Europe's gas outlook: strong demand and fierce competition

All European gas markets have significant growth potential, especially power generation, while the ability to deliver gas from the U.K. to the continent will drive down prices to industrial customers. Those are key findings of selected presentations from the Offshore Northern Seas conference in Stavanger late last month. Olivier Appert, president of France's Cedigaz SA, said that the share of gas in Europe's primary energy demand has grown at more than 3%/year for the past 10 years and

Sept. 7, 1998

5 min read

Those are key findings of selected presentations from the Offshore Northern Seas conference in Stavanger late last month.

Cedigaz view

Olivier Appert, president of France's Cedigaz SA, said that the share of gas in Europe's primary energy demand has grown at more than 3%/year for the past 10 years and that this trend is likely to continue.

Appert said European energy demand is expected to reach 1.77 billion metric tons equivalent (toe)/year in 2010, an increase of 240 million toe/year from current needs. Natural gas is expected to provide more than 40% of the increased demand.

"Accordingly," said Appert, "consumption in the region, including Turkey, is expected to increase by 110 million toe, reaching 420 million toe in 2010, boosting its market share to 24% by then."

European suppliers are expected to cover the bulk of demand growth in the medium to long term. While the North Sea is mature as a gas province, there is still potential for major additions to reserves off Northwest Europe.

Appert estimated Northwest Europe's gas reserves at 5.25 trillion cu m (tcm), with a potential 2.8 tcm of gas still to be found. North Sea gas output could peak at 320 billion cu m (bcm) for 2005, up from 272 bcm in 1997.

After 2005, Appert expects European gas production to stabilize at 300-310 bcm/year, including an increase of 100 bcm/year coming from offshore fields, particularly Norway.

Import supplies

"In addition," said Appert, "gas is abundant within reach of the European market, making it possible for the region to have access to large supply sources.

"Algeria, Libya, and Russia currently supplement the European gas balance, although, to a lesser degree, spot LNG transactions from Abu Dhabi and Qatar also contribute.

"From 1999, Trinidad and Tobago, as well as Nigeria, will join the list of LNG suppliers to the European market. In the long term, the gap between European supply and demand for gas will increase, and larger volumes will have to be importedellipseto meet requirements."

Appert said Russia is in a good position to expand gas production owing to its huge resource base. Russian gas giant Gazprom plans to expand its export capacity to Europe to 180 bcm/year by 2000 from 130 bcm/year now.

"Also," said Appert, "Turkmenistan and the Middle East, particularly Iran, are located withinellipse5,000 km from the biggest markets in Europe and might also contribute to the European gas supply in the long term."

U.K. gas exports

Michel Romieu, chairman and CEO of Elf Aquitaine Gaz, told delegates the start-up in October of the 20 bcm/year Interconnector gas trunk line from the U.K. to Belgium is likely to have a major effect on Europe's gas market.

"First of all," said Romieu, "there will be a flow of gas to the continent under contracts already signed-10 bcm/year is already committed to the Netherlands, Germany, and France.

"Not all of these deals are straightforward medium to long-term contracts; some of them are interruptible, to take advantage of price differentials between the U.K. and the continent.

"This will take place, as there will always be seasonal and daily differentials due to the very different structures of the gas markets in the U.K. and on the continent, even if the average price of gas in the U.K. and in the continent will tend to level off."

There will be contractual flows of gas both ways through the pipeline, he said, although the physical gas flow will be from the U.K. to Belgium for the first few years.

"The consequences of this will be a leveling of gas prices between the U.K. and northern Europe, at least for the industry. A strong factor will be the implementation of the euro (the new European Union currency due to be introduced over 3 years beginning in January 1999)."

Romieu said the euro will make gas prices to industrial customers directly comparable in different countries, driving down prices to the level of the lowest-cost suppliers.

"This will mean reduced margins for all actors along the gas chain," said Romieu. "With swaps between Bacton (U.K.) and Zeebrugge (Belgium), a form of spot marketing will develop in Zeebrugge.

"The continental markets will change gradually, and the gas directive (EU's new gas industry legislation, approved last year) and the Interconnector will help the move towards a more competitive gas industry.

"But the fundamentals will not change: low gas prices for the next few years, competition between the big three exporters to continental Europe, and long-term contracts that will extend beyond 2005.

"This means that there will be fierce competition for industrial customers, for power generation, and in a few niches, but domestic customers will mainly be supplied by traditional gas companies with long-term contracts.

"Unsurprisingly, the winners will be global companies with access to reserves and transportation combined with skills in trading to make the best of different markets, in the U.K. and on the continent."