Nordic natural gas grid viability affirmed

Proposed Nordic Gas Grid [37,189 bytes]

Targeted natural gas markets in Scandinavia can support the construction and operation of a gas pipeline network connecting these countries with Norwegian and Russian supplies.

That can be seen in details that were released from a study that analyzed the economic and environmental feasibility of a gas grid connecting gas fields in Norway and Russia to Finland, Sweden, and Denmark in the next 10 years (OGJ, Nov. 2, 1998, Newsletter).

The study, commissioned by seven Nordic energy companies led by Neste Oy, finds the Nordic gas grid project a viable one.

This conclusion comes after considering the Nordic region's long-term natural gas supply and demand, the grid's investment cost, the environmental impact of the project, and the competitiveness of alternative configurations of the grid itself.

The study's sponsors include Finland's Neste Group and Gasum Oy; Sweden's GÖteborg Energi AB, Mellansvenska Naturgaskonsortiet AB, Sydgas AB, and Vattenfall Naturgas AB; and Denmark's Dansk Naturgas AS. These Nordic companies bore 50% of the study's cost, while the European Commission funded the other 50% (OGJ, Aug. 4, 1997, p. 29).

Essentially, the study unveils a healthy gas market in the target countries of Sweden, Finland, and Denmark, thus validating the grid's construction. It concluded that, in the long term, the pipeline grid would have a prosperous life, serving the target countries as well as other rapidly developing Western European markets, notably the U.K, France, Belgium, Germany, and the Netherlands.

Also, Baltic countries Estonia, Latvia, and Lithuania are pegged as potential users of an expanded Nordic grid.

Supply/demand scenarios

Three supply/demand scenarios are outlined in the Nordic grid study.

Of these three, the first, or base-case, demand scenario, has a probability of 60%, the study found. The other two-high and low-case demand scenarios-have respective probabilities of 10% and 30%.

Russia and Norway, each with their own vast reserves, are expected to be the primary suppliers to the proposed grid (see map).

Norwegian gas supplies currently reach Germany, France, U.K., Belgium, the Netherlands, Spain, Austria, and the Czech Republic and are established through the GFU (Gas Negotiating Committee), represented in part by the Norwegian companies Statoil AS, Norsk Hydro AS, and Saga Petroleum AS. Many European countries are currently negotiating long-term contracts for Norwegian gas, most notably Denmark and Poland, which are close to reaching individual deals with the GFU for long-term contracts.

Russian gas supply contracts are handled primarily through Gazprom unit Gazexport. In addition to the Nordic gas grid, Gazprom and Neste, through their joint venture Transgas Oy, plan to explore the possibility of exporting Russian gas to central Europe through Finland (OGJ, July 14, 1997, p. 33).

Projected demand

Denmark, a net exporter of natural gas, consumed 3.6 billion cu m of gas in 1997.

In the base-case scenario, Denmark's gas consumption is projected to reach 5.5 billion cu m of gas in 2000, with the Danish power generation sector expected to account for 1.5 billion cu m of this total.

However, natural gas reserves in Denmark are declining, according to the study. This decline in reserves is likely to spur growth in Denmark's gas imports. A T-connection from the new Europipe II pipeline is offered as a possible supply source for Denmark. With the Nordic grid in place, however, imports of Russian gas become an alternative source.

Denmark is Sweden's sole supplier of natural gas. Sweden's gas demand in 1997 was 0.9 billion cu m. The study finds, in Sweden's base-case, demand increasing to 4.9 billion cu m/year through the addition of pipelines laid beyond the now-concentrated southwestern portion of the country.

The Nordic grid will provide Sweden with further supply sources, such as Russia and Norway, to fuel its ever-expanding electricity demand. The study notes that, although Sweden's present supply contracts are scheduled to expire after 2005, Denmark may still provide Sweden in the future with occasional, seasonal gas supplies.

Finland, in the meantime, currently imports all of its gas from Russia. Finland's natural gas demand in 1997 was nearly that of Denmark-consuming about 3.4 billion cu m.

Combined heat and power, for Finnish heating and industrial uses, remains the largest natural gas market. The base-case scenario for Finland's demand plateaus at 6.7 billion cu m in 2010. The country's high-case demand peaks at 9.5 billion cu m by 2020, due largely to power generation's increasing demand for gas.

Russia also supplies the Baltic countries with all of their gas. Only moderate demand growth is expected from Estonia, Latvia, and Lithuania. This is due to the fact that abundant supplies of high-sulfur fuel oil are expected to continue dominating these markets. In addition, Estonia's market is heavily penetrated by inexpensive oil shale. In 1997, gas demand in these countries was 5 billion cu m combined.

The Nordic grid will enable the Baltic countries, and others, to negotiate gas supply contracts with Norway and other Western European countries. It is believed, however, that Russian supplies will continue to dominate Baltic gas imports through 2020.

Gas demand in most of Europe, notably the U.K, France, Belgium, Germany, and the Netherlands, will grow steadily, mainly as a result of rising demand from increased power generation for industrial and residential use.

Demand in these countries in 1997 was 251 billion cu m. Both the U.K. and the Netherlands maintain consistent export contracts. Through the Nordic gas grid, the potential exists for incremental supplies for these markets from Russia, although it is not expected that such a need will arise until at least 2005.

Environmental benefits

According to the study, continuing electricity deregulation within the target countries is creating a more market-driven gas sector.

These evolving markets require less and less government intervention, thus shifting government's focus to environmental issues, especially increased air emissions resulting from higher energy consumption.

The study suggests that the development of a Nordic gas grid will result in the overall reduction of greenhouse gas emissions and acid rain levels, when compared with reference-case projections of emissions without a Nordic gas grid.

In the base case, the most notable reduction in emissions was found through the conversion to natural gas from oil and coal to generate electricity, especially in target countries Denmark and Finland.

The Kyoto protocol suggests a European Union member state commitment of 8% reduction in greenhouse gas emissions in 2010 compared with 1990 numbers.

Development options

Nordic grid study participants have yet to decide on a development strategy for the 2,400 km of pipeline that the grid would entail.

The study outlines two options, each with three phases and each developing from opposite directions, east and west.

The total budget for this first study was 1.2 million ecu. Beginning in 1999, grid organizers plan to hold a number of meetings and conduct further, more detailed feasibility studies regarding the project. Topics of these studies include capital costs, operational issues, and IT needs and systems.

To date, four banks have been consulted for the Nordic grid project: ABN Amro, Credit Suisse-First Boston, European Investment Bank, and Nordic Investment Bank.

The first phase of the grid is slated for 2005, with construction scheduled to begin in 2002.