The second article in the series on European energy and LNG issues is devoted to contemporary situation around gas supply, diversification and consumption in the EU’s member states and the Baltic Sea area. Besides, we’d like to attract our readers’ attention to a new publication revealing complex LNG issues in the Baltic Sea region with some perspectives concerning gas future in Europe and the world.
Energy issues are the most important items in political economy of any state, as a country cannot survive without energy; however, the present energy systems are under severe stress and have to be changed. The global and European energy challenges require new approaches: e.g. through for example the “energy transition” and “net-zero economies”, the issues pertinent to both the EU and the member states.
Present national energy policies are deemed to be restructured, in particular the biggest in the world like, e.g. India and China, which are facing deep power crunch in the economies based on coal-fired plants and visually depleted future fuel stocks coped with a squeeze on electricity supplies and blackouts hitting millions of homes and businesses.
Complexities in energy policies are attracting the attention of the EU institutions, e.g. the EU’s finance ministers reflecting urgent issues of increasing energy costs (primary, electricity) and other specific economic concerns. For example, a discussion paper for the Eurozone finance ministers meeting in Luxembourg recently reveals a deepening crisis facing EU states through the hikes in energy prices. A record increase in natural gas prices is having multiple negative effects on national economies and peoples’ wellbeing in the coming winter.
The EU governance is trying to manage Union’s requirements for the reset on national political economies: thus, it requires the states to submit their national budgets’ drafts to the Commission in the fall of each year (usually around mid-October); however, in 2021, the impact of higher prices on national budgets is becoming a complicated issue. The Eurogroup for example expressed concern over consequential inflation; in particular, finance ministers raised key questions to the European Central Bank about the interest rates in the eurozone. It is not clear, whether the rise of energy prices has a permanent or transitory character; the shock is already reflected in slightly growing annual inflation figures in September (about 3-4 percent) compared to just 3 percent in August. Besides, cooperation among the EU-27 states on energy regulations is urgently needed; some states for example argue about the increasing role of nuclear energy in transforming political economies and underline the need for more long-term changes in energy policy.
Thus, French finance minister argued recently about the need to explore in the states “more structural changes”; in particular, he stressed that “in the longer term, the EU should focus on achieving energy independence by investing in de-carbonized all means of energy production”. He also made some arguments in favor of nuclear energy to be classified as green by the Commission: rapid inclusion of nuclear energy within the European tax policy and in the state aid regulations seems quite necessary. Meanwhile in Poland, increasing attention is being put towards small-scale solar projects, turning the issue into a problem for the government.
Energy issues in the Baltics
The Baltic Sea region includes mostly EU member states, except some Russian Federation’s territories (e.g. Kaliningrad and St. Petersburg regions). The EU-Russia energy dialogue was set up in 2000, to provide the overall framework for the energy cooperation between the EU and Russia. This dialogue has been on hold since known events in Ukraine in 2014 and implementation of the Minsk Agreements. Only the technical work-stream on internal market issues under the previous EU-Russia Gas Advisory Council (GAC WS2) remained operational. Despite the suspension of the formal energy dialogue, the EU continues to talk with Russian counterparts on an ad-hoc basis, addressing pressing issues. The EU is also in discussion with the Russian Federation in the context of the trilateral talks on gas transit through the Ukraine, perspective start of Nord Stream-2 and other EU-Russia energy issues.
The LNG import in the EU has fallen by 27% year-on-year in 2020, owing to increasing Asian wholesale gas market prices, which resulted in cargo redirections towards the Asian-Pacific markets. Russia, the US and Qatar had almost equal shares in the extra-EU LNG supply (17 bcm). In 2020, the total EU LNG imports amounted to 84 bcm, down from 88 bcm in 2019. The biggest EU LNG consumers were: Spain (21 bcm), France (20 bcm), Italy (12 bcm), Netherlands (8 bcm) and Belgium (7 bcm). The United States supplied 19 bcm of LNG to the EU, followed by Qatar (18 bcm) and Russia (17 bcm). In global comparison the EU was the third biggest LNG market after Japan (102 bcm) and China (91 bcm) in 2020.
In 2020 gas consumption in the EU was down by 3% (12 bcm); the biggest decreases are observed in Spain (3.7 bcm, -10%), Italy (3.4 bcm, or -5%), France (3.1 bcm, -7%), Germany (2.5 bcm, -3%), compared with the same period of 2019. In the United Kingdom consumption of gas decreased by 9.4 bcm (-12%) during the same period; all abbreviations see below.
New research on LNG in the Baltics
A newly published book analyses the recent development of liquefied natural gas (LNG) in the Baltic Sea region and the energy security’s issues which, according to authors, have improved after Finland, Lithuania, Poland, Russia and Sweden have constructed their LNG import terminals*). In addition, the LNG’s issues are dealt with including major pipeline projects, such as Baltic Pipe, Balticconnector, Nord Stream 2 and Gas Interconnection Poland-Lithuania, as well as their impact on energy security of the Baltic Sea region. Having these issues under analysis, the book represents a perfect reference source for all those interested in the European energy markets and energy security issues.
*) More in: “The Future of Energy Consumption, Security and Natural Gas. LNG in the Baltic Sea region”. – Springer Publ. Palgrave Macmillan. – 2022. Liuhto, Kari (Ed.); ISBN 978-3-030-80367-4. E-book version in: https://www.springer.com/in/book/9783030803667.
New research on LNG shows that this source of energy is not only important for the sub-region’s member states’ economies, but for the whole EU economic structures. However, according to the editor’s note, the book’s origin dates back to 2015 (when the Centrum Balticum Foundation (www.centrumbalticum.org/en) based in Turku, Finland compiled a research “Natural Gas Revolution and the Baltic Sea Region”, the publication reveals to inquisitive readers vital historic transformations in the national gas policies and describes the natural gas development, particularly the LNG, in the Baltic Sea region’s states and to assess the security of energy supply linked to the LNG. More in: https://link.springer.com/content/pdf/bfm%3A978-3-030-80367-4%2F1.pdf.
The book’s twelfth chapters include vital research outcomes concerning, e.g. the LNG exports’ geo-economic factors (by the Polish professor, Mariusz Ruszel), who noted that “the LNG’s-type energy supply is a risky affair as quite a few LNG tankers are owned by EU transporting facilities” (p.VI).
One of the three Russian expert-writers (A. Shadurskiy) describes in detail the current state of Russian LNG terminals and outlines the Russian LNG export future. He correctly mentions that Russia always wanted to be the world’s second largest LNG exporter in the coming years. Thus, transmission of natural gas from Russia to the European countries and Turkey via Ukraine in 2020-24 corresponds to the capacities ordered by Gazprom for transmission through the territory of Ukraine. The agreement between Ukraine’s Naftogaz and Russia’s Gazprom for the reservation of transit capacity by Gazprom in the amount of 65 bcm (178 million cubic meters, mcm per day) in 2020 and 40 bcm (110 mcm per day) in 2021–2024. Russia’s gas transit via Ukraine to southern Russia stopped in 2007 due to Gazprom’s construction of a bypass pipeline.
Norwegian researcher, Jakub M. Godzimirski deals with the hydrocarbon reserves of Europe’s second largest energy exporter Norway, as well as the development of their production and exports to the EU and the UK. He reveals the decrease in Norway’s gas production in the 2030’s and Norway’s significant role as gas supplier to Poland through the Baltic Pipe. He also made a vital point that Norwegian natural gas may have an essential role in the production of green hydrogen. Norway’s relatively voluminous gas reserves, well-developed energy infrastructure and access to renewable hydropower can make Norway a stable perspective partner for the EU in a new era of green hydrogen.
Polish professor Dariusz Zarzecki examines the progress of the LNG development in Poland, i.e. construction in the Baltic Sea region’s largest LNG import terminal in Swinoujuscie in north-western Poland. The country intends to expand this LNG terminal and is planning to build
a second LNG receiving unit in Gdansk in north-eastern Poland. Once Swinoujuscie has been expanded, the Gdansk LNG import terminal and the Baltic Pipe line have been constructed, the import capacity of these units would exceed Poland’s annual natural gas consumption.
The first LNG import terminal in the Baltic States was opened in Lithuania in 2014, which ended the Baltic States sole dependence on Russian natural gas. Lithuanian researcher, Tadas Jakštas underlines the terminal’s importance for energy security of the Baltic States and the significance of Lithuania’s LNG import terminal to security of energy supply in the Baltic States.
Thus, both authors (Zarzecki and Jakštas) demonstrate that the LNG receiving facilities in these two countries have decreased the dependence on Russian natural gas and lowered the price of gas deliveries from Russia by breaking Gazprom’s gas monopoly.
In addition to describing Latvia’s plans for an LNG receiving port, Latvian expert Aboltinš revealed a significant for the security of energy supply for all Baltic States factor, i.e. the underground gas storage in Inchukalns, which is the largest in the Baltic States. This gas storage allows all the three Baltic States and Finland to meet their natural gas needs during the whole winter season.
Finish researchers (Laura Klemetti and Hanna Mäkinen) analyse the development of natural gas, particularly LNG, and the role of the Balticconnector gas pipeline between Estonia and Finland in Finland’s energy supply. The researchers point out that Balticconnector alone does not bring effective gas diversification for Finland, and therefore the security and diversification of gas supply in Finland and the Baltic States necessitates the completion of the gas interconnection between Poland and Lithuania (so-called, GIPL).
The Polish-born energy expert (currently residing in the US), Anna Mikulska assesses the significance of the diversification of gas imports in the Baltic Sea region and the integration of gas transport infrastructures to the security of energy supply. Using a calculation model, she shows that the Baltic Sea region’s countries in general still are over-dependent on Russian natural gas. It is true that the issues of natural gas and specifically LNG can be an important factor for politicians, national governance authorities, corporate and scientific community providing a better understanding of the energy use, perspectives and transition in Baltic Sea region.
The Liuhuto’s chapter reviews the development of natural gas, in particular LNG, in the EU’s energy consumption since the turn of the millennium: although gas consumption decreased by three percent in 2020 due to the economic decline caused by the corona pandemic, the natural gas share in the EU’s energy consumption continues to grow as the EU implements its carbon–neutral energy policy and Germany is set to shut down its last nuclear power plants by the end of 2022. The increased consumption, combined with the decrease in the EU’s gas production, will further increase the EU’s gas import dependence. In 2020, over 85% of gas consumed in the EU was imported from outside the EU.
Russia is still the EU’s largest gas supplier: in 2020, its share was 48% of the EU’s total gas imports, including LNG. Russia’s share of the EU’s gas import, Liuhuto argues, will grow in the coming years, as the gas production of the Netherlands (presently, the largest gas supplier for the EU states) will drop in 2022 when the Netherlands close its largest gas field in Groningen. Hence, gas production in Norway, the EU’s second in volume external gas supplier, will decrease more rapidly over the next decade.
Fortunately, the EU’s gas supply sector has another vital sector -LNG, which in 2020 already contributed a quarter of gas imports into the EU. The LNG share could be even larger, argued authors, as the EU states use only half of the LNG capacity in their ports, and only half of EU member states imported LNG.
Since is LNG is already having a strategic role in the EU’s primary energy consumption, the authors recommend the EU institutions in their decision on security of supply pay more attention to problems around LNG ports, ownerships of LNG tankers and geographical diversification of gas supplies. The LNG boom, which has lasted already about two decades, has slightly reduced the EU’s dependence on Russian gas supplies; however, the ultimate security is far from over. But may be, as soon as trade is reciprocally profitable, the EU and Russia shall stick to some favorable cooperative terms?
It is obvious that an active LNG’s use has numerous additional facilities, e.g. new gas pipelines from Russia to Europe (Nord Stream 2 and TurkStream); waiting for the completion of Nord Stream 2, Germany (as the world’s second largest gas importer) has not constructed a single LNG terminal. It seems that the expected pipelines will continue to dominate gas supply both to Germany and neighbor states. In addition to the existing pipeline facilities, the EU’s “green deal” could facilitate a “hydrogen revolution” will not only provide for some opportunities but also increase uncertainty among the member states concerning LNG. Reference to: https://link.springer.com/chapter/10.1007/978-3-030-80367-4_2
First book reviews have been very positive: the reviewers underlined the book’s value in scientific logic, collected statistics and authors’ team. A couple of Finish reviewers, e.g. Seppo Remes, professor at Finland’s Lappeenranta University of Technology, former member of the Board of Russian plastics and petrochemical giant Sibur Holding have underlined that the book was a “very useful presentation” showing new perspectives for energy security research, as it deals with the ongoing development and the future of natural gas – especially LNG – in the Baltic Sea region. Other analytics stressed that attention to energy as a foundation of modern societies, requires a sophisticated analysis all the factors that affect regional and international energy security. Reviewers underlined the economic interdependence is forcing the countries of the Baltic Sea region to tighten their partnerships concerning the use of gas and LNG.
One of the security’s experts (prof. Marko Palokangas, from Finland’s National Defence University) noted the book’s vital message on the energy issues having both political and economic facets being important for “comprehensive security”. Perfectly true, though the political issues are becoming often visible in the BSR’s energy cooperation.
European energy and Nord Stream-2
A German court dealt a blow to the controversial Russia-to-Germany gas pipeline on Wednesday, deciding not to adopt its philosophical interpretation of what a “completed pipeline” means. Construction on Nord Stream 2 is expected to wrap this summer, but the Gazprom-owned company argued that in 2020 the project was already “completed from the perspective of economic functionality.” The project, which is slated to double the capacity of the existing undersea route from Russian gas fields to Europe, has been a major source of friction in trans-Atlantic relations for several years. The U.S. has claimed it could give Russia new leverage over Europe and introduced sanctions targeting the project. Joe Biden’s administration softened the U.S. stance, reaching a deal with Germany last month to end a longstanding rift over the pipeline. Europe is facing a supply crunch, with inventories at their lowest in more than a decade during fall-2021. As a result, the market has been volatile, with prices tumbling at any signs of the start of flows via Nord Stream 2 and surging on news of tighter supplies. Gazprom said earlier this month that the Nord Stream 2 link can ship 5.6 billion cubic meters of fuel to Europe this year. While the decision was widely expected, some traders bet it could delay much needed flows via the pipeline.
The Düsseldorf Higher Regional Court’s judgment this August didn’t impact the construction of the 1,230 kilometer project, which is scheduled to begin operating this year. Source: https://www.worldoil.com/news/2021/8/25/german-court-order-may-delay-nord-stream-2-pipeline-startup.
In perspective, the Nord Stream pipelines remained the most important supply route of external pipeline gas to the EU: in 2020, its share in European import reached 37%, or 15 bcm in transit; the Ukrainian transit route re-emerged to the second place (34%, 14 bcm), and the Belarus transit came to the third place, with 25% (10 bcm), ahead of Turk Stream (4%, around 2 bcm).
In 2020 about 52 bcm gas was transited through existing Nord Stream; around 38 bcm gas was transited through Ukraine with EU destination, 33 bcm though the Yamal pipeline (to Belarus) and only 5 bcm through the Turk Stream. Decrease in EU Russian gas imports mainly impacted the Ukrainian transit route, argued the authors.
Other failed external LNG facilities
Developers of liquefied natural gas projects in the US are facing more hurdles in their plans to ship the fuel to Europe: e.g. a 2017-long agreement between the US LNG developer NextDecade Corporation and the construction of Irish Port of Cork import terminal in Ireland expired. While natural gas is the cleanest form of fossil fuel, it is still regarded as a serious source of greenhouse emissions and its production is blamed for polluting methane leaks. The second setback for NextDecade in Europe is France’s Engie SA scrapped plans for developing the LNG which was regarded as a victory for environmentalist and in line with the French policy to reduce pollution. However, the Houston-based developer intended to supply the terminal with LNG produced at its planned Rio Grande LNG facility in Texas.
The Cork terminal is already the second in line an LNG import terminal in Ireland to be demolished according to the country’s drive for cleaner energy; anyway, the terminal project has been withdrawn from the EU’s funds. Although the Irish LNG terminal’s suspension will not affect NextDecade’s ability to reach a final investment decision on its Rio Grande export project, the company is in talks with potential customers in Europe and elsewhere and still expects to make a final investment decision in 2021. The company is targeting carbon neutrality at Rio Grande LNG with the use of carbon capture and storage in the belief to create partnership with other US gas producers to supply gas to Rio Grande LNG and further distribute it to the LNG customers LNG with the lowest greenhouse gas intensity. Reference to: https://www.worldoil.com/news/2021/1/15/europe-turns-down-more-us-lng-on-greenhouse-gas-concerns.
Europe’s ambitions to make its economies carbon-neutral over the next three decades are a challenge to the LNG producers around the world that are still seeking billions of dollars worth of investment to construct new terminals. At the same time, the EU is increasing the share of renewables in the region’s power generation mix: already at the end of 2020, wind, solar, biomass and hydro together represented around 37% of the EU power mix (up from 35.2% in 2019), leaving only a smaller share for gas – around 21%, practically unchanged on a year-on-year basis. Power generation from solid fuels is constantly falling, e.g. by about 6 percent in 2020, compared to 2019; the share of solid fuels fell to about 13 percent in 2020 in the EU power mix, down from 15.2% a year earlier. Nuclear generation was slightly down by 3.3% in 2020 year-on-year, and its share reached 25.2%, slightly down from 25.7% in 2019. Carbon prices showed a measurable increase during 2020, rising from 27 €/MtCO2e to 32 €/MtCO2e, which, through increasing fossil generation costs, did not contribute to the competitiveness of coal and lignite in EU power generation.
Speculative double-increase in gas prices’ period, which lasted recently about a month, is not going to change a general European states’ trend towards general de-carbonisation and reduction of all sorts of external carbon-like sources of energy in the states’ energy mix.
High global energy prices are not generally affecting the EU: the Union’s energy policy’s directions are oriented on long-term solutions, so consumers would not feel steep energy prices for a long time.
However, the questions of the member states’ compliance with financial implications of the Commission’s Fit for 55 Climate Change package are still in the states’ priorities. The EU’s general message is that “renewables will fix all”: it is quite clear that the EU’s energy future is renewables and not gas, said Commission President, von der Leyen after the Western Balkans Summit this October. She insisted, e.g. that recent temporary surge in energy costs, which was actually linked to gas hikes, not renewables, which are quite stabile or even falling in price. Speaking recently at the Environment Council, Commission Vice President Frans Timmermans stressed the need to find a “consensus at EU level on how we can protect our citizens against undue price hikes” in future. He however warned that the climate crisis issues could lead to social unrest if the states will deal with these issues irresponsibly and “insupportable”.
There could be several spheres in the member states’ national governance to make a difference: 1) work towards even faster growth within renewable energy: the EU’s ambition is to become an offshore wind major and increase renewable energy capacity tenfold by 2026; 2) invest in new technology to create and build new low-carbon markets, value chains and industries, including for hydrogen; and 3) continue cutting greenhouse gas emissions from EU’s production sector: e.g. the EU is developing the world’s largest floating offshore wind farm, which will reduce emissions from oil and gas installations by as much as the equivalent to emissions from 100,000 vehicles. Besides, the climate change solutions are still important and require a shared solution in support for the goals of the Paris Agreement, towards policies paving the way to net-zero emissions. Reference to:
Note. Abbreviations used in two parts: bcm -Billion Cubic Meters; bcma- Billion Cubic Meters Annually; BEMIP- Baltic Energy Market Interconnection Plan; BRICS- Brazil, Russia, India, China and South Africa; CCGT-Combined Cycle Gas Turbines; kWh- Kilowatt Hour; MW- Megawatt; MWh- Megawatt Hour; CCS- Carbon Capture and Storage; HPP- Hydroelectric Power Plant; CCUS- Carbon Capture, Utilisation and Storage; ENTSO-G – European Network of Transmission System Operators for Gas; GIPL- Gas Interconnection Poland-Lithuania; V4 – Visegrád Four (Czechia, Hungary, Poland and Slovakia); UGSF- Underground Gas Storage Facility; TWh- Terawatt Hour; TJ- Terajoule; toe – tone of Oil Equivalent; Sm3 o.e. – Standard Cubic Meter of Oil Equivalent (1,000 m3of natural gas); RES – Renewable Energy Source; mtoe – Million Tones of Oil Equivalent.