EU natural gas demand is unlikely to rise from current levels in the coming years despite an expected boost in consumption from the power sector, the International Energy Agency said in its latest World Energy Outlook published Tuesday.
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At the same time, the EU is set to become increasingly import-dependent as domestic production slides by as much as 50% from current levels.
"The power sector remains central to the long-term prospects of gas in the EU," the IEA said, adding that the estimated 7% increase in EU consumption last year to more than 460 Bcm was driven by power generation.
"As a result, gas use in the power sector expands slightly in the period to 2040, and over 110 GW of new gas-fired power plants are built to replace retirements and to provide flexibility for an increasing share of variable renewables," it said.
IMPORT DEPENDENCE GROWS
With only flat demand overall in the EU, the expected precipitous fall in EU gas production will see the bloc becoming increasingly import-dependent.
However, the IEA believes the EU can fill the import gap fairly easily.
"The EU is well placed to substitute falling domestic output with imports -- it has a well-functioning and efficient internal gas market, many under-utilized regasification terminals, and a wide portfolio of pipeline import routes," it said.
The agency's projections see EU gas imports increase by some 60 Bcm to reach around 390 Bcm in 2040, with Russia remaining the largest supplier of gas to the EU, maintaining its market share of around 40%.
It said Gazprom will retain a strong competitive position in the European market, with existing long-term contracts of up to 100 Bcm in 2025 (at 70% take-or-pay level), low production costs and more than 150 Bcm of spare gas production capacity.
It also sees production in Norway staying at high levels over the next few years, helped by expansions on the giant Troll field in the North Sea and by the start of the new Aasta Hansteen field in 2018.
But, it said, Norway faces the prospect of declining export availability over the longer term -- after 2020 production is expected gradually to decline from just above 120 Bcm to 100 Bcm toward 2040.
US LNG VS RUSSIAN GAS
As Norwegian shipments drop, a range of other suppliers expands into the European market, the agency said.
"Chief among them are US LNG suppliers, who reach a market share of just over 10% in 2025 and then keep this share in the longer term," it said.
The emergence of the US as a major LNG exporter with the "ability and ambition" to export to Europe could lead Gazprom to react.
The question the IEA poses itself is: will Gazprom choose to engage in a price war to keep US LNG exports to Europe at bay?
"It is reasonable to assume that Gazprom can comfortably supply gas at the level that matches US imports and even undercuts them," it said.
"If Gazprom chooses to lower its price, however, it gains market share but reduces the value of its gas sales -- a strategy that can only be profitable up to a certain point," it said.
Instead, the IEA believes the two sources will learn to co-exist.
"The New Policies Scenario is based on the assumption that Gazprom will accommodate some US LNG in the growing European import market in order to keep prices at a sustainable level," it said.
It rejected the idea of a price war, suggesting this would be counterproductive for both Russia and US LNG suppliers.
"A price war that brings European gas prices down to the variable costs of US LNG exports is not in the interest of either Gazprom or US exporters," it said.
"Nor is such a strategy commercially sustainable in the long term: neither Russian nor US companies are likely to bring new supplies on stream if they cannot recoup the full cost of their existing assets. If a price war were to unfold in Europe, it would also be a sign of collective failure of the LNG industry to unlock new demand in more profitable markets," it said.
"Cut-throat competition in Europe is thus likely to be a last resort."