LNG as game changer for EU geopolitics

European imports of LNG have plummeted by several tens of percent over the last eighteen months due to a surge in Asian demand. Even so the gas sector and policy makers see a bright future for liquid natural gas in the European Union: it’s relatively clean, competitively priced and it reduces EU dependence on its traditional gas suppliers. ‘An ideal transition fuel’.

LNG gas station (c) RTV Oost
The European Commission is a firm believer in LNG as an essential component of the European Union’s energy mix in the medium term. For shipping and heavy road transport in particular, policy makers see major advantages in replacing diesel with cleaner liquid natural gas. Not without reason subsidies totalling 78 million euro were awarded last July to boost landing capacity and expand the logistics infrastructure along the Rhine and Danube rivers. The money is part of the ‘Clean Power for Transport Package’ implemented early this year. As part of the package the EU sets binding targets for key ports to create capacity for the landing and transhipment of LNG. A specially created Commission of Experts was set up last month to monitor progress.

Together with Gothenburg in Sweden, Rotterdam Port is one of the biggest recipients of EU funds. Both ports will use the 34 million euro to build a break-bulk bunker facility. Apart from the money itself, Rotterdam is particularly pleased with the commitment the European Union has shown by extending the subsidy. “The allocation shows that the Commission has every confidence in LNG as a fuel for the future,” the port authority said in a press release.

These days investments in landing, storage and processing of LNG are far from being self-evident. Compared with 2010, when 75 percent of European terminal capacity was being utilized (CEER report, March 2013) capacity utilization has since dwindled to just over 20 percent. The latter estimate comes from Wim Groenendijk, president of Gas LNG Europe, the lobby association of European LNG terminal operators. Figures from CEER indicate that in 2011 LNG accounted for almost a third of the total volume of processed gas. “But,” says Groenendijk, “imports have fallen by 27 percent in two years, while the decline in the first eight months of this year was again 26 percent.”

Even so, Groenendijk is not too worried just yet. The terminals are generally paid on the basis of long-term contracts for the capacity they make available and as such do not suffer immediate financial hardship as a result of the lower capacity utilisation. Another noteworthy factor is that the decline is not primarily due to falling demand in Europe, but results from the surge in Asian demand which has reached record levels. Economic growth, coupled with the nuclear disaster in Japan, has boosted Asian LNG prices there to such an extent that LNG traders in the first instance export available LNG to the East. This has become the premium market, and only once demand there has been met does the remaining LNG go to Europe.

LNG gaining momentum in Europe

Without wishing to seem politically incorrect, Groenendijk says that European gas prices are effectively too low to attract LNG. “Certainly now that gas demand in Europe has declined due to the economic crisis, there are regions elsewhere in the world where LNG can be sold with higher margins. But in the long run, with the development of increased supply, prices will even out.”

“Certainly now Europe is targeting LNG filling stations every 400 kilometres on major routes, the debate has outgrown the chicken-and-egg stage”
LNG fuelling station operator Antwan van Echtelt of LNG-24 agrees. LNG-24 operates a single LNG tanker lorry, which refuels filling stations in the Dutch city of Zwolle and elsewhere. In addition some of the flower transport sector in the western Netherlands is powered by liquid natural gas supplied by LNG-24. Capacity utilization of Van Echtelt’s tanker lorry currently runs at around 20 percent. But he too is optimistic: “It’s still a young market which isn’t working efficiently yet,” he says. “Infrastructure is still in the throes of being built and LNG trucks at the factory gate are still relatively expensive. But even so we’re already in a position to compete with the price of diesel. Just think what will happen once the flywheel gathers momentum.”

For LNG is set to take off, of that Van Echtelt and many others in the gas and transport sector are convinced. “Certainly now Europe is targeting LNG filling stations every 400 kilometres on major routes, the debate has outgrown the chicken-and-egg stage”, he says. Partly due to increasingly strict emission regulations forwarders will increasingly be inclined to opt for LNG.”

Advantages abound

The advantages of large-scale LNG deployment go beyond the environmental benefits, according to a report published by PwC in May on the economic impact for countries such as the Netherlands. “Small-scale LNG can lead to 2.7 billion euro additional economic growth and 8,000 additional job years in the period up to 2030. These results are based on a scenario which assumes current policies and current fuel prices (“Current policies”). In a future scenario which assumes tougher emission regulations and positive price developments (“Clean growth”) the economic impact could increase to 3.4 billion euro and 11,000 job years.’

Not only the Netherlands, but also other EU countries are set to benefit, says PwC. ‘To get an impression of the economic impact in other north-west European countries, we looked at Germany.

“Because LNG interlinks the US, Asian and European gas markets, world gas prices will converge, eventually creating a single huge world market in which pipelines lose their exclusivity as a means of transport”
Based on analyses of the size of the German transport sector, we conclude that the impact in Germany will be largely comparable to the impact in the Netherlands (relative to the size of the Dutch economy). The above relates to the first three economic effects that we identified (investments in ships and trucks, investment in infrastructure and investments in bio-LNG). Possibly the effect on the German economy will be smaller as Germany has fewer trucks and inland shipping barges as well as a smaller shipbuilding sector. But it accommodates a large truck-building industry. Also the health effects will be lower as Germany has a lower population density.’

Everything points to an increase in demand for LNG as a fuel. PwC estimates annual demand of between 0.5 and 2.5 million tonnes in 2030. That amounts to around ‘four to 22 million barrels of oil, implying 2 to 6 percent of total fuel use by ships and trucks.’ To meet the burgeoning demand, world LNG production will be ramped up over the coming years, with Australia set to catch up with Qatar as the world’s leading exporter, experts believe. In addition the United States is also expected to become an LNG exporter.

One world gas market

Currently the US government is still very restrained in issuing export permits, fearful that domestic gas prices will rise sharply through excessive gas exports. “They’re afraid that they could lose the competitive advantage that the US shale gas revolution has generated for heavy industry and the chemicals sectors,” says Groenendijk. His comment touches on another key characteristic of LNG: because it interlinks the US, Asian and European gas markets, world gas prices will converge, eventually creating a single huge world market in which pipelines lose their exclusivity as a means of transport. Over distances of more than 3,000 kilometres LNG can already be transported more profitably than regular gas through a pipeline.‘

A key consideration for the European Union is that LNG is a potential game-changer in terms of geopolitical relations, reducing dependence on the world’s traditional gas suppliers such as Russia and Norway. As such LNG is also an attractive fuel option for traders, says Groenendijk. In addition LNG will of course continue to be inserted into the European gas network via regasification. Over the coming years existing terminal capacity is expected to be further expanded from around 191 billion cubic metres now to more than 280 billion cubic metres in the run-up to 2020.

Sharp capacity utilization rise

Groenendijk is unwilling to venture a prediction about the volumes Europe will process twenty years from now, but does expect that the use of LNG as fuel will have become commonplace by then with infrastructure capacity utilization sharply higher. “All the lights are on green: LNG is seen by many countries as an ideal transition fuel. It may be a fossil fuel, but it’s many times cleaner than traditional fuels in the transport sector. And above all, it’s affordable. And that’s important, because to be ecologically sustainable, it first and foremost has to be economically affordable.”