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Policy and finance contributing to Europe's dying gas demand

Confusing government policies, financial woes and the resurgence of coal are all impacting upon demand for natural gas in Europe

Europe's financial woes, the resurgence of coal and confusing government energy policies are all depressing demand for natural gas in Europe, according to industry leaders.

Speaking in Amsterdam Roger Bootle, managing director of Capital Economics, a consultancy, said a combination of Europe's sovereign-debt crisis and the expected decline in its population over the next fifty years will make a huge dent in the continent's natural gas consumption. ”I'm pretty pessimistic about how the eurozone is going to get out of its debt problems. This is a huge problem and of course the result of which is austerity,” Bootle said. “If the euro holds together the (growth) outlook is pretty poor but I'm hopeful we'll see a partial breakup of the eurozone. If we do we'll find the peripheral countries enjoy a surge in competitiveness.”

According to data from Eurostat, the statistics arm of the European Commission (EC), Europe's GDP fell by 0.6% last year with Portugal, Slovenia and Cyprus leading the downturn.

Europe's gas demand fell by 8% between 2008 and 2009 to 1.05 trillion cubic metres (cm), according to figures from Cedigaz, another statistical authority, with consumption in Greece, Hungary and Spain sliding most steeply. It recovered slightly in 2010, reaching 1.1 trillion cm, only to dip by a further 2% in 2011. Europe's gas consumption is now at a nine-year low.

Economic weakness will continue to depress the continent's natural gas demand, according to the International Energy Agency (IEA). While global gas demand will rise by 510 billion cm between 2010 and 2016, Europe's will stagnate.

Government policies to push renewable energy and efficiency are also strangling the gas market’s growth.

The EC, the EU’s civil service, wants a fifth of Europe's energy to come from renewable sources by 2020. The Commission also wants renewable energy to comprise 10% of fuel use in the transport sector and greater energy efficiencies to shave another 20% off total demand in the next seven years.

Gas executives do not see much coherence in the strategy. “We see a very fragmented Europe, lacking coherent energy policies from a gas market perspective and we are still some way from off an integrated, liberalised and transparent energy market,” Rune Bjornson, Statoil's senior vice president of natural gas said. Growth in demand may pick up again after 2020, he said, but this would happen in spite of energy policies and regulation that would do little to boost the sector.

For all the green motivation behind the EC’s policy drive, meanwhile, coal has been one of the biggest beneficiaries – putting more pressure on demand for cleaner-burning natural gas, according to Wood Mackenzie, a consultancy.

Coal beats gas on price, noted Ben Hollins, head of gas and power research at Wood Mackenzie, and while the power market absorbs more renewable energy supply, gas’s ability to “out-compete coal will depend largely on European policy”.

Europe's coal use rose by 8% in the first four months of last year, to 7.77m tonnes, according to Barclays bank. Spain's coal use soared by 80% in the first five months of last year while the UK's increased by 26%, to 6.3m tonnes. Cheap supplies of the fuel and low carbon prices have provided little incentive for financially vulnerable eurozone states to switch to higher-priced gas while economic austerity grips the continent.

Germany's coal consumption has risen by around 5% since the government decided to sideline nuclear power. The government wants 35% of its electricity to come from renewable energy by 2022, dealing another blow to gas vendors.

Stefan Judisch, chief executive of RWE supply and trading, said gas needs political support in Europe to be able to compete with coal, renewables and the energy-efficiency drives. “There is now more gas infrastructure in Europe than there is demand. The European gas midstream market is in a massive structural change,” Judisch said. The only good news, he said, was that Europe would likely act as  “buffer” when large-scale US liquefied natural gas exports begin. “I don't think all the (US) LNG targeted at Asia will find a home there,” he said, potentially freeing up cheaper cargoes for Europe.

Judisch predicted that the arrival of US LNG in the market would also put on Europe’s piped-gas suppliers, such as Russia, to stop linking gas prices to oil prices. This would help liberalise the continent’s energy market, he said.

Wood Mackenzie expects global gas demand to rise by 33% to 2020 compared with 2010 levels, reaching more than 4 trillion cm. China will drive the demand growth, accounting for for 300 billion cm of extra new alone. Although Europe's gas needs will remain flat, Turkey and parts of central and eastern Europe would probably see some growth.

Another potential demand boost for natural gas could be if parts of the transport sector were gasified, Wood Mackenzie’s Hollins said. But this would need huge investment in infrastructure, meaning transport would be unlikely to provide a significant market in the short term.

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