EU must reform Emissions Trading Scheme to boost gas industry
The European Union (EU) must reform the Emissions Trading Scheme (ETS) to boost natural gas demand and push coal out of the continent's energy mix, industry leaders say
Massimo Di Odoardo, a European gas analyst at Wood Mackenzie consultancy, tells Petroleum Economist that increasing the price of carbon in Europe is the only way to boost the continent's gas demand and support the industry. "The reality is that for gas demand in Europe to recover the only thing that can save the day is a (higher) carbon price," Di Odoardo says. "Even if gas prices go to $9 per million British thermal units (Btu), with current (low) coal prices gas will not be competitive at all. The only way that demand can recover is if Europe gets serious about the carbon price and this can create a shift back from coal use."
Di Odoardo said Europe would need a carbon price of around $40-50 per tonne to push coal out of Europe's energy mix and boost gas demand. EU carbon prices fell to under €3/t ($4.1/t) in April, down from €30/t in 2008, as the economic crisis cut Europe's carbon emissions and demand for carbon permits fell.
The ETS has been regarded as a failure as Europe's carbon emissions have risen, since its introduction in 2005, and low carbon prices provide little incentive to cut coal use. Low carbon prices and the economic crisis have helped to increase Europe's coal consumption. Coal made a comeback into Europe's energy mix after 2008 displacing some of natural gas' share.
Europe is now the second fastest growing market for coal in the world. Last year Europe consumed 517m tonnes of oil equivalent (toe) of coal, according to Cedigaz. This is up from 471m toe in 2009.
However Europe's gas demand fell by 2% last year alone, to 1.08 trillion cubic metres (cm). Average UK NBP gas prices were around $9.50/m Btu last year compared to around $3/m Btu in the US and $15/m Btu in Japan.
Marco Alvera, Eni's vice president, midstream, told the European Autumn Gas Conference in Brussels that the continent was caught in a vicious cycle of weak gas demand being depressed by high prices. This is harming both Europe's gas industry and its industrial output, he said, as investors were transferring projects to the US to take advantage of cheap feedstock from abundant US gas supplies. "Europe seems to be sat quite comfortably in between a hyper-competitive US and an expensive Asia," Alvera said. "What's really happening in an incredible loss of industrial output ... a spiral which is poisoning Europe's competitiveness."
Petrochemical producers have taken advantage of booming US gas output which has pushed prices down to historic lows. A recent study by IHS consultancy said US shale gas had revitalised the country's petrochemicals industry and boosted its economy. "This is bringing with it all the economic benefits (to the US) of that production," Alvera said.
Alvera also blamed subsidies for renewable energy for "biting into industrial activity" and European gas demand. The EU wants renewables to make up 20% of Europe's energy mix by 2020 as part of its drive to cut greenhouse gas emissions by 20% from 1990 levels, by 2020.
Di Odoardo said an increased share of renewables in Europe's energy mix would also limit the extent to which gas would be able to claw back market share from coal.
Alvera added that higher gas demand from Asia, which attracts volumes because prices are around a third higher than in Europe, was tightening supplies of liquefied natural gas (LNG) in Europe. This was keeping European gas prices high despite demand being low.
Wood Mackenzie's Di Odoardo said the tightness in European LNG supply will start to ease from 2018. As new supplies come online, from Australian and US LNG projects, European gas prices will ease which should boost demand. "We see a tipping point around 2018. We believe that the pace of global LNG (supply) growth will be higher than demand," he said. "A lot of the gas, which is now trading from the Atlantic to the Pacific, could potentially come back to Europe. Then perhaps the market will balance."
But it's not just Asian demand which will determine how much LNG makes its way to Europe and if it will be any cheaper. David Maerz, head of trading analytics at BP IST, said Brazil and Argentina are also attracting large volumes of LNG which are supporting global prices. He questioned whether Europe could absorb more volumes as its power demand is 4% lower than before the 2008 financial crisis and its economy remains around 1% smaller.
Avela said that for Europe to recover its competitiveness it must bring down the cost of its natural gas. Developing indigenous shale gas resources and creating a more integrated and unified gas market would help, he said.
Di Odoardo does not see European shale gas as having a significant impact on European gas prices. Wood Mackenzie estimates European shale gas production will only reach around 20bn cm by 2020 which will not be enough to drive prices down on its own.
Alvera added Europe must aggressively promote the integration of natural gas markets to improve security of supply and boost competition and limit the expansion of coal consumption, which is crippling Europe's gas demand.
He said Europe must engage with natural gas producers, such as Russia and Norway to try to negotiate lower prices. "Europe collectively has very strong negotiating leverage with these countries," Avela said. "Ask them to help (gas) demand recovery in exchange for lower energy prices."
Christopher Delbruck, chief executive of E.ON Global Commodities, said one way the industry could boost gas demand was by supporting the use of natural gas in transport. "We need to do something jointly to develop demand, to make gas-fired power generation viable and to support its use in transport," Delbruck said. "I don't think there's a reason for us to be too gloomy."