Where now for the EU’s gas markets?

Patrick Heather, senior research fellow at the Oxford Institute for Energy Studies (OIES), believes that the gas sector will have a key role to play in helping to secure Europe’s future energy needs.

Looking at the European gas market, Patrick Heather states that Dutch output is on the decline while also questioning the ability of the biomethane sector to produce the gas required to decarbonise that industry as a whole.

Having been involved in commodity trading since 1981 with most of his career spent in energy markets, Heather focuses his research on the gas markets of Britain, Continental Europe and Asia.

He says that Europe’s total gas supply in 2017 amounted to 473 billion cubic metres (bcm). Of this figure, indigenous production amounted to 242 bcm, imports from Russia 198 bcm and imports from Algeria 33 bcm. Imports of liquid natural gas (LNG) amounted to 60bcm during the same period.

“Total European gas output increased in 2016/17 by 1.7 per cent,” he says. “This included a 6 per cent increase in supply from Norway but a 13 per cent reduction in supplies from the Netherlands. The year in question was also marked by record levels of imports from Russia. LNG imports into Europe increased by 21 per cent.”

Looking ahead to the 10-year period between 2020 and 2030 Heather predicts that annual Norwegian output could decline from 123 bcm to between 70 and 95 bcm, UK output could fall from 38 bcm to possibly 18 bcm and Dutch output could decline from 20 bcm to a zero value.

“Biogas production is projected to increase from 5 bcm to 50 bcm in this 10-year period. However, some analysts believe this level of increased output will not be achieved,” he continues. “Total gas supply within Europe will fall from 446 bcm to 443 bcm between 2020 and 2030. LNG must also be factored in as a continuing feature of the market.”

The OIES analyst believes that Russia has the potential to supply increased volumes of gas to the European Union, potentially from 210 bcm up to 220 bcm: “Geopolitical factors will come into play here,” he adds. “These include the potential of Russia to export gas to China and the impact of the Nordstream 2 pipeline.”

Heather also points out that Algerian gas imports into Europe may well fall by a factor of one third over the next decade: “The supply of LNG is set to grow, but so is global demand for the product.”

Reflecting on the current strength of the EU gas market, he confirms that demand for gas has been decimated over the past decade, saying that it “can be traced back to the impact of the 2008/09 financial crisis”.

“This was followed by the Eurozone crisis and the availability of cheap coal. In more recent times, demand for gas has been hit by the availability of cheaper renewals,” he says.

EU gas demand in 2010 amounted to 570 bcm. For 2018, the figure was just 520 bcm. Heather continues: “We have seen a modest recovery in gas consumption levels in the past four years. But will demand reach 600bcm during this decade? Many analysts believe this to be very unlikely. Indeed, some believe that we will never see this level of consumption reached again.”

Heather remains cautiously optimistic where the outlook for gas is concerned. He attributes this degree of positivity to a number of factors. These include the continuing phase-out of nuclear power in countries like Germany and the accompanying economic nuclear shutdown in Sweden; the delay in the full commissioning of new nuclear power plants – such as Hinkley Point C in the UK – and the closure of up to 100 GW of coal fired generating capacity across Europe.

“Uncertainty abounds, particularly with regard to the ability of the gas sector to manage its high carbon status over the next decade,” he says, before reflecting on the role which gas can play as a potential renewable energy source in Europe, adding that no “one scenario fits all”.

Turning to the subject of Europe’s gas regions and markets, Heather says that only two mature gas trading hubs actually exist in Europe. These are the Title Transfer Facility (TTF) in the Netherlands and the National Balancing Point (NBP) in the UK. Currently the TTF acts as a benchmark. However, Heather poses the question: will this remain the case into the future?

“Groningen’s production is in fast decline. Production from small fields across Europe is also falling – from
27 bcm in 2013 to 24 bcm in 2017. Current predictions put this figure at just 10 bcm by 2030,” he says. “As indigenous production declines across Europe, the price of gas is likely to be more volatile and subject to global trends”.

“However, a fully transparent and highly liquid market, offering many diverse traded products, can help smooth any price movements and assist traders to manage their own risk. TTF should continue to provide that marketplace.”

Heather also points out that Nordstream and Nordsteam 2 gas pipelines are well located to replace Groningen supply in northern Europe, potentially supplying up to 110 bcm per annum. “A potential major risk would be if another March 2012 weather event occurred. However, the last few years have shown that we can cope. These alternative physical supplies will help alleviate the loss of flexibility from Groningen,” he predicts.

“TTF is now, by far, the largest traded hub in Europe. It has become the Euro benchmark for North West Europe gas supplies. Along with NBP, it is being widely used for hedging and risk management of gas portfolios. TTF is a leader hub in terms of pricing. There is also a strong political will in the Netherlands to keep TTF dominance and maybe more so now that physical gas volumes will decline.”

Turning to the prospects for the UK and Ireland, Heather says that future gas demand is difficult to predict because UK North Sea gas production is in terminal decline and the natural gas storage facility at Rough in the east of England has been decommissioned.

“Ireland’s Corrib field started production in December 2015. It will provide 40 per cent of Irish demand in 2018/19. However, it reached peak output in 2017 and is now in a state of slow decline. Corrib has an estimated 20-year life span,” he adds.

Ireland sourcing 57 per cent of its gas from the UK which, in turn, is connected to Norway means that “post Brexit, both the UK and Ireland will be more dependent on foreign gas than is currently the case”. 

“The UK has very little storage capacity. Ireland, which has an even lower storage capacity, will be cut off from the rest of Europe. All Irish foreign gas will have to be sourced from the UK or transited through that market,” he concludes.