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Norway’s gas expansions vie with Russia for EU demand

E. Gerden, Contributing Writer

Annual demand for natural gas in the EU is pegged at approximately 380 Bm3y–450 Bm3y. A portion of this demand is met by regional production within the EU. However, the European energy system is beset by challenges that are impacting EU gas supply.

Gas production in The Netherlands is falling faster than expected, for example. According to data from the country’s Ministry of Economic Affairs, natural gas output declined by approximately 9% in 2016. Also, the massive Rough gas storage facility in the UK, which usually covers consumption peaks, has seen interrupted operation due to technological problems. Finally, the French government intends to close up to five of the country’s nuclear power plants, which could put additional pressure on electricity prices and boost demand for gas imports.

To supplement Europe’s burgeoning need for energy, particularly gas, Norway aims to become one of the largest producers and suppliers of gas in the coming years, alongside Russia. The Scandinavian country plans to develop new gas fields in the Barents Sea, as well as expand its export gas pipeline network. According to Norway’s Minister of Petroleum and Energy, the country will compete with Russian natural gas monopoly Gazprom through its planned increases in gas production at its largest gas fields, among which are Troll (Fig. 1), Ormen Lange and Snøhvit. This would benefit both Norway and the EU, as it will raise Norway’s energy revenues and allow EU countries to reduce their energy dependence on Russia.

Gerden Fig 01

Fig. 1. Statoil’s Troll A platform, located in the massive Troll gas field in the North Sea.

Meanwhile, Russia’s Gazprom, Norway’s major competitor in the EU gas market, continues to increase its export volumes. The company exported nearly 600 Bm3d of gas to Europe in 2016. This volume represented a new record for Gazprom daily deliveries. In 2015, Gazprom exported 159.4 Bm3 of gas to the EU market. If the Ukrainian gas transportation system is adequate, Gazprom says it is able to cover abnormal peak consumption of gas in Europe.

This year, the average price of gas exports to the EU will increase from $167/Mm3 in 2016 to $180/Mm3–$190/Mm3, which may result in increased competition between major exporters.

In 2017, Gazprom’s gas exports to the EU could exceed 185 Bm3, or approximately 5 Bm3 more than in 2016, representing a new record for the company. However, weather conditions at the end of the present year will influence the total volume of exports.

Combating forecast declines in gas output. At present, Norway exports up to 95% of its gas abroad, and it covers more than 20% of the EU’s gas needs. According to Norwegian government plans, this percentage will significantly increase over the coming years. In 2015, Norway supplied 108 Bm3 of gas to Europe, of which 4 Bm3 were in the form of LNG—a 7% increase from its LNG exports to EU countries in 2014. Although exports in 2016 were forecast to be lower than in 2015, Norway expects to average 100 Bm3y in LNG exports over the next two decades.

A large share of Norway’s untapped gas resources are located in the High North area of the Barents Sea. Despite the depletion of the largest gas fields in the North Sea, the country has been able to support the growth of gas production almost every year since 1993 with the discovery of new fields. However, according to analyst forecasts, Norway’s gas production is set to gradually decline to approximately 90 Bm3y over the next 5 yr, before seeing a major decline to 50 Bm3y by 2027, to less than half of present production levels. The Norwegian government is implementing measures to stimulate greater domestic gas production and offset these forecasts.

The cost of gas production in Norway is one of the highest in Europe. According to a recent report by Statoil, Norway’s largest gas producer, gas production costs are estimated at $1.04/MMBtu. This cost is significantly higher than that of Gazprom, which spends approximately $0.4/MMBtu on gas production.

Many of Norway’s largest gas fields are located on the costly-to-develop North Sea shelf. The government is considering the implementation of several measures to support domestic gas producers. One option is to reduce tariffs on the transportation of gas within the country’s pipeline system. The measure involves a 90% reduction in capital costs. The implementation of this measure will result in a decline in production costs and encourage additional investments in the development of Norway’s offshore fields.

According to government plans, the volume of investments in Norway’s gas industry should significantly increase this year, after the catastrophic drop of 30% observed over the last 2 yr.

Pipeline network expansion proposals. At present, the Norwegian gas pipeline network has a length of 8 Mkm, with a maximum capacity of approximately 120 Bm3y. As part of its gas expansion plan, the country’s pipeline network is set to undergo significant expansion in the coming years.

One of Norway’s major advantages over Russia in the EU gas market is related to the operation of an extensive network of subsea pipelines that links Norway’s offshore gas fields and onshore terminals directly to recipient countries in Europe. Norway operates several gas pipelines that connect directly with other European countries, including France, the UK, Belgium and Germany.

Relatively short transport distances to major consuming countries is another advantage for Norway in the EU gas market. Among the major importers of Norwegian gas are Belgium, France, The Netherlands and the UK. Norway’s LNG production is shipped on carriers from the Snøhvit field offshore Hammerfest, where Statoil’s LNG terminal is located. The Snøhvit terminal on Melkøya Island is the world’s northernmost LNG terminal.

Norway hopes to expand its pipeline infrastructure in remote Arctic waters if more gas discoveries occur in the region. Norway has already built a gas conduit to the Arctic—the Polarled Gas Pipeline—to transport gas from the Aasta Hansteen field, which is Norway’s first deepwater development. A second LNG plant or an expansion of the existing Snøhvit LNG facility is possible, according to the Norwegian government. Also, exploration in the Barents Sea could uncover new reserves, which would result in an extension of the pipeline system farther north.

Despite Norway’s existing advantages and opportunities, competition with Russia in the EU gas market is expected to be very tight for Norway due to Russia’s recovering position in the local market. The forthcoming final decision on the Nord Stream 2 project, which is expected to be beneficial to Gazprom, will play a role in this increasing competition. Other influencing factors include the settlement of the European Commission’s claim with Gazprom, and the completion of litigations in the Stockholm Arbitration Tribunal between Ukranian Naftogaz and Gazprom.

Another major EU concern is climate change. According to Norway’s Director of Climate and the Environment, Hildegunn T. Blindheim, Europe will be unable to achieve the climate targets set in Paris without Norwegian natural gas. European countries are expected to increasingly rely on gas as a heating fuel, which will help shrink carbon emissions in the future.

The continuing reliance of EU countries on natural gas is reflected in recent statistics from the Russian Ministry of Energy. According to Ministry analysts, demand for gas in the EU in 2016 grew by 6% over 2015. EU gas consumption is expected to expand further this year. According to Russian government predictions, Gazprom will likely increase its share in the European gas market over the near term. GP

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Editorial comment
-Adrienne Blume
According to GIIGNL’s 2018 Annual Report, global LNG trade expanded by 3.5 Bft3d in 2018, to 38.2 Bft3d—a record 10% increase.
Power, LNG projects drive pipeline construction in Africa
-Shem Oirere
Increasing public investment in gas-fired power plants in Africa, the continuing recovery in global oil prices and persistent insecurity in key producer markets, such as Nigeria, are likely to impact gas transmission pipeline projects on the continent, even as more international companies express interest in the region’s stranded gas resources.

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