Around the world: where is gas supply coming from?

In a broad-ranging session on the future global gas supply at Flame 2016, panellists discussed the outlook for supply from Europe, the US, Middle East and Asia, creating a headline vision of global supply trends.

The European View

Europe has access to plentiful supplies of gas, said Tor Martin Anfinnsen, Senior Vice President Marketing & Trading, Statoil, to kick off the session, and this is likely to remain the case for some time to come. Anfinnsen’s view is that Europe’s supply is more diversified than it ever has been, and this diversification is only set to grow.

“I think that it’s demand rather than supply that will be our main concern – why? Because markets are shrinking as gas is being challenged by policy decisions and consumer perspectives – we as an industry urgently need to address this as it’s a serious issue,” he added.

Approximately 90% of Europe’s gas imports are piped from Norway, Russia and North Africa and this has provided Europe with reliable supplies for decades at prices significantly below global prices. Europe’s ability to access more sources is also growing as global LNG capacity ramps up.

Anfinnsen believes that the volume of LNG imports into Europe in the future will largely come down to price and how much gas demand can be stimulated further through activity such as small-scale LNG projects, automotive fuel etc. Volumes coming out of Norway will be sustained at current levels until at least 2035, but security of supply still remains a concern to many European countries.

Other issues challenging access and supply of LNG in Europe, according to Anfinnsen, are changes in industry structure with the demise of some traditional gas marketeers, a lack of sufficient gas energy research and a contradiction between European policy makers’ encouragement of more infrastructure in parallel with the introduction of European-wide policies to push gas alternatives. Today’s European consumers are tending to think that electricity is clean, whilst gas is not.

“A coal-powered Tesla is a pretty dirty car when you put it in simple terms”, said Anfinnsen. “We have a job to do – we as an industry must understand that our stakeholders are not buying our current story and it must be adapted.”

Changing world of Russian Gas

Vladimir Drebentsov, Head of Russia & CIS Economics at BP, painted a picture of a changing Russian gas market, in both supply and demand terms. Last year Gazprom production contracted by 6% whilst Russian independent producers saw their production increase by 9%. Now these independent suppliers contribute around one third of Russian gas, and they already account for more than half of the domestic Russian gas market.

“They keep squeezing Gazprom because they offer gas at cheaper prices; Gazprom must look at an export market in future if they want to arrest this decline,” Drebentsov told the audience.

Drebentsov brushed off concerns about the security of supplies from Russia. He pointed out that in recent decades, Russia, has, in fact, been the most consistent supplier of gas to Europe in volume terms, but that the European gas market is becoming more diversified.

“Looking forward, as the gas market becomes more integrated, even consumers in the Eastern part of Europe will become less concerned as they will be able to get access to alternative supplies. What will matter more in the future is Gazprom becoming more flexible on price.”

In the future for European LNG proposed by Drebentsov, by 2035 the mutual interdependence of Europe and Russia will remain. He predicted that Europe will remain the largest market for Russia’s exports, alongside increases in exports to the East, particularly China.

Increasing supply from the US

Proposing a future vision from the US was Octávio Simões, President of Sempra LNG; he outlined six major projects underway already on the East coast of the US that will deliver a total of 64mtpa in new capacity by the end of 2020; long-term financing is required to fund these types of project.

The key question is, where will this large volume of additional gas supplies go to?

Simões believes that US LNG can compete in Europe on price against future demand, and that it will deliver some key advantages for the market. The first of those advantages is price transparency based on a cost-plus model, as well as flexibility on volume and destination. “Most importantly,” he added, “the future buyers are utilities that require reliability of supply – they don’t want projects that sacrifice price for reliability and that will be a differentiator for the US projects.”

Where else will US gas find a market? Simões believes that will be determined by demand from both the economies that are making a decision between liquids and gas for new generation energy, and also those economies that have already decided they are not going to use oil and coal in the future.

The Middle East and Asian View

For John Feddersen, Director of Aurora Energy Research, the Middle Eastern picture is encapsulated in the projections for gas supplies from Iran – he believes that Iran will be the key driver of supply growth in the Middle East in the future. The country has enormous reserves and is strategically located, and from what we can tell, extraction costs are relatively low.

For Feddersen, however, Iran will never (in the short term) be the export powerhouse that it has the potential to be; there may well, however, be scope for it to be a competitor after 2025. There are several key reasons for this, he explained, including the likely massive growth in domestic demand as sanctions are lifted. This boost in domestic demand will come primarily from the oil production sector, as well as chemicals and industry.

There are also major issues around the pipeline economics in Europe, where there is over-capacity already from Russia and across the continent. It’s therefore going to be difficult for another commercial pipeline to be built in this over-supplied market. In addition, the investment needed for liquefaction of Iranian gas will mean prices are just too high for it to compete with existing suppliers. Iran, however, may well be competitive in the future Asian market against Australia and Qatar.

The major growth driver of regional supply in the coming years in Asia will be in China, with its booming domestic demand. The major uncertainty with China, however, will be the Chinese government’s approach to environmental issues and removing coal from its economy. In Feddersen’s view, if China aggressively reduces coal consumption then huge quantities of gas imports will be required.