Europe's Gas Headache

Natural gas is a headache for Europe. Geography has made Europe dependant on three countries for major gas supplies: Russia, Algeria, and Norway. Higher energy prices have created an assertive Russia, and Europeans fear they are vulnerable to "energy blackmail." Meanwhile, Algeria has ceased its liberalization campaign and recently expelled Repsol YPF and Gas Natural from the Gassi Touil LNG project. There is even some anxiety in Europe due to a merger between Statoil and Norsk Hydro. And all this is happening as the global competition for LNG is intensifying.

No wonder Europeans are gloomy. Look closer, however, and Europe's position is not as grim. Europe has indeed become more dependent on imported gas, but it is Norway which is the main beneficiary - and imports from Nigeria, Qatar, Trinidad, Libya, and Egypt have provided additional volumes. Algeria has increased its market share in Europe since 1997, but only minimally; Russia's share has remained steady.

Still, not all is well. Gazprom is not investing enough to meet future demand, and new supplies will be expensive due to high extraction and transport costs. In Algeria's case, delays have plagued the country's major export projects, casting doubt on the country's ability to meet its export targets in the near term. At the same time, gas imports from Norway may increase by almost fifty percent in the next decade, reassuring wary Europeans. Gas from the Caspian Sea will also enter Europe this year, though major further supplies will have to wait. Qatar and Nigeria will add gas in the near term, while Libya's medium-term potential is large as well.

The main issue for Europe is deregulation, not import dependence. The countries that have liberalized the most have improved their security. Spain, which used to import around 60% of its gas from Algeria, has managed to reduce that number to 33%. The UK has seen lower average prices than countries on the continent - and deregulation has brought about a multitude of import projects to help the country manage the decline in its gas production.

The main energy crises Europe has faced could have been averted by a better market - one that sent clear price signals and guaranteed access to pipeline networks. That battle is still being waged, however: the European Commission is pushing for more competition, while some member states see energy as a strategic sector that needs protection. The emerging consensus is toward better regulation and the independent operation of networks - both improvements on the current system. Europeans want a common energy policy to deal with their insecurity. What they really need is a common market.

Key Conclusions

Europe's traditional suppliers, Russia and Algeria, face challenges in increasing their exports to Europe.

Norway and Qatar will become even larger suppliers into Europe in the next few years.

The pace of liberalization will greatly affect European gas markets and gas security.

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Nikos Tsafos is an Analyst in the Global Gas Group. For further information on this article contact Enews_ntsafos@pfcenergy.com.