Liquid gas market could soothe EU energy fears
ANDREW RETTMAN
23.06.2006 @ 17:20 CET
EUOBSERVER / BRUSSELS - A budding transformation in the way gas is traded worldwide could help soothe EU energy security tensions, with more ocean-going tankers of liquid natural gas (LNG) traded in future on oil-type spot markets, reducing EU dependency on pipeline politics.
Currently most EU gas - which supplies around 20 percent of electricity in member states such as the UK or Germany - is pumped via pipelines from Russia, Norway and Algeria. The price is fixed in one or five year contracts, with gas prices pegged to oil prices but fluctuating less violently.
Hammerfest: the future is taking concrete shape (Photo: EUobserver)
But robust growth in the LNG market will in the next two to three years see gas prices decoupled from oil prices, with LNG bought and sold on its own trading exchanges and with gas tankers chopping and changing their destinations to reach the highest bidder, experts predict.
"This will give us access to a global market like oil," European Commission energy spokesman Fernando Espuny said. "If somebody suddenly can't sell you gas, you just go somewhere else," he added, at a time when Ukraine-Russia wrangles threaten a rerun of the EU's January gas crisis.
"LNG opens the number of places where gas can come from. Suddenly, we are no longer dependent on Kazakhstan or Russia. You can bring in LNG from the Middle East, Venezuela, from anywhere," Ernst & Young global utilities director Ben van Gils told EUobserver.
"LNG will play a key role in the security of supply," Statoil spokesman Sverre Kojedal indicated. "Now you can sell gas to the US or anywhere. Oil and gas from the Arctic Circle will play a key part in the security of supply for the EU and US in the years to come."
Brussels is backing LNG by naming it as a key source of diversification in its March energy green paper and by allowing breaks from anti-state aid EU law for governments, such as the UK, who are already investing in regasification port terminals.
The 21 June EU-US summit conclusions promised to "facilitate development of LNG."
The future is here
In Statoil's new LNG cooling plant in Hammerfest in northern Norway, the future is already taking shape.
The plant, set to start work by the end of 2007, will suck gas through a 143 km-long, 28 inch-wide steel pipe from the Snow White gas field out in the Barents Sea, chill it to -163 degrees celsius and put it on a dedicated fleet of four tankers sailing 70 times a year to the US, France and Spain.
Each tanker on each trip will carry enough gas to power a city the size of Amsterdam for six months, with 4 billion cubic metres (bcm) a year of the plant's output tied up in long-term US and Spanish contracts, but the remaining 1.7 bcm traded freely as "equity gas" by two French firms.
Further north in the Barents Sea, Russia's Gazprom is preparing to start up the world's largest ever LNG project in the Stockman gas field - ten times the size of Snow White.
The firm is to name partners from a pool of five US, French and Norwegian firms at the upcoming G8 summit, in a deal brokered at senior government level.
If all goes well, Stockman will be up and running by 2015, with Gazprom subsidiary Mezhregiongaz, planning to start a pilot gas trading exchange in Russia in 2007 that will initially offer up to 10 bcm of gas on the spot market, the equivalent of 2 percent of annual EU consumption.
"LNG is booming, but it's still building up. The contracts are not very big but it is developing and developing," Ernst & Young's Mr van Gils said. "It's a very likely scenario that LNG will have established its own market in the next couple of years."
The LNG picture is not all rosy however. There is good money to be made - Statoil's Snow White pipe will bring in €2 billion a year - but investment costs are high. The Snow White project cost €7 billion to ship 6 bcm a year, while the German-Russian Baltic Sea pipe will cost €4 billion for 55 bcm.
Pipelines still attractive
"New gas pipelines, such as the Nabucco pipeline, will continue to remain attractive for now," Mr van Gils predicted. "There will still be more investment in new pipelines to try and solve the world's geopolitical problems in the years to come."
Despite the added diversity of LNG from Qatar, Venezuela or Nigeria, Russia is set to dominate the emerging LNG market due to the size of its reserves. Russia has 30 percent of the world's proven gas reserves and up to 25 percent of predicted undiscovered reserves, US geologists say.
And the emergence of a key new energy security resource could also bring its own, unpredictable consequences for relations among gas-hungry players such as the US, the EU, India and China.
In his prescient 2003 essay "The Next Prize" US energy guru Daniel Yergin wrote:
"One of the more haunting aspects of this new global gas business is its reminder of the transformational years of the late 1960s and early 1970s, when the US became integrated with the world oil market."
"The surge in demand from the world markets, pulled by the engine of the US economy, set the scene for the oil crises of the 1970s and created dependencies with which the world still wrestles."