EUROPE'S NEED FOR GAS IMPORTS DESTINED TO GROW

March 13, 1995
International trade in natural gas is increasing for the same reasons that it did much earlier in oil: demand growth in traditional consuming areas and new demand in emergent markets, both increasingly separated geographically from the main sources of supply.
Domenico Dispenza
Snam SpA
Milan

International trade in natural gas is increasing for the same reasons that it did much earlier in oil: demand growth in traditional consuming areas and new demand in emergent markets, both increasingly separated geographically from the main sources of supply.

Beyond those reasons for trade development, however, the international commercialization of natural gas differs from that of other energy sources. More than is the case for any other fuel, trade in natural gas requires continuous, long-term relationships between partners who must make very large investments in the underlying production and transportation projects.

Recognition of these principles will be crucial to fulfillment of the great potential that exists for trade between the high-resource countries of the Middle East and the high-consumption nations of Europe. If governments and countries in these regions can establish the necessary long-term relationships, trade between the Middle East and Western and Central Europe can represent a major area of growth for the natural gas industry well into the next century.

MARKET BACKGROUND

Growth in European demand for energy and, especially, natural gas is part of an already strong, worldwide trend.

World energy consumption in the last 20 years-from the first energy crisis through various other crises until today-has increased by 38%.

Among fossil fuels in this period, natural gas has been the most dynamic energy source, with a growth of 65% vs. 12% for oil and 28% for coal (Fig. 1). (26827 bytes)

In terms of market share, natural gas has grown from 19% to 23%) in the past 20 years, while oil has declined from 49% to 40%, and coal from 30% to 27% (Fig. 2). (24329 bytes)

The diverse use patterns of the three energy sources on the final consumer markets cannot be related to reserves. In fact, world coal reserves are equal to 67% of total fossil fuels, while oil reserves amount to 17% and gas reserves 16% (Fig. 3). (23537 bytes)

MAJOR CONSUMPTION AREAS

The world natural gas market today has three major consumption areas: North America, Europe, and the Far East. Industries and households in these regions use 88% of the world's production of natural gas.

North America, which started the use of natural gas on an industrial scale, is self-sufficient in gas and has good prospects for remaining so. It is a mature market with unique characteristics. One of these characteristics is considerable fragmentation of operators, from production through distribution. Another is deregulated prices and laws framed to favor wider competition, not only horizontally between operators in the same sector but also vertically between different businesses in the gas chain.

All this has led to the formation of a vast, consolidated gas market, which is unified on a legal basis but fragmented due to the presence of the large number of operators who work mainly through spot transactions and therefore plan on a day-bv-day basis.

The North American situation thus is different from those of the younger markets in Europe and Asia, where the gas industry's major development phase was based chiefly on international supplies moving under long-term contracts.

The enormous resources of Canada and Mexico will help keep North America self-sufficient. The region's limited imports, from suppliers such as Algeria, the Caribbean region, and the Gulf of Guinea, have little influence on domestic supply policies.

EUROPEAN GROWTH

By comparison with North America, future sources of supply for the growing markets of Western and Central Europe are less certain.

Whether supply sources develop mainly inside or outside of these areas will depend not on availability of gas but rather on considerations of geographic diversity, distance of travel, and, of course, costs and investments.

In 1993, 52% of Western Europe's gas requirements were met by internationally traded gas, including supplies from European exporters such as the Netherlands, Norway, and Denmark as well volumes outside the region such as Algeria, Libya, and the former Soviet Union (FSU; Fig. 4) (30269 bytes)(FSU; Fig. 5). (39556 bytes)

According to recent analyses, West European demand for natural gas could total 400-460 billion cu m in 2010, compared with 325 billion cu m in 1993. An important variable, and a reason for the wide gap in projected demand levels for 2010, is demand for electric power generation, which is difficult to predict.

The West European electricity generation industry is undergoing far-reaching changes. On the institutional level, there is a policy of privatization of the major public power generating enterprises in response to a clear European Union directive. On the level of energy resource management, operators in the sector are oriented toward much greater use of natural gas, both because of its technological suitability for use in power stations and because of its environmental advantages.

Further gains in gas use for power generation are possible as private industries adopt combined cycle gas turbines and cogeneration systems to fill their power needs.

Future choices in the power generation sector thus will have a great effect on natural gas consumption in Europe and, therefore, on the need for new supplies.

Production of natural gas in Western Europe is expected to decline after 2000, while imports from outside the region will increase considerably. Supplies covered by contracts under negotiation now and by current contracts likely to be prolonged will total an estimated 330 billion cu m by 2010.

To fill demand at projected levels, therefore, new sources of gas imports totaling 70-130 billion cu m/year must be identified, negotiated, and brought on line (Fig. 6). (93114801 bytes)

CENTRAL EUROPE'S SUPPLY

Central Europe's gas supply structure will have to change, too, both to meet expected demand growth and to geographically diversify sources. At present the region's gas comes half from domestic production and half from Russia.

Following sweeping political changes, the countries of Central Europe are rationalizing their energy sectors and reorganizing industry. The old policy of support for heavy industry, a major consumer of energy, and access to cheap fossil fuel supplies from Russia inflated demand for energy and led to very high levels of consumption per product unit and in general terms.

Changes to the old scheme created opportunities for natural gas, demand for which has grown so that today the fuel meets around 20% of the area's total energy requirements. Natural gas will rebalance an energy system still too dependent on coal, which accounted for 55% of Central European energy consumption in IS)93.

From a total of 65 billion cu m in 1993, Central European demand for natural gas is expected to rise to 100120 billion cu m by 2010 (Fig. 7). (30035 bytes) If internal production and imports from Russia do not change drastically - even though the will and need are in place to diversify and balance sources of supply - 35-55 billion cu m/year must be negotiated and supplied from other areas of production.

In all of Europe outside the FSU, then, new gas supplies required from other areas in 2010 will total 105-185 billion cu m/year (Fig. 8). (28025 bytes)

Even the lower figure would mean that in 15 years the countries of Western and Central Europe would need to increase supplies from outside the area by 80%. In 1993 these supplies amounted to 130 billion cu m: 96 billion cu m from Russia, 32 billion cu m from Algeria, and around 2 billion cu m from Libya.

MIDDLE EAST ROLE

From the point of view of gas resources available in the entire planet, there are no particular problems involved in sustaining demand for gas to the year 2010 and beyond.

The life of worldwide gas reserves today exceeds 60 years, and new resources are continually being discovered. The problem lies in the geographical distribution of those resources relative to markets.

It is likely that around 2010 North Africa and the FSU will have exhausted the expansion phases of' their exports, not because of a shortage of gas but rather because they will have reached the maximum level of production and export from a structural point of view.

Western and Central Europe, now very dependent on these regions, will increasingly look toward new and increasingly distant sources of gas supply. This new search will inevitably focus on the Middle Eastern producing countries.

This region, with its 44.3 trillion cu m of natural gas reserves-a third of the world's total-will be called on to play a growing role in international natural gas supply (Fig. 9). (40958 bytes)

The fall of certain ideological barriers and the slow dissolution of other political ones could open new international relationships and create the basis for new economic and energy initiatives.

Some major gas export projects from the Middle East, both by land and by sea, are already being studied. They are encountering difficulties from, on the one hand, a world economic recession that is not yet over, and, on the other hand, the scale of financing necessary to deal with the long and complex natural gas chain.

The resulting reestimates of natural gas supply costs will create the need to find new types of contracts and involve a larger number of operators - on a joint venture basis, of course. This will be the case above all for countries crossed by pipelines, for whom a new gas project must be seen as an opportunity for diversification of energy supplies and industrial development in general.

The involvement of more operators will make it possible to develop very large gas projects and thus limit the impact of the enormous investments required. It will also be necessary to develop demand for natural gas in the producing countries to take advantage of economies of scale in the upstream phase.

PROBLEMS OF SUPPLY

Along with the international commercialization of natural gas, there are various problems for which, with the growth of future commitments, better and increasingly appropriate solutions must be found.

From the political point of view, there is one fundamental requisite for the institutional framework for large gas projects: It must be peaceful and stable, both in the producing country and in the surrounding area, as well as in the countries crossed by transportation systems.

For Europeans, as major consumers of gas, it has always been fundamental that in each project gas reserves were guaranteed to be sufficient to maintain the export flow for all of the contract period. This guarantee may not apply to Middle Eastern countries because of the great size of their resources. It nonetheless remains essential for the producing-exporting country to guarantee total technical and economic reliability for reserves development in order to maintain a normal and constant supply of gas.

Importers must also be guaranteed contracted annual volumes over time. They base economic viability of entire projects on these volumes, in terms of both incidence of transport costs and amortization, over many years, of the enormous amounts of capital invested.

The guarantee of supply continuity is an indispensable condition if the importer is to manage and develop markets for its gas.

Given the size and international value of gas projects, it is important that governments of exporting countries and of countries crossed by pipelines be involved in any aspects that may concern them. This cooperation may go beyond a merely political endorsement and take the form of direct and indirect participation.

From the legal and regulatory point of view, the contributions of local governmental authorities may take the form of providing a stable institutional framework and an adequate fiscal and royalties policy, so as to favor projects economically. Project participants must be guaranteed a return on their investments.

International projects, whether they involve pipelines or liquefied natural gas, require increasingly complex and sophisticated technology. The exporting country thus favors the development of technically advanced local industry, with the help of international know-how and experience, by leaving its own markets open to foreign companies and technical staff.

COSTS, COOPERATION

The increased use of natural gas will necessarily raise the cost of supply. This makes it even more important to find new ways of developing projects and above all new ways of cooperating.

Cooperation enhances trust among project participants and increases the security of international trade in natural gas. It serves the interests of all parties affected by the growing role of natural gas in worldwide energy and economic affairs. The interests are not only economic but social and political as well.

THE AUTHOR

Domenico Dispenza is director of gas supply at Snam SpA, Milan, and head of relations with the European Union. In addition, he is managing director of Promgas, a joint venture between Snam and Gazprom of Russia. He joined Snam in 1974.

Dispenza holds an MA in aeronautical sciences from Politecnico, Milan, and master's in advanced technologies.

Copyright 1995 Oil & Gas Journal. All Rights Reserved.