Will Russian gas find new niches in Europe?
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Despite the risks of a slowdown in demand, European gas imports in the next few years should uphold reduced gas production on the continent and the phasing out of coal-fired power generation, say experts from the Global Energy Association.

The first quarter of the year was a profitable one for exports of Russian gas to Europe – Gazprom’s supplies abroad, expressed in yearly terms, rose by 30.7 % (a rise of 12.4 billion cu.m.), the company said on social media. The increase for Germany was 33.3 %, for Finland 67.3 % and for Serbia 71.3 %.

    Father frost

    The explosive rise in exports was directly linked to cold winter weather and the consequent decline in stocks in underground gas storage reservoirs. From January to March 2020, levels declined by a total of 39.1 billion cu. m. in European storage reservoirs – in the same period of 2021, the decline was 27 % greater at 49.7 billion cu.m., according to data from Gas Infrastructure Europe.

    That difference was reflected in temperatures, according to the German meteorological service – the average temperature in January was 2.7 degrees Celsius lower than in 2020. In February, average temperatures were 3.5 degrees lower.

    Producers of liquefied natural gas reaped slightly fewer benefits from the colder winter – supplies increased 11 % compared to the fourth quarter of 2020 – from 18 million to 20 million tonnes in the period from January to March, according to data from Refinitiv. But that level was still considerably less than the 28 million tonnes recorded in the first quarter of 2020.

    Gas production in Norway – where more than 90 % is aimed at export — also dipped compared to 2020 levels. The decline year-on-year quickened from 0.9 % in January to 5.8 % in February, the Norwegian Petroleum Directorate reported (more recent figures were not available).

    A narrowing competitive field

    This by no means represents a softening of the competitive field for Russian pipeline-delivered gas.

     On the contrary, over the next few years, the competition will almost certainly become tougher.

     In the first instance, there will be reduced demand. After experiencing a 3 % dip through the crisis of 2020, gas consumption in Europe in 2021 will rise by 2.1 %, according to a short-term forecast by the International Energy Agency (IEA). But over the longer term, demand for gas will ease – every year by 0.5 % up until 2030, according to the IEA’s long-term forecast.

    One of the reasons behind this could be competition between gas generation and alternative energy, which has boosted its position over the past decade. Between 2010 and 2020 in the countries of the EU (excluding Britain), output at gas-fired stations, according to the Ember think tank, declined by 44 terawatt hours (TWh) to 545 TWh. Generation by solar and wind sources rose by 377 TWh to 540 TWh. And the share of different types of power generation changed proportionately: the share taken up by gas in 2020 stood at 20 % — the same as in 2010, while the share of solar and wind power climbed from 6 %to 20 %.

    This trend is most unlikely to be thrown into reverse – given that the capacity of wind power installations more than doubled between 2011 and 2020, from 95 GW to 205 GW. Solar power capacity nearly trebled – from 55 GW to 163 GW, according to IRENA, the International Renewable Energy Agency.

    The IEA estimates that wind power capacity will rise eery year on average by 1.6 % and solar -power capacity by 8.6 %. Capacity of gas-fired stations will rise by only 1.1 %.

    There will also be increased competition in terms of gas supply, given the launch of the Baltic Pipe, due to carry Norwegian gas to continental Europe from October 2022. And another project, the Trans-Adriatic Pipeline, the last of three branches of the Southern Gas Corridor, due to take Azerbaijan gas to the markets of Southern and Western Europe – was completed in November 2020.

     Producers of LNG are also working on expanding infrastructure, including operators of new American projects Rio Grande LNG and Texas LNG Brownsville (with a total capacity of 31 million tonnes) – these have already received export permits from the U.S. Department of Energy.

    Opportunities for suppliers

    The sustainability of Russian pipeline-delivered exports will to a great extent depend on whether new niches will appear on European markets.

     One such niche to fill would be reductions in European gas production.

     From 2018-2020, production fell 35 billion cu.m. (from 246 billion cu. b. to 211 billion cu.m) and, according to IEA forecasts, will decline a further 7 billion cu.m. in 2021 to 204 billion cu. m. One factor here is the phasing out of the Groningen gas field where, according to figures from Global Platts, production from October 2019 to September 2020 was less than half when compared to the period from 2018-2019 (from 17.5 billion cu.m. To 8.7 billion cu.m.)

    Other niches might be the replacement of coal-fired generation which, from 2015-2020, sank by nearly 50 % (from 705 TWh to 365 TWh, according to Ember). Its place in the energy balance also plunged from 25 % to 13 %. Ten European countries have already announced plans to abandon coal power generation. Portugal is to stop by the end of this year with France and Slovakia to do the same by 2023, Ireland, Austria and Italy by 2025, Finland and the Netherlands by 2029 and Hungary and Denmark by 2030.

    As gas is becoming more accessible, it is unlikely coal-fired stations in these countries will be replaced solely by solar and wind installations.

    Industry is another source of increased demand.

    An example is Arcellor Mittal – one of the world’s largest steel producers, which is planning to invest up to 1.5 billion euros to switch operations to gas at plants in the German cities of Bremen and Eisenhuettenstadt. The changeover should help the company reduce its CO2 emissions, Reuters reported.

    Low gas prices — In 2020, prices on the prominent TTF (Title Transfer Facility) hub sank to their lowest levels since the 1990s – will stimulate such a changeover by other industrial producers. One of the key decisions to be made over the next decade will depend on the extent to which this will influence consumption and imports of gas.

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