no prediction regarding Yugoslavia.

Surprisingly, Chichkin sees rather large hikes in gas produced in Bulgaria (where the current flow is insignificant), Hungary, Poland, and Romania. Only Czechoslovakia is unlikely to register a substantial change in current gas production by 1995, the Gosplan economist said.

Chichkin sees little prospect that higher Soviet natural gas exports to western Europe will offset smaller deliveries to eastern European countries.

He said, "A decrease in volume of purchases of Soviet natural gas by European Economic Community countries will be linked to economic, geographical and political factors: a gradual reorientation of gas imports by these western nations to LNG and LPG coming from 'nearby'regions (North Africa and the Near and Middle East)."

Few Soviet economists or western observers agree with Chichkin's highly pessimistic view of the U.S.S.R.'s gas export prospects through 1995. However, the Soviet Union will face increased gas sales competition in western and eastern Europe through the mid-1990s and beyond.

Eastern Europe in particular wants to shift emphasis in fuel use from oil and highly polluting coal to cleaner burning natural gas.

Writing in the magazine Vneshnyaya Torgovlya published by the U.S.S.R.'s Ministry of Foreign Economic Relations, Soviet Economist Yuri Yershov said his country plans to increase gas production to more than 1 trillion cu m/year by 1995. However, his article was prepared before the enormous drop in growth of Soviet gas flow in late 1990 and early 1991.

Commenting on the U.S.S.R.'s future energy sales to foreign customers, Yershov declared, "Given stabilized shipments of oil, its place in the structure of Soviet exports will be taken by gas, coal, and electricity.

"Common sense calls for an appreciable reduction in oil exports. It is impossible, however, to stop foreign oil sales immediately or to replace them by export of other products, including natural gas. Higher domestic natural gas flow should compensate for a decline or lack of increase in liquid fuel production. Under the U.S.S.R.'s 13th 5 year economic plan (1991-95), 70% of the entire increase in Soviet production of energy is expected to be obtained through use of gas fuel."

Yershov was optimistic there will be an appreciable increase in energy demand during the next few years as well as during the long term in developing nations and eastern Europe. He added it also is possible to expect a rise in world energy prices to accompany higher demand.

In an analysis of the Soviet petroleum industry, Salomon Bros. said, "In the long run, the U.S.S.R. could advance its substantial lead in the intra-European gas trade.

"For the time being, at least, eastern European countries will continue to buy their gas from the Soviets. At the moment, most of these nations have no supply alternative to Soviet gas."

Copyright 1991 Oil & Gas Journal. All Rights Reserved.