An Italian translation of this post is available here . Thanks to Maurizio Moretto for the translation. Thanks are also due to Jean Laherrere of ASPO France for providing his interpretations of Russian and North African gas supplies.

This is the talk I was honored to deliver to ASPO Italy on 3rd May 2008 at their annual conference in Turin. 24 slides below the fold plus narrative of what I said on the day. The narrative boxes are below the slides.

Posted by Euan Mearns on May 13, 2008 - 10:00am in The Oil Drum: Europe

Natural gas provides 29% of OECD Europe’s primary fossil fuel energy.

It is used for: Home heating Heat and power for industry and commerce Electrical power generation Feedstock for chemicals and fertilizer For the last 25 years fossil fuel consumption has been more or less flat in Europe. But as the use of coal has declined, the use of natural gas has increased.

In the last 40 years, Europe’s consumption of natural gas has increased 19 fold. I think this is really quite an astonishing chart showing how our use of and reliance upon natural gas for fuel has grown. As we shall see later, this was made possible by rapid growth of natural gas production in the North Sea. This bounty whilst not yet exhausted is getting tired and is about to go into decline causing major problems for European gas and energy security.

Since we are in Italy, it is worth spending a moment looking at Italy’s reliance on natural gas. Italy does produce some gas - 11 bcm in 2006 and falling. This is compared with consumption of 77 bcm. So Italy like all other OECD European states, apart from Norway and The Netherlands is dependent upon imported gas. Natural gas makes up 38% of Italy’s primary energy consumption and 48% of electricity generation. Italy is more reliant on imported natural gas than most other European states – which is perhaps the reason Ugo asked me to give this talk☺

Historically, gas markets have been regional with points of consumption close to supply linked mainly by pipelines – N America, Europe and Russia. The main exception has been Japan / S Korea that has a long established LNG supply train. This and the following slide are borrowed from this presentation by BG Group (large pdf).

This picture is in the process of changing. Emergence of new markets for natural gas made possible by growth in LNG. S America, India, China and the Middle East – not shown on this map. LNG provides much greater interconnectivity of markets, greater competition and is rapidly leading to harmonisation of prices. Not shown on this map is the declining production in traditional sources of supply in N America and Europe.

This simplified map shows the principal supplies to Europe. These correlate with security of supply and understanding of that security. Indigenous supplies are most secure and we know most about them

Adjacent supplies are less secure and are less well understood

LNG supplies are fairly well understood – but we don’t know how the market will allocate supply to Europe and those supplies transported by ship are least secure.

The main features:

Three important countries: The UK, The Netherlands and Norway The UK gas production peaked in 2001 and is declining at 8.5% per annum – there is little disagreement on this point – the UK BERR (government) agrees with this scenario. This is one of Europe’s biggest gas supply problems since the UK used to export a little gas and is now looking to import increasing amounts of gas every year. This is placing considerable strain on the whole European gas market. The Netherlands have had a carefully regulated gas industry with production in Gronigen pegged by law. This has resulted in a very broad production plateau – a very sensible strategy. The offshore Holland gas production is now in decline (like the UK) and this will lead to slowly falling Dutch gas production. Norway is at a crossroads. The production gas export system has recently been expanded to 120 BCM per annum with the addition of the Langeled pipeline linking the Ormen Lange Field to England (and to continental Europe). The two giant gas fields, Ormen Lange and Troll and can go on producing at a suppressed plateau for many decades. But many of the other North Sea gas fields are in decline. Especially the oil associated gas and the combined prognosis is that Norwegian gas production may peak next year – a forecast provided by Rune Likvern – an informal contributor to The Oil Drum. This has been confirmed by informal releases from the Norwegian Government and the peaking of Norwegian gas will have profound effect upon European gas security. In summary, the prognosis for indigenous European gas production is quite bleak. Peak was probably in 2004 and in future we can look forward to relentless declines.

If we combine this European production forecast with a consumption and import model projecting historic growth in demand into the future we get a picture of rapidly expanding gas imports. In 2006 we imported 197 BCM natural gas and this model scenario projects that growing to 492 BCM by 2020 – that’s only 12 years away. Where will all that new supply come from? We are already seeing signs of high price rationing demand and I don’t believe this scenario can or will unfold. When I made this chart I sketched in this line indicating demand curtailment – and I will try to quantifying this at a later stage.

As this map shows Russia has many gas fields in West Siberia and the Yamal peninsula indicated here in red. Historic production was dominated by 3 supergiants – Yamburg, Urengoy and Medvezhye. Since 1970, these three fields provided the bulk of Russian gas production – powering the Soviet Union and Western Europe. These three supergiants are now in decline – this is no secret – the data has been published.

In 2006 Russia exported 115 billion cubic meters gas to Europe. The three most important importing countries are Germany, Italy and Turkey. New pipelines planned will provide 88 BCM new import infrastructure.

But will this bring new gas, or old gas via a new route? This is one of the most important questions to answer.

These two charts show two very different pictures of Russian gas production forecasts. The upper chart is based on existing and new pipelines from a forecast commissioned by the UK government. This shows export capacity doubling from 120 to 300 bcm per annum by 2030. This is what the UK government wants to believe will happen? The lower chart is compiled by Jean Laherrere and is based on decline modelling of existing fields with new field developments stacked upon the heritage assests of Yamburg Urengoy and Medvezhy. This shows fairly flat Russian gas production forward to 2020 – this has a more realistic feel.

Much hope has been placed in new pipelines being built from Russia. Nord-stream will produce gas from fields identified by Laherrere that will merely compensate for the decline from existing fields. If this is correct then it will not bring “new gas” to Europe but will merely maintain existing production levels.

This is a very important slide. It shows that Russia consumes two thirds of its own gas production. It also shows that other countries import gas from Russia – notably Ukraine and Turkey. Exports are very sensitive to any downturn in production or upturn in domestic consumption. With the data we have it is near impossible to model these variables.

With flat production and a continued rise in Russian gas consumption, exports could fall dramatically between now and 2020. How would these reduced exports be allocated. I’d guess to the richest countries who can pay the highest price – perhaps via the new pipelines.

North Africa is already linked to Europe by pipelines, and production and exports from Libya and Egypt are expanding. Most of N African gas production comes to Europe and this source of supply should continue to grow until about 2016. But note that Egypt is forecast to consume more and more of its own gas production that will lead to a peak and then decline in exports.

We now move on to look at how the LNG market might evolve. The market is currently dominated by Japan and S Korea. Total production in 2006 was 211 BCM and Europe had 25% share of that market. How will future LNG supplies be allocated? That’s a difficult question to answer.

This is a forecast of how LNG supply is forecast to grow, prepared on behalf of the UK government. It should grow from 211 BCM in 2006 to 600 BCM in 2020.

The LNG supply chain is long and complex. Note that we must contemplate storing LNG during summer by re-injecting into depleted gas reservoirs.

LNG tankers are also vulnerable in three notorious tanker bottlenecks in Hormuz, Suez and Malacca. The malicious actions of a very few individuals there could seriously disrupt gas supplies to Europe – disrupting industry, commerce and electrical power generation.

So how does all this information and speculation add up? By making the assumptions indicated, a supply shortfall is indicated by 2013. If this were to happen, then Europe would have to learn to live with less. This is subject to many uncertainties that could work either way – the shortfall could occur sooner or later. The main uncertainties are: Norwegian gas production Russian gas production and export forecasts. The share OECD Europe gets of these exports. The allocation of LNG exports.

In developing gas supply scenarios it is also very important to be aware of the cyclic seasonal nature of gas demand. The fact that most demand is centred on the N Hemisphere creates an annual global demand spike There is a need for increased gas storage throughout Europe in order to smooth out that seasonality. This may also smooth out seasonal pricing with consequences for the gas storage industries.

Further reading on The Oil Drum

The European Gas Market by Euan Mearns.

Daddy, will the lights be on at Christmas? by Euan Mearns.

The ASPO-Italy conference in Torino by Ugo Bardi.