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E.On sees Europe’s gas future married to renewables

The future of European gas is married to renewable energy and reforms of the carbon emissions trading system, the head of Germany’s E.On Ruhrgas and E.On Trading said in an exclusive interview with Petroleum Economist

Europe would also be a natural destination for US liquefied natural gas (LNG) exports, while Asia was expected to beat Europe in the race to develop shale gas, Klaus Schäfer told Petroleum Economist before his speech on Gas and Renewable Partnerships at the Wold Gas Conference.

“With gas-fired generation, there is a quick ramp-up time and flexibility. The existing gas infrastructure and storage means it can be modulated very well. All these things are not possible with other types of generation,” Schäfer said. “I think it’s the perfect tandem of the two and therefore am quite positive on the future of gas.”

Electricity production from renewables such as wind and solar can drop suddenly and therefore needs backup generation, which is a natural fit for gas-fired turbines and the existing gas system, he said.

E.On is also developing other technologies which may further complement or increase gas demand, including combined heat and power (CHP) – which uses residual heat from electricity generation to warm up buildings – and using excess renewable power to create hydrogen. 

“In Germany when it is sunny and windy, we have negative power prices. So we pay our French neighbours to take electricity to stop overloading the grid,” he said. If the excess power could be used to produce hydrogen from water, then it would be put directly into the gas grid.

“In terms of technology, it could use renewable energy to produce gas,” he added.

European gas consumption has slumped over the last year, but Schäfer believe this is a blip due to mild temperatures, concerns over the European economy and a broken European carbon emission trading system leading to more utilisation of coal-fired power generation.

“Gas is not competitive with coal at the moment and we’ve seen aggressive power switching in the UK and other places. The fuel that saw the biggest growth last year, apart from renewables, was lignite (a low-grade type of coal),” he said. “I see growth potential for gas if it is competitive in power generation, which it currently isn’t because of the carbon situation.”

He said the European emissions trading system needed a “complete overhaul” to give utilities long-term price certainty for infrastructure investments, and the prices of carbon should also be linked with efficiency and renewable targets. 

Carbon prices in Europe have slumped to all-time lows this year, reducing the cost of burning coal, which releases 50% more carbon dioxide than natural gas.

He added cheaper gas would also stimulate demand, pointing out that low US gas prices have helped grow the country's economy. At $2.50/million British thermal units (Btu), US gas is around four times cheaper than European gas and has contributed to a rebound in chemical production and manufacturing.

But in the long-run, European gas demand is expected to rise and Schäfer believes some of this growth will be met by US LNG exports.

“European buyers have their own demand base, power generation, and downstream assets so they can attract large volumes over the long term. We expect US Gulf coast exporters to see Europe as a natural destination,” he said. 

Of the three US LNG projects that have made the most progress, both Sabine Pass and Cameron are located in the Gulf of Mexico. Meanwhile Cove Point is in Maryland, which is also on the east coast, so all three could supply Europe with LNG. 

To reach Asia, LNG cargoes from these projects would have to travel through an expanded Panama Canal and cross the Pacific which would add to canal fees, longer charter times and vessel fuel costs.

But the growth of LNG could also bring global gas prices together.

“We’ll see greater convergence in the future, but the distances are too great to see complete convergence, so we’ll always have some regional dynamics,” he said. Schäfer also said it was up to the consumer to break oil-linked LNG contracts, although the emergence of additional exporters may help.

“If customers want gas at different indexations, they’ll find a way of getting it. As long as Asian buyers buy on oil-linked contracts, they will exist,” he said.

For E.On’s own gas contracts, Schäfer said the German company had revised some supply agreements to reduce the amount of oil-indexation. European utilities have lost billions of dollars in recent years as oil prices have jumped, but increased prices have not been passed on to customers 

“We have made further progress in the negotiations with producers. For example, we have managed to secure price rebates for two third of our supply volumes. We are still engaged in intense discussions with the other producers.” he said.

Asia would also likely beat Europe in developing shale gas, although there would be some European production eventually, Schäfer said, adding this was because Asia had higher demand growth and high gas prices, which would drive development.

“One should not reject the possibility of shale gas in Europe, but I don’t think it’ll happen in this decade. I expect it to happen much faster in Asia actually and I doubt if the industry will concentrate on Europe,” he said. 

The International Energy Agency also forecast China to be a huge unconventional gas producer by 2035, while a poll of delegates by GL Nobel Denton conducted at the World Gas Conference showed China would be the world’s largest shale gas producer by 2030.

Companies developing shale in Europe also have to face other challenges such as environmental regulation and different land ownership issues. But if one country is successful, then others may follow suit, Schäfer said.

“Europe has a lot of pipeline sources at competitive prices compared with new shale. From a marginal cost point-of-view, shale has to be competitive,” he added. 

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