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Natural gas still not getting through in Europe

Coal still beats natural gas in many European markets, notably Germany. This makes no sense, says Wintershall chief executive Mario Mehren

It was supposed to be simple: gas would be the bridging fuel—the relatively clean hydrocarbon that underpinned the EU's transition to a bright renewables-led future. But the reality has proved more complex, with political disputes hampering prospects for further Russian pipeline supply and energy policy designed to
promote renewables failing to curb the use of more-polluting coal.

Yet the case for gas remains overwhelming, according to Mario Mehren, chief executive of German-based producer Wintershall, a subsidiary of BASF.

Both EU domestic gas and piped volumes from Russia, Norway and North Africa, (complemented by liquefied natural gas from wherever is cheapest) will provide the continent with secure, diverse supplies and a more competitive energy market, he says. At the same time, it will support the growth of intermittent renewable energy until better storage technology comes along. New pipeline supply from central Asia, slated for the 2020s, will only enhance these benefits.

But, while natural gas continues to play a key role in the continent's energy market, its growth has hardly been spectacular, eroding coal's position only very slowly.

In Germany, the EU's largest economy, coal retains its dominant status in the power market, with hard and brown coal accounting for 40% of electricity generation, leaving gas trailing behind. German power providers opted for cheap European coal to fill the gap left by winding down Germany's nuclear power programme, with decision-making largely unhampered by concerns over the higher carbon emissions, given the low price of carbon in the EU emissions trading system.

In the Netherlands, gas production has been scaled back following popular and political pressure (like worries over seismic tremors linked to the industry). In Poland, concerns over Russian gas hegemony have sparked opposition to further imports. Shale gas exploration has failed to get off the ground properly anywhere on the continent.

For Mehren, complacency has been a factor. "In a way, it is our fault as a gas industry that we have not spoken loudly enough. Maybe we thought that, intellectually, our arguments were so convincing that we haven't repeated them often enough," he told Petroleum Economist in the company's home town of Kassel.

Mehren calls for a more unified approach from an industry whose default position tends to be competition rather than collaboration. "Perhaps we have been too fragmented, with the pipeline guys blaming the LNG guys, the Norwegians blaming the Russians and vice versa. Everybody has been trying to make his or her molecule of gas seem the most beautiful and that, of course, is damaging the product—and there is only one product," he says.

German policy puzzle

A scattergun approach to energy policy in the continent's largest economy, Germany, hasn't helped.

"Germany is an example of what happens when you don't define one clear [energy] target," says Mehren. He believes that multiple targets for renewable energy use, electric vehicle use, more home insulation and so on overlook the need for an overarching target to reduce carbon emissions. This is best achieved by using gas in conjunction with renewables, he says. Instead, coal has become an unexpected partner for subsidised green energy.

"We have the highest electricity price and our CO2 emissions are going up. That is probably the worst possible outcome," says Mehren. Not too surprisingly, he's a fan of the approach to energy use adopted in the UK, where coal has been regulated out of the market leaving more room for natural gas.

Mehren also thinks Europe is missing a trick by not maximising production from its domestic gas resources, in particular shale gas. In March, the company abandoned scientific research into shale gas, in two fields in North Rhine-Westphalia, after a law came into force in February that severely curtailed research into unconventional reservoirs.

"I don't see a bright future for shale gas, and for me that's a disaster in a country that is poor in raw materials," he says. German gas production has slumped in recent years and, at 6.3m tonnes of oil equivalent, covered just under 10% of domestic gas consumption in 2015, according to the European Commission. That's compared with more than 18% a decade earlier.

But Berlin is now working hard to put gas at the heart of its energy strategy. "I see in my country, no opposition to gas for the foreseeable future," says Friedbert Pflüger, director of the European Centre for Energy and Resource Security at King's College, London, and a German deputy defence minister in the early years of Angela Merkel's chancellorship. He says Martin Schulz, the popular new leader of the opposition Social Democratic Party, would also be a pro-gas leader in the event of victory over Merkel.

Gazprom ties

Delays to the Nord Stream 2 gas pipeline to bring more Russian gas to Germany is another source of frustration for Wintershall, which is a potential partner in Gazprom's project.

The company has ties with Gazprom going back 25 years and refers to Russia as its most important core region. Wintershall has a 35% share of the profits in Yuzhno Russkoe, a Western Siberian gasfield producing around 25bn cubic metres a year, and a 50% stake in the Block 1 A development of the Achimov formation in the Urengoy field, also in Western Siberia.

Wintershall plans to push on with further developments in the Achimov formation. Mehren says Russian gas supply to Europe can withstand competition from anywhere.

The company has also kicked on with its European exploration and production programme, with a focus on Norway, where it now produces around 80,000 barrels of oil equivalent a day. The strategy there has been to keep costs down by making use of existing infrastructure where possible. On the Wintershall-operated Maria field, located in 300 metres of water in the Norwegian Sea, two subsea installations were placed on the sea bed in mid-2016 in preparation for connection with the nearby existing platforms, Kristin, Heidrun, and Åsgard B.

The company also has oil and gas interests in the Netherlands and UK, as well Argentina and the UAE. In total, it produced around 165m boe in 2016, with around 70% of that comprising gas.

Baltic pipeline battle heats up

As a potential partner in the $11bn Nord Stream 2 gas pipeline, Wintershall has experienced, at first hand, the effects of European discontent over Russia's dominant position in the continent's gas market, which jeopardised plans for a group of companies to finance the Gazprom-operated Nord Stream 2 pipeline.

The project, which is designed to roughly double the amount of Russian gas being fed by pipeline to Germany, to around 110bn cubic metres a year, was originally due on stream in 2019. It was to be financed by France's Engie, Austria's OMV, Shell and Germany's Uniper, along with Wintershall and Gazprom.

The financing plan was abandoned in late 2016, following opposition from Poland and other eastern European and Baltic countries, which feared Nord Stream 2 would give greater dominance of the region's energy supply to Gazprom and increase Russian political influence with the EU. The pipeline would complement the existing Nord Stream pipeline, stretching 1,200km from Russia, across the Baltic to Germany.

In March 2017, European Competition Commissioner Margrethe Vestager said Nord Stream 2 was not considered a so-called "project of common interest" for EU countries. That left Gazprom and its partners to find alternative ways to fund the project, or wait for the mood to change. By early April, the European Commission was sounding out member states on whether it should negotiate directly with Russia to try to strike a deal on Nord Stream 2, but it was unclear how long this would take or what the chances of success were.

Russia will be keen to reach an agreement as soon as possible, given that 2019, the year in which it had hoped the pipeline would be operational, is also the year in which it needs to renegotiate transit fees with Ukraine for its current southern gas pipeline into Europe. Moscow wants to make sure it has an alternative route in place, given the frosty relations between the two countries.

But the key to the future of Nord Stream 2 may lie in Berlin rather than Brussels or Moscow. In contrast to some of its eastern neighbours, the German government is enthusiastic about the project, mindful of the country's increasing reliance on coal and its diminishing nuclear power programme—and there is a bonus in that Germany would likely become a more important trading hub for the European gas network. Berlin is pushing hard to win over the doubters at the Commission and get the consortium back on track.

Mario Mehren, Wintershall's chief executive, says there was no reason to delay on the project.

"You have private money to be invested in completing European gas infrastructure. Why aren't we applauding the companies bringing in that money," he says. "It's their risk if gas doesn't flow through the pipeline because it's too expensive or whatever. I really don't get it."

He gives short shrift to the argument that Nord Stream 2 will hand Russia, the second-largest external gas supplier to the EU after Norway, an unfair monopolistic advantage over other gas exporters. Increased diversity of supply makes that impossible, he contends.

"If you don't like Russian gas, you don't buy it. You buy liquefied natural gas, you buy Norwegian gas, you buy North African gas," he says. "Just having the pipeline is not a threat, because you can still decide where you buy."

Opponents of greater dependence on Russian gas argue that the alternatives are likely to remain under-developed if relatively cheap Russian pipeline supply is available. But Russian gas enthusiasts say the days when the country can ignore the rest of the world when setting its pricing is over.

They are fond of citing the example of Lithuania's Klaipeda LNG import terminal, built in 2014. Even before it was on stream, just the threat of alternative supply enabled the country—until then totally dependent on Russian gas—to negotiate a 20% discount on Gazprom supply, and the project has rarely run at anything like capacity since.

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