In the past decade we have seen a significant decrease in gas demand. Part of it can be due to energy efficiency improvements, but Nick Butler writes in the Financial Times that the absence of a carbon price that keeps coal cheap, together with other factors, are also important. What do you think?
Has gas demand in Europe peaked?
Can anything reverse the decline of natural gas as a source of primary energy in Europe? Gas demand in 2015, despite a fractional uptick on the 2014 figure, was 20 per cent below the level reached a decade ago. Unless something changes radically, Europe has passed the point of peak gas consumption. The promise of “a golden age of gas” talked up by the industry and some commentators a few years ago looks very tarnished.
The reasons for this are obvious. In the absence of a carbon price, coal is cheap and in countries such as Germany it retains crucial political support because of the jobs it involves. Renewables are subsidised. So gas is squeezed, especially in the power sector because efficiency gains and slow economic growth have kept total electricity demand down.
It is very hard to see any of those factors being reversed anytime soon. There is no prospect of a carbon price set at a level that will change behaviour or force the closure of existing coal-fired stations. Renewable investment remains quite strong, adding to the existing capital stock. With downward pressure on its price gas may be cheap, but coal is cheaper and even if renewable subsidies are pruned back technology is advancing all the time and the costs of both solar and wind are now materially lower than they have ever been.
The result is fierce competition in a market where consumption is at best static. Production from the UK side of the North Sea can only fall which means imports will be required, but there is no shortage of willing suppliers. In addition to Norway, Qatar and Trinidad the first shipments of liquefied gas are now arriving from the US, with more planned. The big question mark is what will happen to trade with Russia — currently the largest single supplier of gas to Europe and the provider of 40 per cent of imports.
The dispute over Ukraine has done nothing to set back Russian trade. Quite the reverse. At the same time as advocating continued sanctions against Moscow because of the Russian annexation of Crimea, the German government is pushing through the new Nordstream2 gas line that will carry Russian gas through subsea pipelines to Germany and then on to western European markets. Eastern European opposition is strong, but not strong enough to counter the weight of German influence in Brussels.
It seems likely that there will be some minor concessions to the east European states that might lose their transit fees, along with an agreement by Moscow to maintain supplies to Ukraine as long as someone pays for the gas. The result will be a net increase in Russian supplies to Europe, with Gazprom clearly prepared to reduce prices to protect its market share. Russia will provide a larger proportion of the limited volumes of gas needed and the notion of a European energy policy designed to promote energy security through diversity of supplies will be dead in the water.
All this suggests that prices could fall further. It must be painful to be holding high-cost gas assets such as expensive LNG facilities — and even more painful to own the growing number of stranded gas fields that are not being developed because they sit at the high end of the cost curve. Those who want to see shale gas produced in the UK or elsewhere now face not just continuing protests but the prospect of weak demand and weak prices.
What could change the situation? A surge in energy demand driven by rapid economic growth in Europe would certainly help but the phrase “rapid economic growth in Europe” sounds like an oxymoron. The establishment of an effective carbon price at a level sufficient to alter behaviour (say $40 or $50 a tonne) would limit the use of coal but the failure of Europe to set such a price — despite numerous commitments to reduce emissions — suggests that the political will necessary to impose serious charges on carbon is still lacking.
In the end, natural gas may be evolving into being a swing supplier — a back-up source of power when the wind doesn’t blow, or when nuclear power plants are delayed. Gas-powered generating capacity would in those circumstances provide a layer of comfort, with capacity payments to meet the costs of keeping stations in continuous readiness even if they are only used for 20 or 30 per cent of the time. In different ways, that is what is happening in both the UK and Germany.
As we move from scarcity to plenty in the energy market, the terms of trade will alter and some suppliers will inevitably lose out. The natural gas suppliers look like being the next victims.