SHELL SEES RISING GAS DEMAND IN WESTERN EUROPE

Gas consumption in western Europe could grow by 50% from current levels to reach 16 tcf/year by 2010.

Meeting this increasing demand will inevitably impose upward pressure on prices, says Roland Williams, managing director of Shell International Gas Ltd.

Williams told a London conference of the Association of International Petroleum Negotiators there is growth potential in every sector of the European gas market.

Less than two thirds of the gas consumed in western Europe is produced there. Members of the C.I.S. provide 21% of western Europe's gas, while Algeria provides 11%.

To meet expected growth in demand, European countries could produce 7 tcf/year as a secure supply base. An investment of $60 billion will be needed to maintain this volume during the next 2 decades.

Major contributors will continue to be the Netherlands, U.K., and Norway, Williams said, which together account for three fourths of western Europe's production.

SUPPLY OPTIONS

To make up a supply shortfall, western Europe has a number of long term options, each with its problems.

Gas supplies from Russia and Turkmenistan move by pipeline across other countries, notably Ukraine. Disputes with Ukrainian authorities over payments and transit tariffs led to intermittent reductions in exports.

"With Germany and Italy reliant on C.I.S. gas for more than a third of their supplies, these disruptions clearly cause major concern in western Europe," Williams said.

"The potential for serious consequences from disruption would increase with greater volumetric reliance on C.I.S. sources. Only a sustained return to high performance reliability from the C.I.S. will change this thesis."

Development of new fields in Russia takes longer and costs more than was expected 2 or 3 years ago. Also, market reforms mean Russian producers and transporters are increasingly looking for improved returns on investments.

"However," Williams said, "if based on western style economics, the huge distances involved mean that the wholesale costs of a great deal of the gas piped to the West European border A,ill easily exceed current price levels. "

Algeria exported 1.13 tcf of gas to Europe last year-more than half as liquefied natural gas and the rest by pipeline.

Major refurbishment of Algeria's LNG plants is expected to raise capacity by as much as 50%, while pipeline capacity to southern Italy is being doubled and a new pipeline is expected to move Algerian gas to Spain by the mid-1990s.

"On top of this," Williams said, "Algeria has demonstrated its willingness to invite foreign companies to participate in upstream developments to find gas and enhance recovery from existing operations.

"Existing gas reserves, which are all onshore, have the potential to support a doubling of exports, but investment in the more remote, smaller accumulations in the southern Saharan regions will only be recovered through higher gas sales prices."

OTHER SOURCES

Other potential supply sources include West Africa and Latin America. Nigerian reserves are particularly plentiful, but both regions are likely to supply only a small part of European demand.

"This leaves one very substantial reserve base within striking distance of European markets: the Middle East," Williams said.

"This is increasingly, being recognized by buyers. But concerns are bound to remain over excessive reliance on the Middle East for energy supplies, given the effects of political instability on oil supplies over the past 2 decades."

With more than 30% of the world's gas reserves in the Middle East, it is not surprising, Williams said, that several countries plan to export gas as a means of supplementing the declining value of their oil reserves.

New export pipeline projects are proposed from Iran. Five LNG projects-four in Qatar and one in Oman-have been announced, while others have been discussed in Yemen and Iran.

"There is little doubt that much of the Middle East reserve base is low cost gas," Williams said, "often in large fields or as associated gas that is presently reinjected or flared.

"But in my view, volumes will penetrate the European market only when proceeds here make a better attempt at accommodating the costs of transporting this gas over the long distances involved."

Williams said Shell's analysis of known projects shows that relatively little additional gas could be viably supplied to the European market at current returns.

"With distance from market placing a serious cost penalty on prospective projects, gas from West Siberia or the Middle East will tend to be at the more expensive end of the range compared with incremental projects in the North Sea or onshore Europe."