Prospects of the European Gas Market

Abstract This paper discusses prospects for increased consumption of natural gas within the European Union (EU) up to 2030. Particular emphasis is on the power generation sector, where the main growth in demand is expected to occur, on supply and infrastructural constraints and on future price of natural gas. It can be concluded that EU gas-import needs will increase substantially up to 2010, driven by a combination of rapid increase in demand in southern Europe and declining production in northern Europe. As a result there will be an increased import dependency which will affect security of supply, not only in the gas sector but also in the electricity sector. Gas demand after 2010 will partially depend on the level of continued CO2 emission restrictions, a possible nuclear phase-out in the UK, Germany and Belgium and to what extent the option to store CO2 in subsurface reservoirs will be applied. However, supplies of gas are plentiful, at least in the medium-term up to 2010/2015, and a number of new countries will emerge as substantial suppliers to the European gas market, increasing competition and possibly leading to a situation of oversupply between 2008 and 2012 which in turn may create a downward pressure on gas prices. In addition, the US market may, pending on demand and indigenous production, experience considerable oversupply between around 2008 and 2015, reducing the possibilities of conducting arbitrage between the two main markets in the Atlantic basin and further contributing to a downward pressure on the gas price. On the other hand, the oil price will continue to be a major determinant of the gas price and a tight oil supply/demand balance will create an upward pressure on the gas price. Global liquefaction and regasification capacity is expected to more than double between now and 2010 leading to a more flexible and global gas trading and increasing spot sales and although the cost of LNG has decreased substantially over the past three decades it is still more costly than piped gas at distances up to 3000—4000 km within comparable regions. Thus, an increased use of LNG will contribute to an increase in average gas prices locally. Problems related to gas production capacity together with abundant supply to the EU markets and increased competition points to that Russia will loose market share in the short run, in particular as piped Russian gas is not competitive on the main growth markets, i.e. UK, and Italy/Spain. Nevertheless, in the long run, it can be expected that the EU dependency on gas from Russia as well as on the Middle East will increase. The vulnerability in supply security and the high dependency on Russian gas has been highlighted by the latest events (January 2006) with Russia cutting supplies to Ukraine. A critical factor is the large and timely investments required along the entire fuel chain in order to meet rapidly increasing demand, often in regions with uncertain investment conditions. Also, the producing countries are likely to invest according to national interest rather than to supply an increasing global demand. Keywords: Natural gas; Power generation; Europe; Security of suppl