The Emergence of Global Gas Markets: Europe

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Continuing in our series on natural gas markets, I’ll be talking about European markets in this blog.

Europe is a large complex continent with many different components and over twenty natural gas markets contained within the region. Therefore, there are a lot of different forces that affect European markets. The biggest forces at present that I know of are national policies on hydraulic fracturing, the European Unions’ (EU) 20/20 by 2020 environmental goal, competition with Asian markets for LNG imports, and natural gas pricing policies.

To begin illustrating the European markets let’s talk about where the NG is coming from.

Natural Gas Supply

Looking at Eurostat annual imports and exports and a variety of graphs such as figure 1 leads me to the conclusion that Europe is a net importer of NG. The majority of the natural gas coming to Europe is conventional gas from Russia, in 2009 Russia supplied 36% of the total imports of NG in Europe. This number has likely risen since 2009 due to the addition of new pipelines like Nord Stream in the last few years. It is difficult to say how much it has increased, but I would not be surprised if that number has increased to 50%+.

The graph should help illustrate where NG is coming from and where it is entering Europe.

Figure 1: Gas Consumption Map for 2010 (Source: Sia Partners)

The blue triangles represent liquefied natural gas (LNG) import areas. Much of Europe’s

LNG comes from Qatar and Nigeria. However, the future availability of these imports is uncertain as there has been a decline for imports in 2011 and 2012. According to the Q2 – Q3 Quarterly Report on European Gas Markets from the European commission’s LNG imports from Qatar fell 34%, and Nigeria 44% in the first half of 2012.

Liquefied Natural Gas (LNG)

One of the reasons for the decline in LNG imports is Asian competition. Asian markets are willing to pay double what European markets will pay. In house data shows that on average Europeans are willing to pay about $9.8/MMBtu for LNG whereas Asian is willing to pay $17.2/MMBTU and higher. The difference in price is causing many suppliers to favor selling to Asia instead of Europe.

This is a problem for Europe’s NG supply security. The EU wants to diversify its NG supply to be less reliant on Russian imports and LNG was one of its more favorable alternatives. However, with Asian markets taking a large portion of the global supply there is less available for Europe. This could lead to an increase in price for LNG in the EU due to a smaller incoming supply, or to a higher willingness to pay for Europeans to secure more LNG import contracts.

But that’s enough on LNG for now let’s move on to another popular NG source, NG from Hydraulic Fracturing.

Hydraulic Fracturing and Shale Gas

Hydraulic fracturing is a topic of interest these days. The process promises an environmentally friendly alternative method to produces affordable NG. However, these claims are being disputed around nationally around the world. In the EU each nation can decide on their own policies regarding hydraulic Fracturing; this is subject to general EU law and agreements.

While the jury’s still out for a lot of countries in Europe, my research shows that for now France, the Netherlands, the Czech Republic, Bulgaria, and Romania have put either a complete ban or moratorium on hydraulic fracturing, and the UK, Germany, Poland, and Sweden are either exploring or practicing hydraulic fracturing.

The European Commission recently released a report on the economic viability of hydraulic fracturing in Europe. The report suggests that hydraulic fracturing in Europe will be significantly more expensive than first thought. Many predictions were based on experiences in North American but Europe is a very different market. Simply put I would say Europe has more road blocks and fees associated with the process than North America.

The exact production and extraction costs can vary significantly by region and there is a lot of uncertainty in the predictions. After reading the report I got the impression that it is likely that development costs in Europe will be significantly higher than historic costs in North America. My interpretation of the report is that estimates of the cost of hydraulic fracturing in Europe are hovering around the breakeven price, and that price prediction intervals are skewed towards higher prices, which would mean no profits. Therefore, the economic viability of the practice is still in question. Recall though that shale gas is more promising for some European regions than others. I advise any interested party to explore further into a specific country of interest before making any decisions.

If you’d like to read the European Commission’s report it is publicly available on the European commission website.

Natural Gas Prices in Europe

Europe has many different natural gas prices. Just about every country has its own price.

Figure 2: Natural Gas Prices in European Countries (Source: Eurostat)

Figure 2 was created in ZEMA using data from Eurostat. It shows the average adjusted price of natural gas for various countries in the EU on a bi-annual time scale. There is significant variation in price across countries in Europe.These prices are the result of a many different factors. Remember how I said Europe is a complex continent? This makes it incredibly hard to say why a nation’s price is higher than another.

One of the common reasons that I noticed was how the gas is priced.

Oil-Indexation and Market Driven Price

There are two main pricing schemes in Europe oil-index pricing, and market driven pricing. Oil-index pricing uses the oil price to derive a price for natural gas, and market driven pricing lets the market decide what it is willing to pay. My research suggests that the split between these pricing schemes is about 50-50. Furthermore, I read that some suppliers are even legislated to offer a percentage of their supply via the different price methods.

This is a problem because the two prices are different, sometimes drastically so. Currently the practice of oil-indexation is being questioned, because natural gas has become a standalone fuel. The argument has been made that Oil-index pricing is no longer appropriate.

A lot more can be said about the European natural gas markets and we are planning a “European Commodities Markets” webinar to discuss European markets in the near future. In the webinar we will go into more detail about NG markets in Europe and many other commodities.

In case you missed the first of our natural gas blog series on North American markets, you can find it here. Stay tuned for our next blog on Canada in our five-part series on global gas later this week.

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