A lost decade for European natural gas?
6 May 2013
This article appears in the Spring 2013 issue of IEA Energy: The Journal of the International Energy Agency.
Like an athlete striving to re-attain past glories, European gas companies, along with their suppliers, look at domestic consumption and wonder, “When will it return to the record level of 2010?”
European OECD member countries consumed 567 billion cubic metres (bcm) that year, an 8% gain that more than wiped out the 6% drop in 2009 caused by the economic crisis.
But, as the IEA warned in the Medium-Term Oil and Gas Market Report 2011, that dramatic increase was an illusion, with half of the gain driven by a particularly cold winter. The milder 2011, along with anaemic economic growth and higher gas prices, indeed saw a 8% decline in demand. Neither the economic nor the pricing environment improved in 2012, and demand is estimated to have declined by 2%, getting close to the 500 bcm mark. Seasonally-adjusted gas consumption has actually lost ten years of gains, and a few countries, such as the United Kingdom, are back to levels unseen since 1995.
Only five years ago, most scenarios assumed that European gas demand would be well above 600 bcm in 2015 and around 700 bcm by 2030, driven by the power sector. Gas-fired plants were to benefit from their lower CO2 emissions compared with coal and their complementarity with renewables. Only scenarios featuring a strong increase of nuclear, renewable energy or both, plus drastic improvements in energy efficiency, were expected to dampen or reverse this growth track, and even then only in the long term (post-2020).
Delving into the details to find the cause
The economic crisis, persistent high gas prices and the still-unabated growth of renewable energy completely changed this outlook, and some analysts consider a recovery to 2010 levels by the end of this decade quite optimistic. But we should be careful about “over-negativising” the overall prospects for gas and instead analyse sectors individually.
The residential/commercial sector, the backbone of European gas consumption with 38% to 40% share of the market, looks unlikely to make huge gains, given only modest population growth and governmental efforts to incentivise energy efficiency in existing and new houses. Moreover, increasing prices in most countries are prompting users to lower thermostats whenever they can. Unless the European climate gets much colder – are we not worried about global warming – there is little hope for major gains in this sector. Instead, companies are counting on a stabilisation.
Industry has never quite recovered from the economic crisis. Indices on production in manufacturing are below their 2007 levels in most European countries, which translates into lower energy consumption. Another blow originates from North America, where wholesale gas prices are one-third to one-quarter of the rates in Europe, giving fertilisers and chemicals industries there an unprecedented advantage. Only an improved economic outlook or much lower gas prices would trigger a recovery in this sector, and both look relatively unlikely in the medium term.
Power generation is where much hope lies, even if it was the major driver for the recent sharp drop in demand. Gas-fired plants are suffering not only from low growth in electricity demand (with Turkey alone providing two-thirds of the initial increase in 2012), but also continued strong growth of renewables, including an almost 30% increase over the first nine months of 2012, and a lack of competitiveness against coal-fired plants. Ironically, the United States, where low gas prices are prompting a switch from coal, is exporting cheap coal and triggering a golden age of coal in Europe, despite the Emission Trading Scheme’s price for carbon.
Decommissionings may power a recovery
But additional nuclear plants will be decommissioned by the end of the decade as well as many coal-fired plants after 2015 under the European Union’s 2001 Large Combustion Plants Directive. To what extent this will drive an increase in gas demand depends on how the gap between power demand and renewables generation will be filled. Gas was once seen as the fuel of choice, then the default fuel, but now power producers are reluctant to invest in gas-fired plants if those are to run only a few hundred hours each year as complements to other, variable energy sources, instead of the 4 000 hours in previous economic models. Additionally, the question of dispatch between gas- and coal-fired plants will hinge on the delicate balance of future coal, gas and CO2 prices.
The uncertainties are considerable for those investing all along the gas value chain – and therefore for future security of supply.
The International Energy Agency (IEA) produces IEA Energy, but analysis and views contained in the journal are those of individual IEA analysts and not necessarily those of the IEA Secretariat or IEA member countries, and are not to be construed as advice on any specific issue or situation.
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