EUROPEAN GAS MARKET: PIPELINE GAS VS LNG

By Feso Bright

European Gas in the World Energy Mix

Europe has an increasingly diverse energy mix but records a significant dependence on natural gas to meet its energy requirement with a minimum of approximately 25% of its energy supply as at 2008- shown in table 1.

Table 1: Total Europe Primary Energy Supply (KTOE): 2006 to 2008

Source: (International Energy Administration, Cited in Bright, 2009, p. 6)

Natural gas is the cleanest fossil fuel available and due to efficiency, relatively low capital cost (OECD/ IEA, 2005, p. 64) as well as other demand drivers, natural gas is an important energy source in the energy mix of Europe.

How does the gas market work?

Product and Value Chain

There are three major stages in the gas value chain as shown in figure 1 below:

Figure 1: Natural Gas Industry Value Chain

Source: (Energy Information Administration, 2010)

The first phase covers all exploration and production activity in which the gas is obtained up to wellhead, separated and processed. The second phase involves compression and transmission to storage, national distributors or main grid points. The third phase involves the distribution and transportation of natural gas or LNG (Liquefied Natural Gas) via trains or pipelines to other markets or the end consumer respectively (Energy Information Administration, 2010). Various regional and market structures exist for the operation of the natural gas value chain but they all share in common two saleable end products which emerge from this value chain; natural gas and LNG. LNG is however, always regasified (converted back into natural gas) at destination point.

Transportation and Trade in focus: Pipeline Gas versus LNG

Pipelines and LNG trains/tankers are the only commercial means of transportation and distribution of natural gas and LNG for Europe today. Most of Europe’s pipeline gas comes from Russia which accounts for 38% of its imports as shown in figure 2, with Norway and Netherlands following closely. Figure 3 shows that Algeria is the primary supplier of LNG to Europe with 35% of its imports while Nigeria and Qatar following.

Figure 2: Pipeline Sources for Europe 2008

Source: (Cedigaz, cited in British Pertroleum, 2009, p. 30)

Figure 3: LNG Sources for Europe 2008

Source: (Cedigaz, cited in British Pertroleum, 2009, p. 30)

Overall, Europe had a 55% share of total world gas imports while its share of natural gas and LNG are 24% and 67% respectively- as shown in table 2.

Table 2: Distribution of EU and World Gas imports 2008 (BCM) Billion Cubic Meters

Source: (Cedigaz, cited in British Pertroleum, 2009, p. 30)

The nature of the import and transportation sources has implications for security of supply and economics of investing in supply options. Consumption and Production drivers when understood also provide a background which enables an understanding of the supply gap and its implications.

Economics of Transportation: Pipeline versus LNG cost and scale

Figure 4: Transportation costs and the effect of scale

Source: (Jensen, 2007, p.3)

Figure 4 reveals that the exhorbitantly capital expenditure makes short distance LNG transportation unfeasible compared to pipeline; it also shows that long distance LNG transportation appears to be less costly than pipeline use. Nonetheless, pipelines vary in capacity and in terms of terrain (offshore, onshore) as above. Also, figure 5 below reveals that pipelines offer more economies of scale than LNG; which is an attractive feature from a business and margins stand point.

Figure 5: Costs of moving Gas & LNG over 1,200 miles

Source: (Jensen, LNG VS PIPELINES. Economic and Technical Pros and Cons, 2007)

It has been established that LNG transport cost is susceptible to unexpected upward cost swings (Jensen, 2007), however it must be noted that the notion of cost as the sole value driver is inaccurate. Competition from other sources of supply, distribution networks in the downstream (Jensen, 2007) and other factors combine to influence strategic choices.

NUTSHELL:

This is not the end of the analysis though. Typically one would want to examine the European consumption and production levels as well as the drivers of demand and supply; as these necessarily affect the choice between LNG and Pipeline transportation. On the whole, pipelines and lng transportation are necessary links in answering the Europe Security of Energy Supply question.