Gassing up Europe

Slumping prices and sagging demand in Asia are making Europe more interesting for gas exports.

Top EU officials have been on the road from Morocco to Turkmenistan hoping to tie up new gas deals to wean the bloc off dependence on Russia, but now Asia’s economic slowdown is making the European Commission’s work easier by freeing up gas that would otherwise be heading to China and Japan.

The European Union’s liquefied natural gas (LNG) imports rose by 24 percent year-on-year in the first three months of 2015, accounting for 15 percent of the bloc’s total gas supply. They also went up by 10 percent in 2014, marking the first rebound following three straight years of declines.

But European demand had little to do with this pick-up. It was mostly due to economic forces further afield in Asia, where a previously insatiable appetite for foreign gas has hit a sudden slowdown.

“I see Europe as a sort of dumping ground for the world’s LNG, a matter of last resort. If you can’t get your cargo anywhere else, you send it to Europe,” said Andy Flower, an independent LNG market consultant. “It’s already happening.”

That’s because European LNG import terminals have the space and flexibility to receive cargos on short notice, whenever the supply and price fits. Deliveries to Italy, Spain, France and elsewhere have tapered off in recent years, as the economic recession slowed the bloc’s demand for gas and high oil prices pushed LNG prices up. Even shipments that did land in Europe were often sent onward to Asia, where demand was stronger and prices higher.

But all that is changing. As China’s economy slows, the country’s annual gas consumption growth has dropped to 5.6 percent in 2014, down from an average increase of 17.3 percent per year between 2002 and 2013, according to Al Jazeera. In Japan, meanwhile, imports are faltering as the country grapples with an economic recession and a cautious return to nuclear power.

This all fits nicely with the EU’s political strategy — at least for now.

New sources

Energy supply diversification is a key piece of the Commission’s energy union proposal, and LNG is touted as one of the prime alternatives to Russian pipeline imports.

“Even if the price of LNG is a bit higher than marketplace prices, we see that the over-supply of LNG has a very positive role in decreasing the price of pipeline gas,” Latvia’s Economic Minister Dana Reizniece-Ozola said in June, during her government’s European Council presidency.

Most of Europe’s LNG imports arrive from Qatar, Algeria and Nigeria, but new export projects in Australia, the U.S. and Canada provide new opportunities too — even as the EU works to phase out fossil fuels, Miguel Arias Cañete, the commissioner for climate action and energy, has said. The Commission is devising a strategy to maximize its LNG imports in the mid- to long-term, and is seeking public input until September 30.

Still, LNG is not Europe’s only potential source for gas. The Commission has also pointed to North Africa and the Caspian, and Arias Cañete and Maroš Šefčovič, the vice president for energy union, made diplomatic trips to the regions in May to discuss their export potential. Iran offers another possibility for gas supplies, although that is unlikely to happen in the near term.

Then there’s Eni’s new discovery of a “supergiant” gas field off the coast of Egypt, announced over the weekend. The Zohr field is believed to be the largest in the Mediterranean Sea, with an estimated 850 billion cubic meters of gas. The company’s initial comments, however, suggest the gas would mostly supply Egypt.

‘Political rhetoric’

Arias Cañete has talked about LNG with his Australian counterparts in recent meetings. The topic is also on the agenda for the G20 energy ministers’ meeting in October.

Australian exporters, however, have yet to take notice.

“I’m just back from a major gas conference in Darwin, and there was zero discussion of Europe,” said Geoffrey Cann, national director of oil and gas at Deloitte Australia. “The conference speakers generally dismissed Europe as, at best, a secondary market relative to the Asian market.”

Suppliers in the eastern U.S., Trinidad and Tobago, Equatorial Guinea, Nigeria and elsewhere in Africa are closer and, therefore, more obvious places for Europe to go shopping for LNG.

But the market is changing quickly. The slump in global oil prices has weighed on LNG prices in Asia, knocking them from the record highs of early 2014. Coupled with dampening demand, Australian exporters may have to look further afield.

“I think it’s largely political rhetoric,” said Flower. “But it’s not out of the question anymore, you may see the odd Australian cargo coming to Europe.”

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