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Demand doubts cloud grand plans for gas

April 27, 2010

By Guy Dinmore and Heba Saleh, FT
So much uncertainty hangs over the shape of Europe’s future energy sources that grand plans to transform the Mediterranean into a spaghetti junction of gas pipelines — with Italy as hub – risk languishing on the drawing board.

“After this financial crisis we are a bit in the fog,” admits Umberto Quadrino, chief executive of Edison, a Milan-based utility and Europe’s oldest energy company.

Just two years ago there was an air of panic over how Europe would bridge a huge deficit in gas forecast over the next decade. Demand was rising, domestic production was falling sharply, ageing nuclear power plants were to be phased out and coal-fired power stations were seen threatening EU targets to cut emissions.

Much has changed since and forecasts have been dramatically revised. Gas consumption in the EU-27 fell an average of nearly 7 per cent in 2009 and is seen taking several years to get back to pre-crisis levels. Nuclear power may be given a new lease of life in Germany, and coal is not out of fashion yet.

Also contributing to falls in the price of gas has been the rapid development of shale gas that has made the US self-sufficient and large quantities of Gulf and Asian LNG (liquefied natural gas) looking for an alternative market.

Unsurprisingly in this environment, producers from North Africa to Russia and Central Asia are hesitating over committing to new investments.

Nonetheless, Mr Quadrino sees Europe needing to boost its gas supplies by 100bn to 120bn cubic metres of gas a year, about 30 per cent above current levels, by 2020.

North Africa for sure will be a major supplier, he told the FT, dominated by Algeria and Egypt that could together deliver an extra 25bn to 30bn cubic metres. Libya, a potential player, lacks sufficient investment in gas liquefaction projects and its existing pipelines have limited potential for expansion.

By July Algeria will start moving gas through its new Medgaz pipeline to Spain. Its planned Galsi pipeline to Sardinia and on to mainland Italy is projected to start by 2016. Egypt is investing in liquefaction terminals.

Although it lies far from the Mediterranean, Russia’s shadow still looms large over such plans. Europe lacks a coherent energy strategy but one major goal, backed by the US, is to reduce its dependence on Russian gas.

Even if North Africa steps up to the plate, Europe is still looking at importing large amounts of gas from Azerbaijan and possibly further afield from Turkmenistan.

Azerbaijan, planning the second stage of its Caspian offshore Shah Deniz field, is being courted – with various degrees of arm-twisting – by Russia and at least three European consortiums, with the US monitoring closely.

Mr Quadrino’s Edison is leading the ITGI pipeline project that would take 10bn cubic metres a gas a year from Azerbaijan through Turkey’s existing network on to Greece and then a hop across the sea to southern Italy. His European rivals are the Nabucco consortium — which has a much more ambitious but less feasible scheme to pipe 30bn cubic metres to central Europe — and TAP, led by Norway’s Statoil and EGL, a Swiss energy trading company, which is offering a final leg of pipe from Albania to Italy.

Italy’s role as future hub is enhanced by the recent opening of the world’s first offshore Rovigo regasification terminal, with long-term deliveries guaranteed by Qatar of 8bn cubic metres a year.

Domenico Dispenza, head of gas and power division at Italy’s Eni, the largest foreign operator in North Africa, says he agrees with the question posed by Algeria’s energy minister, Chakib Khelil — “How big will Europe’s energy gap really be?”

Projects are being postponed, says Mr Dispenza. “For Algeria and Libya, is this the right moment to push for extra supplies?” he adds. As for Egypt, he questions how much gas will be left for export after meeting growing domestic demand.

“I think that in both Libya and Algeria there is probably a lack of confidence in global gas markets because of what they see as low prices,” said John Hamilton a specialist on the region for African Energy, an industry publication. Last month Mr Khelil called on gas exporting countries to reduce their output because the current price of $4 on the spot market “was not sustainable for producers.”

Mr Hamilton also says that there is a lack of “definition” in Algeria, which supplies Europe with some 15 per cent of its gas, over what its production policy should be, especially in light of Algeria’s own needs.

In both Algeria and Libya there had been a progressive tendency towards resource nationalism with tough conditions imposed on international oil and gas companies.

In Libya, the hydrocarbons sector has increasingly become a battlefield between reformers who want to encourage foreign investment and conservatives who want to squeeze international companies for as much as they can.

So far, the two sides seem evenly balanced, but Libya remains a tough environment for international companies as illustrated by the experience of Verenex, a Canadian oil company which found itself blocked when it tried to sell its Libyan assets to China National Petroleum Corp.

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