The EU Strategy for Liquefied Natural Gas and Gas Storage

Introduction

On 16 February 2016 the European Commission released new proposals on measures relating to its gas and heating and cooling strategy. The measures seek to prevent gas crises and, in the event of any gas supply disruption, ensure better coordination and support between EU countries. Further, the proposals seek to boost energy security by tightening intergovernmental agreements between the EU and non-EU countries in the energy sector and increasing access to LNG and gas storage facilities in the EU.  Finally, in promoting energy efficiency and the use of renewable energy, the Commission proposes a smart, efficient and sustainable heating and cooling system.

The proposals form part of the Commission’s Energy Union strategy launched on 25 February 2016, the main objectives of which are to provide all Europeans with energy which is secure, sustainable and competitive.

This article focuses on the role of natural gas and summarises the Commission’s proposal on the strategy for LNG in the EU. It follows an earlier article that we published (on 4 August 2015) on the Commission’s public consultation launched on 8 July 2015 seeking stakeholders’ views on the challenges and opportunities for LNG in the EU.

Role of natural gas

Natural gas currently represents a quarter of the EU’s overall energy consumption – approximately 26% of which is used in the power generation sector, 23% in industry and the majority of the remainder in the residential and services sectors (mainly for heating of buildings).

In the medium term gas is expected to continue to play a vital role in the EU energy mix, with gas remaining an important source of heat in industry and buildings, and playing a larger role as an alternative transport fuel, particularly in maritime transport and heavy-duty vehicles.

However, whilst gas demand is projected to remain relatively stable, domestic gas production is declining, exposing the EU to increasing import dependency. As a result, diversification of the EU’s gas supply is a key objective of the Energy Union’s strategy to achieve security of supply.

Significance of LNG – the EU Strategy on LNG

Currently less than half of the EU’s gas demand is met by domestic production. The rest is imported primarily from Norway (30%), Russia (39%) and Algeria (13%).  In recent years, LNG has accounted for approximately 10% of gas imports, primarily from Qatar, Algeria and Nigeria.  However, the prospect of a dramatic expansion of global supply of LNG (from the US and Australia) in the near future presents an opportunity for the EU.

Following public consultation, the Commission concluded, in its proposals on the EU Strategy on LNG and Gas Storage, that LNG and gas storage can play a significant role in making the EU gas system more diverse and flexible and, therefore, contribute to the Energy Union’s objective of security of supply.

Whilst many EU Member States enjoy mature and liquid gas markets, four Member States in the Baltic, central-eastern and south-eastern Europeans regions are heavily dependent on a single supplier and, therefore, are severely vulnerable to supply interruptions. For this reason, these Member States need to rapidly develop access to alternative sources of energy and the Commission believes that LNG, among other things, could contribute significantly in this regard.

The Commission has identified the following action points in order to exploit the full potential of accessing the global LNG market and to make the EU an attractive market for suppliers:

  • the EU must ensure that the necessary infrastructure is in place to complete the internal gas market and allow all Member States to benefit from access to global LNG markets – either directly or via other Member States;
  • the EU must complete the internal gas market so that it sends the right price signals – to attract LNG deliveries and to encourage the necessary infrastructure investments; and
  • the EU must step up its efforts to cooperate with international partners to promote free, liquid and transparent global LNG markets – this means intensifying dialogues with current and future suppliers and other major LNG consumers to remove obstacles to the trading of LNG on global markets.

We briefly summarise each action point further below:

Infrastructure

The EU has an extensive gas grid stretching across the continent. In addition to significant domestic production, it benefits from pipeline connections to some of the world’s largest gas suppliers, including Russia, Norway and Algeria. Further, the EU’s existing LNG terminals provide sufficient overall regasification capacity. However, LNG terminals are not optimally distributed across the EU and in recent years have had relatively low utilisation rates largely due to higher prices attracting cargoes to Asia.

The Commission concludes that the challenge of non-optimal distribution may be tackled by either building new terminals in appropriate locations or improving access to existing terminals.

The key issue with the proposed infrastructure is commercial viability. In principle the Commission’s position is that LNG terminals should be financed through tariffs (with market participants bearing the risk of investment in some cases). EU funds, however, may be available to strengthen the weak commercial viability of certain terminals that are key to achieving security of supply.

Existing EU policy framework and funding currently supports the EU’s gas infrastructure, including through high-level groups focusing on, and identifying, key projects of common interest (PCIs). The LNG strategy identifies a subset of these PCIs that would specifically contribute to its objectives. Modelling shows that implementation of these key PCIs would end single-source dependency and provide all Member States access to LNG, either via terminals or indirectly via interconnectors and/or access to liquid hubs. These projects are identified and categorised within 3 separate regions – Central East South Europe; the Baltics; and South-West Europe – and include new regasification facilities, new interconnectors and reinforcement of existing systems, including to allow reverse flow capabilities.

Internal gas market

In addition to sufficient infrastructure, properly functioning and liquid gas markets are also necessary to fully exploit the potentials of global LNG.

The implementation of existing EU energy legislation, in particular the Third Energy Package and network codes, is making substantial progress towards the development of a fully functioning internal gas market. However, whilst the Third Energy Package aims to make market entry more flexible through third-party access to infrastructure, a significant number of LNG terminals are currently exempted.

In this regard, the Commission urges Member States, in cooperation with national regulatory authorities (NRAs), to take necessary action to complete the internal gas market by eliminating the remaining regulatory, commercial and legal barriers and to provide local markets effective access to regional gas hubs.

Cooperation with International partners

As a major importer of LNG (the second largest after Japan), the EU has a keen policy interest in promoting a free, liquid and transparent global LNG market. To this end, the EU must work closely with international partners to ensure that market participants are not prevented from establishing commercial relationships and that there are no limitations on free trade.

EU energy diplomacy should actively pursue this aim in bilateral and multilateral discussions as follows:

  • with Australia and other potential LNG suppliers, with priority continuing to be given to dialogues with Algeria, the US and Canada; and
  • with other major LNG importers such as Japan in order to pursue common interests in promoting transparent and liquid LNG markets.

Additionally, the Commission must ensure that relevant inter-governmental agreements between Member States and non-EU countries in the energy sector are in compliance with EU law and policy.

Conclusion

By creating better access to LNG and, therefore, increase diversity of supply of gas sources, and encouraging the emergence of a properly functioning and liquid gas market, not only will the EU achieve its objective of security of supply, but it will also achieve a more competitive gas market. Further, LNG may also play a significant role in providing the EU with a sustainable source of energy whereby gas is used as an alternative and cleaner replacement transport fuel compared to diesel or heavy fuel oil in heavy-duty vehicles such as lorries or marine fuels in shipping. Small scale LNG may also play a role, in the absence of renewable energy sources, in the supply of heat and power for industry or other consumers in remote and/or off-grid areas that are dependent on more polluting fuels.

The measures identified by the Commission in the Strategy for LNG and Gas Storage is fundamental to the Energy Union’s aim of a secure and competitive gas market. It will require resolute action, particularly at Member State and regional level. The Commission will report on the progress of the LNG strategy (together with storage) in its annual State of the Energy Union.

It should be noted that the Commission makes certain reservations in its strategy, notably that, in the funding of the key PCIs, the full economic case for new infrastructure must be considered and the most cost-effective solutions be adopted and that care must be taken with regard to investment in infrastructure to avoid the risk of technology lock-in or stranded assets.


By Nina Howell, Counsel, and Trinh Chubbock.

Visit http://www.energylawexchange.com/ for more information.

 

1 Comment
  1. Andreas Thanos 2 years ago

    Very good summary; thank you.

    However, I cannot help but smile when I read the EU's efforts. On one hand, Brussels claims that it wants to encourage competition. On the other, we see its efforts with Nord Stream 2. The sabotaging of NS2 will only lead to higher natural gas costs (liquid or gas) for consumers in the EU member states.

    Further, Brussels wants to work on bilateral and multilateral discussions. However, anyone who follows the market knows that the actual contract negotiations, in a competitive market, are not entered into between nations; they are entered into by the seller (a private entity in a competitive environment/free market) and the buyer (a private entity in a competitive environment/free market). Federal or state governments can enter into agreements regarding import duties but do/should not regarding pricing. If that were the case there would not be a a competitive/free market.

    Developing an LNG infrastructure, as we saw with the Hamina LNG project, is a rather expensive undertaking, that market participants will have to invest in. If/when a sovereign nation or Brussels gets involved they will, again, be tilting the scales towards one form of the fuel and one type of supplier.

    A balanced approached needs to be taken. However, "politics" (EU-Russia, EU-US, EU-Norway) has the potential to create more barriers. That is why Brussels should try and stay out of it.

    The EU is fairly new to this concept of competition in the energy world. I fear that Brussels-based proclamations on how the market should evolve raise the risk for a market failure.

    Again, thank you for your summary,

    Like (6)

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