Let's get serious (about gas)!

June 20, 2011 | 00:00

Message from the International Gas Union to European policymakers:

Let's get serious (about gas)!

The 'golden age' for gas that the International Energy Agency is predicting for the world, certainly looks to be coming true in Europe. Long-term demand looks set to rise as a result of various factors: the nuclear rethink in Germany and elsewhere, the need for companies and countries to substitute coal and oil for lower-carbon gas, and the fact that gas-fired power stations are flexible and do not present major public acceptance issues. At the same time, long-term supply looks more secure than it has in a long time. Norway is opening up new acreage for exploitation, Russia and the Caspian countries are eager to export their gas to Europe in newly to be built pipelines, more and more LNG is coming to Europe - and then of course there is the promise of a shale gas boom beyond 2020.

Plenty of reasons for happy faces at the 16th European Gas Conference that was held recently by the International Gas Union (IGU) in Oslo. There is just one thing that threatens to spoil the party. European governments are slow to get the good news about gas, Torstein Indrebø, Secretary General of the IGU, and Marcel Kramer, IGU Regional Coordinator as well as CEO of South Stream, tell our Northern European correspondent Reiner Gatermann. In an interview with Reiner, the two gas executives argue that a strong political commitment on the part of the EU and national governments is what is needed now to turn prospects into realities. ‘Governments need to address the political risks and issues of long-term demand security.’

When you heard the news that Germany plans the closure of all her nuclear power plants, did you open the champagne bottles?

Indrebø: I wouldn’t say that we opened the champagne bottles. But we can see positive impacts on the gas market. However, we have a lot of sympathy with the Japanese about this tragic accident. As we see it, the world will need energy from oil, nuclear, coal and gas for a very long time. If Germany goes ahead with her decision that will mean increased demand for gas. What our upstream partners need and are looking for is long term demand security. There are quite a few projects in the pipeline, like Shtokman, which depend on the European market and will not go ahead without long term agreements.

At this conference we heard that there is uncertainty both on the demand and on the supply side.

Kramer: Certainly there is a range to be discussed. We could face stronger economic development, which means more gas, or the economy could grow more gradually in Europe. That influences the range we are talking about. The actual implementation of Germany’s nuclear decision will take several governments. They may adjust the policy or its implementation. But at least we now have some answers to policy questions which indicate a larger role for gas.

What was your first spontaneous reaction when you got the news from Germany?

Indrebø: My reaction was this is a good illustration that the energy discussion is not only about CO2 emissions. The whole lifecycle of energy sources is important. There are certain concerns on the nuclear issue that were ignored by some people. The focus was only on nuclear as a CO2 emission free source of energy, but there are other risk factors. I hope we will get a more balanced debate about the pros and cons of nuclear and other energy sources after this.

Kramer: It also illustrates that a very big part of the population is really focused on safety and reliability. And these issues have been very much questioned in this tragic Japanese case. That does not mean that other fuels are problem free. They are not. But I think the public reaction, to which German politics reacted so strongly, was, regardless of what is the cheapest or easiest solution, above all we want safer energy, we want reliability.

So what about renewable energies. How economically viable are they in your view?

Indrebø: What we have seen so far is that cost aspects haven’t been addressed fully. We know that in the case of wind power generation capacity, only less than a third of this capacity will be utilized. This fact makes renewables more expensive. It is a very costly way to mitigate climate change compared to replacing coal fired power with gas fired power. However, we realize that renewables will take a bigger market share as they become more competitive over time.

Kramer: There is a tremendous amount of subsidizing going on. Subsidies are very large in different EU countries and at the EU level. That indicates that there is really no solid market base for renewables, at least at this moment.

Indrebø: Of course, we see renewable energy coming, but our message is that gas can be a partner to renewables as an enabler of wind and solar. They cannot work alone and need a flexible and reliable energy source as gas to guarantee power supply to society.

Is your message being picked up?

Indrebø: Until just a few years ago, there was no need for active lobbying and promotion of gas at the policy level. Gas was simply the preferred fuel in the market. We did not need subsidies like nuclear and coal and we still don’t. Demand was big and the industry worked hard to satisfy it. Then we were hit by the economic crisis. Also, the climate debate accelerated. And suddenly governments produced

Gas was simply the preferred fuel in the market. We did not need subsidies like nuclear and coal and we still don't
policy documents and we couldn’t find the word gas there, despite its important role in energy supply. That became for the industry a wake-up call. We had to become more active in the promotion of gas and to advocate our case. We had not been clever enough to point out that gas is a much cleaner energy carrier than oil and coal. Gas is a very cost-competitive energy carrier and as such important for millions of energy related jobs. It is also a positive contributor to governments enabling public funding and welfare for its citizens. In IGU we recognized two years ago that gas needs a much more active voice to argue its case.

Is there now enough political support in the EU and the national capitals for the gas sector? So that, for example, there will be sufficient investments in pipelines?

Indrebø: What is underestimated are the enormous investments that have already been made in the energy system – in pipelines, power plants, etcetera. You can’t change that overnight, to replace it with a renewable system. That would be extremely expensive and a waste of society’s investments. Those are energy realities that governments are now slowly coming to understand. When IGU last winter had a meeting with the German government, there was still not much consideration given to gas, but it is coming, and I am confident that gas will have a more prominent place in future policy papers. But governments still need to address the political risks and issues of long-term demand security. This is critical to ensure investments in pipelines as well as upstream and downstream gas infrastructure. One must remember the huge upfront investments that must be in place before any income is generated.

How do you view EU energy policy in this respect? The Third Package deals with ownership of the networks and pipelines, among other things. Is this issue now settled?

Kramer: Well, the dossier is hardly closed. Even the Second Package is far from closed. I was told that there are still 50 to 60 infringement procedures going on relating to the Second Package. On the other hand, countries are committed to implement the package and bring it into the national regulations. The key issue on the Third package is whether it indeed stimulates what it is supposed to stimulate, namely

What is underestimated are the enormous investments that have already been made in the energy system - in pipelines, power plants, etcetera. You can't change that overnight, to replace it with a renewable system
investment in infrastructure, liquidity in the market, more trading and more competition. We see signs of obstacles to investments, concerns about investments from energy companies, and they have the greatest interest and the means to make this work and to realize large new projects .Rates of return are sometimes too low, procedures are too long, etcetera. Those problems are recognized by the Commission and we hope they will be addressed.

Turning to the gas market, do you think the German nuclear decision will lead to a rise in gas prices?

Indrebø: That depends on several factors. In the short term it may have some impact, since people probably think that we will need more gas. If supply balances demand, and that will happen in the long term, one can argue this will not lead to a higher price. The fact that gas has the lowest level of greenhouse gases of the fossil fuels when used in power generation should be reflected in the gas price.

How would you characterize the European supply situation today?

Kramer: It is quite well balanced. We have Norway and Russia, and LNG is coming on very strongly. LNG is as big now as Norwegian supply. Compared to 10, 15 years ago, the market is now remarkably more balanced. There is much more diversified supply, there is more infrastructure and there is also more gas storage. That taken together makes concerns about so-called “overdependence” somewhat out of date , and hypothetical.

How do you look at the prospects for Norway?

Indrebø: Norway will be able to fulfill its long term agreements. That’s for sure. And I think Norway will develop new reserves. This ambition has just been confirmed by the Minister of Energy. He mentioned the opening of new acreage. And that is in Norway a big issue. I also heard a very strong commitment by the main Norwegian commercial companies at this conference.

But he did not mention Lofoten and Västerålen [areas in the Norwegian Sea whose exploitation is highly controversial in Norway, editor].

Indrebø: No, that would be very difficult for him. But his general statement was positive to the opening of new acreage in the North, maybe not Lofoten, but further north since we now have the borderline agreement with Russia in the Barents Sea.

But skeptics are arguing that Norway will face supply problems beyond the year 2020. Until recently Norway had not had a major new discovery since 1997, although they did make a major new discovery recently.

Gas plant at Kårstø, Norway (Photo Øyvind Hagen / Statoil)
Indrebø: I have heard the skeptics. But we are talking about the years 2020 and 2030 and beyond. With the existing infrastructure in place, it will not take so much time to connect new fields and bring new gas to the markets. There will be a decline after 2020 from existing fields, but the commitments are there to meet the contractual obligations, and there is exploration going on for new reserves as we speak.

How important is Nord Stream? In some countries this pipeline is welcomed, but in Sweden, Poland and the Baltic States it is regarded as an additional tool for Russia to extend her power over the European energy market.

Kramer: The growing European import requirement is not only something analysts are talking about. It is real. Nord Stream was built on contracts, demonstrating the need for additional imports. They form the commercial foundation for the pipeline investment. It is not the Russians who are simply pushing the gas to the market. Nord Stream is a commercial project which does not require subsidies. The EU recognizes it as a high priority project, and rightly so. That there are countries along the route which have different views on what is beneficial for them in their relationship with Russia is a fact of life. However, all permitting issues have been resolved in a transparent process. But we see in these countries also opportunities for new gas developments. Think of storage and other infrastructure. Polish businesses are arguing strongly in favor of Nord Stream gas to be fed in via the German route. At the end, after a long and difficult debate, everyone will recognize Nord Stream is not only a commercially viable but also a strategically useful project.

Mr Kramer, you are not only the Regional Coordinator of IGU, you are also the CEO of South Stream. Has the struggle around the southern corridor come closer to a solution?

Kramer: There is today a much better understanding first of all for the need of additional imports. See also the latest IEA gas market outlook. Secondly, there is a strong desire by countries in southeastern Europe to import more gas, also to help to meet environmental targets. And there are different companies that are willing to invest a lot of money to make this happen. The resources in the Caspian area are very large. And the countries there are working hard to get their gas to the European market. So there are many positive ingredients to work with. We in South Stream are focusing primarily on a new secure route even though we will bring some new gas to Europe.

But there are four pipelines – two major ones and two smaller ones – more or less competing with each other. Couldn’t they be combined?

Kramer: We thought about that. If you could find opportunities to optimize this would be to the benefit of everybody. The overriding issue is that the projects are on different timescales. You would need to have

You would need to have a United Nations conference on pipelines to come to an integrated system. Every project has its own challenges, routes and sponsors
a United Nations conference on pipelines to come to an integrated system. Every project has its own challenges, routes and sponsors. If we look at the latest development, the Nabucco shareholders have now founded a political committee. That is an illustration of the fact that they recognize that politics in their case plays a major role and that they have to solve it.

For South Stream, do you have a time perspective?

Kramer: Very much so. We will deliver the first gas before the end of 2015. This plan is still practical and feasible. But there is still a lot of work to do.

The New York Times carried a front-page article the other day that suggested that South Stream could turn out to be 'an elaborate bluff' on the part of Gazprom. The article underlined that South Stream is 'the world's most expensive natural gas pipeline'. Could you comment on this assertion?

Kramer: The project is obviously "real", we are working hard with a large group of stakeholders on specific preparations and are all investing time, money and reputation in that. Costs are not known yet, as we are still determining the final design and routing. We will see the actual costs later on , and will go for the optimal solutions and for a bankable commercial project.

Should the EU on behalf of her member states negotiate with Russia or Norway about Europe’s gas supply, as indicated in the plan for a Caspian Development Corporation?

Indrebø: Interesting question. The EU is not in the position to make long term commitments unless they have somebody, like companies, to back up these agreements. What we should have at the political level is a partnership outlining the long term vision for the downstream as well as the upstream sector, in which both exporters and importers are represented. With the political commitment in place at EU and national level, the commercial companies would be ready to make the necessary investment commitments. Nord Stream is a good example of how it can work with when political and commercial partnership work in parallel. Long term supplies from Russia and Norway can be secured under the existing model. In today’s Europe, the EU cannot take commercial positions in the gas market.

Should it do so in the future?

Indrebø: I can’t really see this happening. The EU will always need somebody who buys and sells the gas. The EU can work further for a political partnership, but I can’t see a commercial commitment taken by the Commission.

Kramer: That is an important distinction. We see the usefulness of a political partnership, providing the member states all agree. And that is a big if. What we however see in reality is that most of the member countries are not yet at a point where they are keen to give this essentially commercial but also strategic negotiating role to some sort of central body.

Mr Indrebø, has your industry changed its up to now rather cautious view on shale gas? Can shale gas become a fully integrated part of the gas industry?

Indrebø: The development in unconventional gas, and that comprises shale gas, coalbed methane and tight gas, has taken the industry by surprise. The industry is much exited about this development as it has made available huge amounts of additional reserves. IEA estimates that we now have more than 250 years of recoverable gas reserves based on current production.

We heard today that also shipping may become a huge new market for gas/LNG as a fuel rather than heavy fuel oil and diesel
It is true that we have seen a number of concerns and challenges in the US about water contamination, chemical content in the fracking liquids, etcetera. These issues are being addressed by the industry in cooperation with the authorities. The public concern must be taken seriously by the industry, and I am confident that the issues raised will be resolved.
In the US shale gas is already fully integrated and its share of the total production is increasing. For Europe, with significant potential for shale gas production, I can see shale gas as an opportunity to stop the decline of its domestic gas production, and a way to enhance its supply security. We will have to wait a few years to see the outcome.

In Europe there is quite a bit of opposition to shale gas development, for example in France. Are you doing anything to overcome this opposition? In general, is shale gas part of your gas advocacy efforts?

Indrebø: In general shale gas is part of the IGU advocacy efforts as we see shale gas to be a very positive development for the global energy supply. The world needs more clean energy, and we can now even stronger than before argue that gas should be part of the long term solution in a low-carbon society. Shale gas seems to be widely distributed around the world which is positive.
When it comes to public opposition, we provide members and the public with facts and figures to encourage a more fact-based discussion. Our members in the US are taking the opposition extremely serious, and Europe will learn from this. IGU organises and supports shale gas events and conferences to enhance the dialogue between industry and authorities on shale gas issues. We work very hard now as an industry to improve our communication toward the stakeholders outside the industry.

Is natural gas a realistic option in the transport sector? Should actions be taken to promote natural gas use in cars?

Kramer: This is another sector which has a big potential in Europe as well as in the US and all over the world. Gas is much cheaper than oil, provided taxes and duties do not remove the price advantage for the consumer. For the importers it makes sense to replace oil with gas and LNG in the transport sector, as there are also environmental benefits. It might make sense for the gas exporting countries too, as their market will become larger.

Most people would prefer to see electric cars break through, with the electricity produced by windmills.

Indrebø: It is clear that gas can be effectively used directly in the vehicles. It will reduce greenhouse gases and emissions of particles which have become a major source of air pollution in cities all over the world. The truck and bus fleets are obvious target markets. We heard today that also shipping may become a huge new market for gas/LNG as a fuel rather than heavy fuel oil and diesel. Electric cars will come, too, in large numbers. Wind power alone cannot not cover the demand, so there too gas power can play a role. There are new initiatives in Germany, the US and other countries to promote gas in the transportation sector with investments in filling stations.

Could biomethane help to decarbonise the gas sector?

Indrebø: Biomethane or biogas could be supplementary in the long term, but again, it will take time to develop the technology and make it commercial. If that happens, it can have a big impact. IGU is working on a study on this, to be presented at the World Gas Conference in Malaysia next year. A positive aspect of biomethane is that it can be used in the existing gas infrastructure.


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