Europe's Failed Natural Gas Strategy Gazprom Hopes to Build Second Baltic Sea Pipeline
Part 2: America's Growing Role in the Natural Gas Market
With the help of a technology known as hydraulic fracturing, or fracking, energy companies are able to tap into gas reserves that were considered unattainable until now. The environmentally controversial method is widely in use in the United States. In the southern states of Louisiana and Texas, for example, so-called frack trucks travel from well to well, forcing a liquid mixture of water, sand and chemicals into the ground under high pressure. This fractures rock formations, allowing gas to escape that would otherwise have remained trapped in the ground. In the US market, some 60 percent of natural gas is now being produced by unconventional means.
The use of fracking has enabled the United States to become the world's largest producer, even larger than Russia. What is currently happening in the United States "represents a potentially decisive shift in the history of energy," says ExxonMobile CEO Rex Tillerson.
The excess supply of gas has caused prices to plunge in the United States. Only four years ago, the price for one million BTU (British Thermal Units), the standard energy unit in the industry, briefly rose to $14. Today the price has dropped to only about $2.
US trucking companies have long since begun converting their fleets from diesel to natural gas. Coal producers are having trouble selling their product, because it's become cheaper to operate power plants with natural gas. It's also better for the environment, given that natural gas emits only half as much CO2 as coal. On the whole, the low price of natural gas in the United States has given the country a significant advantage and attracted foreign investment. After all, prices for natural gas elsewhere are much higher. In Asia, consumers pay up to $16 for a million BTU. In Europe, they range between $6 and $8.
But this price differential between the US and the rest of the world will probably not be sustainable for long, now that energy companies are transporting more and more of the fuel by ship in the form of Liquefied Natural Gas (LNG), making natural gas a global commodity.
Risks for the Russian Business Model
Many ports are building new terminals for LNG tankers. On the Louisiana coast, for example, Houston-based Cheniere Energy has built a transshipment station that was originally intended for importation. Now the company plans to use it as a launch pad to export cheap American natural gas worldwide.
This new competition threatens the Russians' traditional business model. They are accustomed to pegging the price of gas to oil prices. Delivery contracts sometimes run into the decades, and if customers need less, they have to pay the full contract price anyway. The principle, called "take or pay," has been extremely profitable for the Russians.
As old contracts begin to expire, customers are becoming more self-confident in new negotiations, because they can now buy natural gas on the spot markets. On the European Energy Exchange (EEX) in the eastern German city of Leipzig, for example, trading volume increased by more than 50 percent last year.
Being part of a competitive environment is a new experience for the Russians. Nevertheless, Nord Stream Managing Director Warnig is convinced that a new pipeline through the Baltic Sea will pay off. "Shale gas," he says, "will not acquire the same importance in Europe as it has in the United States, if only because of the much smaller areas where drilling can take place. In fact, we are even likely to see a substantial shortfall in Europe in the next 20 years."
He believes that demand for natural gas in northwestern Europe will remain relatively constant, at about 300 billion cubic meters a year, until 2030. During the same time period, however, supplies from natural gas producers such as Great Britain and the Netherlands are likely to decline, Warnig believes -- from 150 billion cubic meters annually today to just 50 billion each year in 2030.
Competition in Europe
Also working in Gazprom's favor is the fact that Germany's shift away from nuclear power has made natural gas that much more important. Modern gas-fired power plants are extremely well suited to offsetting the strong fluctuations in the power grid that result from renewable energy sources' growing share of the energy mix. If the wind isn't blowing or the sun isn't shining, operators can fire up the power plants within minutes, much less time than for any coal-fired power plant, and thus keep the grid stable.
According to energy industry estimates, Germany will need at least a dozen more gas-fired power plants in the coming years. The Russians would like to not only supply the gas, but also operate the power plants, as Gazprom CEO Alexey Miller recently announced. Then they could earn money in two ways, by selling both the gas and the electricity.
But that is still a long way off. Whether things will go according to plan for the Russians depends mainly on how the flood of gas triggered by the United States will affect Europe. If it puts pressure on prices, the Russians will be forced to make concessions when negotiating future contracts.
All of which means that the natural gas market in Europe is seeing the kind of competition that hasn't existed thus far. In the end, this development could have a greater impact on energy security than the decision over how long the Nabucco pipeline will be -- or whether it will be built at all.
Translated from the German by Christopher Sultan
- Part 1: Gazprom Hopes to Build Second Baltic Sea Pipeline
- Part 2: America's Growing Role in the Natural Gas Market