Follow us on Twitter     and Facebook       Sign up for Email Updates:
 

European gas supplies threatened by misguided energy and climate policy

LONDON – Europe’s gas businesses and the future supply of natural gas to European markets are under threat from energy and climate policies that misguidedly favour low/zero-carbon energy technologies. The consequences could be: missed medium-term climate change mitigation targets, higher-than-necessary energy bills for countries that have granted massive subsidies to renewables, and a deterioration in relationships with external suppliers of natural gas that threatens the reliability of future gas supplies.

These are the main conclusions of the latest Viewpoint – “Europe’s natural gas industry – facing the challenge of survival?” – published this week by Gas Strategies, the energy consultants.
The report is based largely on an electronic opinion poll of 450 industry executives and policy-makers at the recent European Autumn Gas Conference (EAGC) in Berlin. It highlights three key issues that need to be addressed by European energy companies involved in the natural gas business:
* Natural gas is losing ground to other fuels in the hearts and minds of policy-makers, largely because of policies motivated by mitigating climate change.
* The welter of European energy policy and regulatory initiatives currently emerging from European Union administrators is making Europe look less and less attractive to gas exporters, just as indigenous gas production is in steep decline.
* The supply glut of 2009-10 has depressed the prices of gas in traded markets, creating a persistent divergence in the prices of traded gas and the oil-indexed gas of long-term contracts. This divergence has ratcheted up pressure for the re-negotiation of oil-indexed long-term contracts that form the basis of most European gas contracts. Billions of Euros are at stake for both sellers and buyers, and pricing disputes stand to become more hostile over the next year.
The report recommends that Europe’s gas businesses step up efforts to make their case to policy-makers in advance of the first European Union Energy Summit, due to take place in February.

“The evolution of future gas demand in Europe will depend to a great extent on policy decisions taken over the next two years,” says James Ball, President Director of Gas Strategies. “But, to date, the natural gas industry has done a poor job of convincing policy-makers of the crucial role that gas – as the least-polluting of the fossil fuels – needs to play in a carbon-constrained world.

“Although natural gas is the only carbon-reducing solution that pays its own way, it has become increasingly side-lined in favour of low/zero-carbon energy sources, such as renewables, nuclear power and clean coal. Renewables, in particular, have attracted hundreds of billions of Euros of subsidies to help them along. How long will consumers accept these subsidies unnecessarily bloating their energy bills?”

The report says: “In its quest to advocate a greater use of gas in Europe to help meet the 2020 climate targets, the industry can call on more than just the usual arguments about gas emitting much less carbon dioxide per unit of electricity generated than other fossil fuels, and the need to provide flexible back-up for intermittent renewables. The issues raised by massive subsidies for renewables threaten to cause a political storm in some EU countries because of the effects they are having on electricity bills – at a time when governments are insisting to their electorates that austerity measures are unavoidable.”
A further issue is that while gas-fired power is expected to provide flexible backup for intermittent renewable energy sources, such as wind and solar power, it remains unclear how the operators of gas-fired power stations will be recompensed for this flexibility. “In short,” concludes the report, “not only are policy-makers subsidising renewables, they seem to expect the gas industry to subsidise them too.”

These are issues that the gas industry should be exploiting to its advantage, says the report, “because of the role that natural gas should play in helping to meet climate mitigation targets on a basis that is also economic for consumers”.
Highlighting the effect that climate and energy policies are having on Europe’s attractiveness as a gas market, the report says: “The promotion of renewables, nuclear and clean coal at the expense of natural gas has not escaped the notice of Europe’s existing and potential gas suppliers. Not surprisingly, they are wondering how much of and how reliable a market for gas there will be in Europe in coming decades.

“Europe’s policy-makers need to consider carefully how their policies will affect supplier-buyer relationships over the long term. Just as suppliers have previously asserted concerns that they were not consulted in the drive for a competitive single market in their product, there is a danger that suppliers who now additionally feel that Europe does not offer sufficient security of demand will instead look to boost exports to markets in Asia Pacific, where demand for gas is expected to grow rapidly.”

Focusing on the dynamics of gas trading in Europe, the report notes the pressures on the industry’s traditional commercial structures that have been created by the strong divergence of oil and traded gas prices since early 2009:
“Pressures are growing for the re-negotiation of traditional long-term supply contracts that are mainly indexed to the prices of crude oil and oil products. For our part, we see the evidence that we are entering an unprecedented era of hostile contract disputes over the issue of indexation – a major issue for the gas industry. Billions of Euros are at stake, not just for the industry as a whole, but for each of the companies involved.”

Commenting on the report’s conclusions, Pat Breen, Chief Executive at Gas Strategies, says: “In Europe there are few, if any, significant pure gas companies remaining. Gas businesses now must earn their place, competing on risk and return for investment funds against other parts of wider energy portfolio plays. If such investment is to survive the industry must thrive; there is no middle ground in today’s capital markets. In doing so, Europe’s gas businesses must be able to formulate and implement strategies that address all the challenges raised by demand, supply and pricing issues – because they are so closely inter-related.”

To download a copy of the full report, go to : http://www.gasstrategies.com/files/files/EAGC_Viewpoint_2010.pdf

For further information and comment, please contact: James Ball, President Director, Gas Strategies, Email: j.ball@gasstrategies.com, Telephone: +44 (0)20 7332 9986.

NOTES FOR EDITORS
The annual European Autumn Gas Conference (EAGC) is Europe’s longest-running natural gas conference. It is organised by dmg :: events.

Given the attendance at the conference, with distinguished speakers (who also vote) and senior-level delegates, the results provide a valuable insight into the preoccupations of the people at the sharp end of European gas.
It is a rare opportunity to ask a significant cross-section of the industry’s key executives for their sentiment on how the industry is developing and what the future might hold. Each year, delegates are asked a series of carefully framed, multi-choice questions, the answers to which are given using an electronic voting system.
Rather than let the results of these polls fade with the memories of the conference, for the past six years Gas Strategies, which sponsors these voting sessions, has been involved in both the framing of the questions, and subsequently producing a concise view of what emerged.

The results from this year’s event – the 25th EAGC, held in Berlin, Germany’s capital city – build on those that emerged from Bilbao in 2009, Lake Como in 2008, Düsseldorf in 2007, Cannes in 2006 and London in 2005.
In framing our report we also canvass speakers, delegates and our own consultants about what the results mean and then analyse the replies and responses to see how they might be used to identify challenges and to feed into the formulation of strategy.

This entry was posted in News Room. Bookmark the permalink. Both comments and trackbacks are currently closed.