Oil and Energy Trends, 18 October 2002

Contents

• Focus: Europe combs world for more gas
• Looking Ahead: Interest rises in Libya as political situation changes

Focus: Europe combs world for more gas

• Rising demand
• Plenty of gas
• Falling output
• Rising imports
• Deregulation, imports, and prices

Natural gas consumption is rising rapidly in Europe.  In most areas, on the other hand, production is near its peak.  Imports will have to increase as consumption continues to rise, spurred on by environmental policies and market deregulation.  Already the world’s largest importer of gas, Europe is likely to increase its share of the international gas trade over the coming decade.  A number of uncertainties, however, remain.  The expected surge in gas imports is likely to put existing market structures under growing pressure.  Further uncertainty surrounds the outlook for gas in electricity generation.  Some countries are undecided on how far they can make use of nuclear power to meet emissions targets under the Kyoto Protocol.  Any changes in the proportion generated by nuclear are likely to be accounted for principally by gas.

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Rising demand

Gas consumption is rising faster than any other primary energy source in Europe.  From 1991 to 2001, it went up by 3.3% a year, compared with an annual increase in all main forms of energy of only 0.7% (see Table A).  At the same time, gas increased its proportion of Europe’s primary energy from 17.2% to 22.3% over the same period (see Table B).  Much of the rise in gas consumption appears to have been at the expense of coal.  In the UK, for example, North Sea gas backed-out coal from a large number of coal-fired power stations and was principally responsible for a fall in the output of UK coal of nearly two-thirds between 1991 and 2001.  Some years before this, the production of coal in the Netherlands ceased completely as natural gas from the Groningen field began to be substituted in electricity generation.

What became known as the ‘dash for gas’ in the 1990s came about mainly as the result of a number of favourable factors.  The development of gas-fired power stations that were thermally more efficient than other forms of generation provided a market for the growing volumes that were available from the North Sea: particularly the British sector, where output more than doubled between 1991 and 2000.  In 1995, the UK overtook the Netherlands as Europe’s leading producer of natural gas, and remains in that position today. It produces about half the gas in the European Union (EU) and is the fourth-largest gas producer in the world.

Perhaps the most significant development of all, however, was the deregulation of electricity markets in the EU: above all, in the UK.  From the late 1980s, the UK began to attract independent power producers (IPPs) as the generating market was liberalized.  Later, the same happened in certain other parts of Europe, as electricity market liberalization was formally adopted as a policy by the EU.  At the same time, restrictions on the use of natural gas in power generation were lifted in several countries.  The result of all these developments was to create a large new gas market just at the time when companies in the southern North Sea were making important new gas discoveries.

Many of the new power stations were equipped with combined-cycle gas turbines (CCGTs), which recover heat from the gas turbines for re-use in steam turbines.  These CCGTs did not operate as traditional gas-fired stations supplying mainly peak electricity.  Instead, they were mainly operated to supply base-load power, which put them in direct competition with older and less efficient coal-fired stations.  Coal’s share in European energy balances declined as a result (see Table B).  One of the sharpest falls was in the UK, where coal’s share fell from 30% in 1991 to below 18% in 2001.  In what appears like a panic reaction, the British government announced a moratorium on new gas-fired power stations in November 1991; only to reconsider it the following month, saying that gas-fired schemes would be considered ‘on their merits’.

Another casualty of gas was oil-fired electricity generation.  Oil remained important into the 1990s in the electricity industries of Italy, Portugal, Greece, Ireland, and even in parts of the UK, including Northern Ireland, Wales, and southern England.  In some countries, such as Italy, there were even plans to increase the use of oil in power generation.  Following the deregulation of generating there, some oil refiners announced plans to raise on-site power production with a view to supplying the national grid.  In several parts of Europe, including the UK, the Netherlands and Sweden, there were plans to gasify heavy refinery residues to generate power.  Petróleos de Venezuela (PDVSA) promoted other schemes to use an emulsion produced from Venezuelan bitumen, known as Orimulsion.  The refinery schemes were generally on a small scale, while Orimulsion required costly flue-gas desulphurization, which inhibited take-up of the fuel, despite PDVSA’s innovative sales policy in pricing the petroleum-based fuel in relation to coal.  The Venezuelans have since switched their marketing efforts to Asia.

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Plenty of gas

Rising electricity demand and the liberalization of the generating sector combined with the availability of large new suppliers from the North Sea encouraged vertical integration of gas and electricity by private oil and gas companies.  Gas-to-power was particularly attractive in England and Wales, where the market dominance of a few large privatized generators helped to keep power prices higher than they would have been had the market been more evenly divided amongst more power suppliers.  This benefited the IPPs since, under the system of ‘pool’ pricing, all companies called on to generate power at any one time were paid the same.

A further encouragement to gas use in general was the deregulation of European gas markets.  Again, the UK was a pioneer.  The EU eventually took up the policy as part of its strategy to create a ‘single market’ in energy.  Targets were set for partial market-opening in stages (see Table C).  Some countries, notably France, dragged their feet; but many exceeded the EU’s brief and liberalized markets completely (see Table D).  The European Commission has since said that it wants gas and power markets to be opened up still further.

Outside the EU, gas was seen as a way of replacing old inefficient and polluting coal- and lignite-fired power plants, particularly in Central and Eastern Europe.  Turkey attracted several gas-producing countries in the Middle East and Central Asia with its rapidly growing electricity demand, leading to a rash of proposals for new gas-fired stations, and the signing of several import agreements.

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Falling output

This year, the growth in European gas consumption appears to have faltered, especially in Turkey, where the government has tried to renegotiate some of its import contracts.  The long-term outlook is nevertheless for higher gas consumption.  At the same time, the supply situation in Europe is also changing.  The UK’s production is reaching its peak and is expected to decline quite sharply after 2004.  By the following year, the UK could even become a net importer of gas: at least during the period of peak winter demand.  A report by the British Department of Trade and Industry predicts import dependency of up to 58% by 2010.  UK gas forecasts could yet prove to be too pessimistic; but the long term downward trend remains clear.

Outside the UK Continental Shelf there are few areas of Western Europe capable of raising their output significantly, with the exception of Norway.  Output here is set to rise with the opening-up of the Barents and Norwegian Seas.  The UK is an obvious market for Norway’s extra gas, and there are several proposals for new pipelines across the North Sea.  The Norwegians are also planning an LNG export terminal to serve the Snøvhit field.  Norway’s gas alone will not cover the rising deficit in the UK and other parts of Western Europe: and some fields may even be delayed for environmental or cost reasons.  Thus Western Europe will have to look outside its borders to meet its rising gas deficit in future.

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Rising imports

The nearest sources are Russia and North Africa.  Both areas plan increases in production, and both are also able to supply gas by pipeline.  Russia is developing a major new field complex on the Yamal peninsula, which is estimated to contain 350 trillion cubic feet (tcf), amounting to more than twice the current proven reserves of the entire North Sea.  Once Yamal is fully on stream in 2010, it is expected to supply 5.8 billion cubic feet a day (bn cfd) to France, Germany and Italy.  Russia is also planning to step up deliveries to countries further east, including Finland and Turkey.  A new pipeline under the Black Sea is designed to be commissioned in the fourth quarter of this year which will eventually supply Turkey with 1.5 bn cfd.  From about 2012, Russia hopes to have a second large Arctic field in use, the offshore Shtokman field, which will supply markets in Western Europe.

Three countries in North Africa could provide around 5 bn cfd more gas by the end of the decade, using a combination of pipelines and LNG.  Two, Algeria and Libya, already supply Europe, while the third, Egypt, is planning to start LNG exports in 2005.  The largest increase is expected from Algeria, which plans to raise exports from 6 bn cfd to between 8 and 9 bn cfd by the end of the decade.  Algeria’s output is expected to be boosted next year with the commissioning of the BP-Sonatrach {http://www.sonatrach.dz/} In Salah project.  Just under 1 bn cfd is expected to be exported to Southern Europe.  A roughly similar amount should also be available from Gassi Touil.  Bids to develop the field will be sought in 2003.  About 60% of Algerian gas is exported to Europe by pipeline, and this proportion is expected to increase over the next 8–10 years.

Libya, which at present exports only small volumes of LNG to Spain, plans an export pipeline to Italy by mid-decade supplying about 0.8 bn cfd (see ‘Looking Ahead’).  Egypt has ambitious plans to deliver gas by pipeline to the Levant (see OET website) but is likely to send the bulk of its exports as LNG to Europe.  The first LNG export train is due on stream in 2005.  By the end of the decade, Egypt could be sending between 1 and 2 bn cfd to European destinations.

Other gas suppliers to Europe include Nigeria, Trinidad and Tobago, Oman, and Qatar.  All have plans to increase deliveries over the coming decade.  Nigeria’s LNG exports to Europe could exceed 2 bn cfd by 2010.  Qatar is already targeting the UK market.  Earlier this year, it was reported to be considering building a new export train to serve the British market.  The delivery of more gas is being negotiated with two other European countries: Italy and Spain.  The British deal would require the construction of an LNG receiving terminal in the UK.  In the era before North Sea gas, the UK became the world’s first LNG importer.  From 1964 to the early 1980s it imported Algerian gas via a terminal at Canvey Island on the Thames.  The facility was subsequently sold and converted to LPG.  Recently, however, British utility Lattice has talked of building another terminal on the Thames, at Isle of Grain, while a refiner, Petroplus, has floated the idea of a terminal at Milford Haven in west Wales.

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Deregulation, imports, and prices

A major aim of the gas deregulation in the EU is to reduce prices to consumers.  Gas contract prices in Europe are mainly linked to oil.  What Europe’s competition authorities would like to see is gas-to-gas competition of the sort found in the American market.  This is most likely to occur in a market where many suppliers are in competition.  In order to bring this about, however, the EU Commission will have to act to break the dominance of the large integrated utilities in certain key markets such as Germany, France, and Italy. 

Lower gas prices, however, might also have their downside.  Some of the new gas developments aimed at Europe are high cost, marginal fields.  These include Statoil’s Snøvhit field, where the costs of developing an LNG project in the Arctic are likely to be considerably higher than those in North and West Africa and the Middle East.  Gazprom’s Yamal field is another that requires high, not low prices in the EU.  Europe should nevertheless be able to secure the gas it needs, eventually.  If some of the Arctic gas were not to appear, there are other countries like Turkmenistan, Yemen, Iran, and even Iraq that could soon be queuing-up to supply gas to Europe.

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Looking Ahead: Interest rises in Libya as political situation changes

The lack of progress in major new upstream projects in Kuwait, Saudi Arabia, and Iraq is helping to revive international interest on Libya.  Even the USA, which currently bans its companies from investing there, is seeking an improvement in relations, as it seeks to reduce US dependence on the Persian Gulf for oil.

Assessing the resources

Libya’s proven oil reserves of 36 bn bbl are the ninth largest in the world.  What attracts many companies, however, is the fact that two-thirds of the country is still unexplored.  Libya’s National Oil Company (NOC) estimates potential oil and gas reserves at 200 bn bbl of oil equivalent, though this must be considered a somewhat speculative assessment.  Libya has been slow to develop its oil and gas resources, partly as a result of US sanctions, but now has plans to accelerate progress.

 Several new oil fields are due on stream between now and 2006, and output increases are planned for some existing fields.  Libya’s output is partly constrained by its OPEC ceiling of 1.2 mn bpd.  The Libyans would like to raise production by about 0.4 mn bpd by 2006: a modest target, which looks readily achievable.  Most of the increase in production will come from new fields, but Libya also has plans to raise output at its 165,000 bpd al-Sharara field by 40,000 bpd, and to double output of the 20,000 bpd Mabruk field.

Some of Libya’s new production will come from natural gas liquids (NGL) arising from the opening up of gas fields in the Western Desert.  Here, Italy’s ENI and NOC are developing a $6 billion scheme known as the West Libya Gas Project (WLGP).  The main aim of WLGP is to produce gas for export to Italy via a new pipeline.  Output is expected to be in the region of 1 bn cfd of which 80% will go for export.  Around 100,000 bpd of oil and NGL are likely to be produced as well.

Libya’s gas reserves are even less well developed than those of oil.  Output is currently less than 0.6 billion cfd, of which about 15% was exported as LNG to Enagas of Spain in 2001.  Libya has long had the ambition to become a major gas exporter, and is keen to develop further projects.  LNG exports are constrained by the inability of the Marsa al-Brega export terminal to extract NGL from the liquefied gas.

Expanding electricity

Some of the extra gas will be used to fuel new power stations.  The General Electricity Company of Libya (GECOL) plans to add 4.9 GW of new generating capacity between now and 2010, raising the total to 9.5 GW.  Not all the new capacity will be gas-fired, however, since Libya is unlikely to be able to develop new gas fields quickly enough.  It may even have to import gas from Egypt for a time until its own gas programme catches up with domestic demand.  There are already plans for a gas-for-oil swap with Egypt under which Libya would supply 150,000 bpd of oil in return for up to 0.5 bn cfd of Egyptian gas. 

The Libyans may also try to export electricity.  As a first stage, they will need to upgrade and extend their own national transmission system, then expand their links with neighbouring power grids.  At present, Libya has cross-border links with Tunisia and Egypt, but there are long term plans to build an integrated grid covering a large part of North Africa.

How far and how fast Libya can expand its energy industries depends to a considerable extent on the future policy of the USA towards Libya.  Under the Iran-Libya Sanctions Act (ILSA), American investment and the supply of US technology are banned.  ILSA is due for renewal in 2006, but there are moves in Washington and Tripoli to improve political relations.  Perhaps significantly, Libya was not on the ‘axis of evil’ described by President Bush in January.

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© Blackwell Publishing Ltd, 2002