A shifting EU energy landscape

The Nord Stream project, which comprises two natural gas pipelines totaling 1,223km, the first of which will have a capacity of 27.5 billion cubic meters per year, has been approved by the Finnish and Swedish governments. The news comes as defining features of the European gas landscape are in flux. Weak industrial demand has seen Russian exports to Europe decline to 39.1 billion cubic meters, down 16% from 2008. Demand appears to be rebounding in some regions, but parts of Eastern Europe especially remain weak and it is by no means clear how long the effects of the financial crisis will linger. Many fret that the removal of quantitative easing programs and fiscal stimulus packages will reveal continued structural weaknesses in the underlying economy.

Against this backdrop of uncertainty, two further fundamental drivers are emerging, each with implications that are as yet unclear. The first is the growth in renewable energy generation in Europe. Around 8,600MW of new wind energy capacity will be installed in the EU27 in 2009 - an annual growth rate of 1% compared to 2008. Given banks' reluctance to invest in anything beyond low risk projects, this figure sounds quite encouraging, but the real test will come in 2010 when projects which were commissioned earlier run out. If the EU27 meets targets of generating 20% of energy from renewable sources, the gas-fired capacity required will soar, as it is a necessary back-up for when the wind does not blow. Even if this is not the case, the effects of the Large Combustion Plant Directive will mean gas must replace much of Europe's coal-fired generation soon. At this stage it is too early to say how much this will counteract the effects of the recession on gas demand.

All hail the shale?

The second emerging driver is shale gas. Thanks to improvements in E&P technology, recoverable reserves in the US have increased to such a degree that LNG regasification terminals are being altered to allow liquefaction for export. While Europe's geology is clearly different from the American Mid-West, the industry has high hopes that hydraulic fracturing will dramatically increase recoverable reserves. Again, at this stage it is too early to assess the impact of the technology on European reserves, but even if this comes to naught, at minimum some of the LNG supplies previously destined for the US will be available to Europe, therefore increasing supply.

Thus it appears that the fundamental beliefs which have underpinned European states' energy planning for the past five years may soon be turned on their heads. From 2011, Nord Stream will increase the security of Russian supplies to Europe. LNG regasification capacity will also be far higher and it is reasonable to assume that LNG supply will remain strong for at least the next four years. Finally, indigenous supplies may not actually be declining at the rate previously assumed. Hence, over-reliance on gas (the central obstacle facing policy makers between now and the new generation of nuclear plants' activation around 2020) may not present such a critical flaw as previously thought. Of course, under-investment in new infrastructure resulting from the financial crisis could yet leave the gas market tight by 2015 (particularly if the global economy were to rebound powerfully) but perhaps the debate surrounding Europe's energy strategy might now be conducted in less hysterical tones.

For more information on Datamonitor's predictions for LNG supply, see the report "LNG as a Price Driver: Development of Europe's LNG market and impact on retail prices", which was published on August 5, 2009 and can be found on the Datamonitor Utilities Knowledge Center.

A service of YellowBrix, Inc.