EU risks stranding gas investments as bloc builds new pipelines

By ISIS ALMEIDA
Bloomberg

European Union countries are at risk of stranding natural gas investments as they build pipelines between nations amid declining demand, according to an energy trading industry group.

The push for new routes and more infrastructure to bolster security of supply has led to “significant” investment, resulting in historic pipeline links being used less, Doug Wood, the chairman of the gas committee for the European Federation of Energy Traders in Amsterdam, said in an interview.

Low utilization of gas assets may deter future investment, said Wood, who took his post on Jan. 1.

“One of the challenges facing the gas industry will be what happens to those stranded assets,” said Wood, a former BP executive. “How will they be funded? Who will pay for them?”

EU leaders want to boost security of energy supplies as a conflict in Ukraine threatens natural gas flows from Russia for the third winter since 2006. The bloc’s energy union includes accelerating cross-border gas and power links, removing market barriers and diversifying sources. Russia provides about 30% of Europe’s gas, half of which flows through Ukraine.

Europe’s gas consumption probably fell 9% in 2014, a fourth year of declines, according to Eurogas, an industry lobby group in Brussels. The bloc’s gas network grew to 2.2 million kilometers (1.4 million miles) in 2013 from 2 million kilometers in 2010, Eurogas data showed. The EU gained a member nation in the period.

Nord Stream

Russia delivered 50% more gas to Europe via the Nord Stream pipeline under the Baltic Sea directly to Germany in 2014 from the previous year, while cutting transit to Europe through Ukraine by 40%, according to OAO Gazprom and pipeline operator UkrTransGaz.

The reduced Ukraine flows means pipelines managed by Slovakia’s Eustream are being used less, according to Wood. The grid operator transported 58.5 billion cubic meters (2.1 trillion cubic feet) of gas in 2013, down from 74 billion in 2011, the year Nord Stream opened, the Bratislava-based company’s annual report showed. Eustream’s revenue fell 11 percent in 2013 to 697 million euros ($822 million) from 2012.

“The poster child for pipeline capacity has always been Eustream,” Wood said. “There has been significant reduced flows of Russian gas through the Slovakian Eustream even before the current Ukraine crisis and the question is, what happens to the pipeline revenue? They can’t expect Slovakian domestic consumers to pay for a huge international transit line.”

Energy Union

The European Commission, the bloc’s regulatory arm, signaled last year it wants to release its energy union plan in the first three months of this year. There needs to be clarity on what the EU’s intentions are on its energy plan, and EFET is working with the bloc, Wood said, without providing details.

While European gas usage has waned, governments across Europe are still building pipelines whether the market needs them or not, Wood said. There’s currently no set framework under which countries transporting the gas share the costs of building pipelines with the nations receiving the fuel, he said.

“Security of supply is something that is very important to governments because they don’t want to be the government in charge when the lights go out,” he said. “If you have an oversupplied transportation capacity and then you apply market rules, guess what? The market rules just reflect the oversupply and you get a much reduced valuation.”

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