According to Reuters, gas supplies to Europe will become less reliable as much of its new demand in the coming decade will need to be met with gas from politically unstable countries in Africa.
Europe’s gas demand is expected to rise by approximately 20% to 580 million m3/y in the next 10 years, as economic growth resumes and governments plan to switch from coal to gas for power generation.
At the same time, supplies to Europe from the North Sea are expected to fall by at least 20% as reserves dwindle, while established suppliers such as Russia and Norway will not be able to increase exports by much and Qatar focuses more on lucrative Asian markets.
Hence, Europe’s most reliable supply source will have to be largely replaced by supplies that the industry considers to be the most unreliable.
Analysts have indicated that this will increase the likelihood of supply disruptions and result in a risk premium that will be priced on European markets.
It will also make Europe’s gas prices more closely resemble oil, often seeing price spikes due to security problems in Asia and the Middle East.
‘Political violence could hit production or transit routes. Should Europe be reliant on these African gas producers, there is a potential risk that wholesale prices will rise’, said Amy Gibbs at political insurer Jardine Lloyd Thompson.
Ofgem has commissioned a report on future supply risks. This report said that ‘the decline in UK continental production has inevitably resulted in increased reliance on international gas markets. This exposes Great Britain to a range of additional risks’.
Research indicates that Europe will need to meet around 20% of its annual gas demand equivalent to 125 billion m3 from sources in Africa. High production costs and a lack of expertise in many countries that are planning to export gas means that new supplies will be expensive and are likely to be delayed.
Furthermore, Africa currently only has approximately 85 billion m3/y of gas available for export, a figure exploration companies expect to rise to 130 billion m3 by 2020. Europe will want almost all of this gas, something analysts say is unlikely given Asian buyers pay more than Europe. Most of East Africa’s expected production of 40 billion m3/y is already earmarked for Asian buyers.
High risk and price
Adding to rising supply tightness is political instability and high production costs.
Violent uprisings have already toppled governments in Libya and Egypt and reduced supplies, while an attack on Algeria’s In Amenas gas facility, which is run by BP and Statoil, in January highlighted the risk there.
An Ernst & Young report has highlighted security risks in Algeria, Angola, Libya, and Nigeria. Risk levels in all African countries with major natural gas export potential were considered either moderate or high.
Consultancy firm Control Risks also considers all African gas exporters to have medium to high political risk levels.
One of the biggest concerns is Algeria, Africa’s biggest contributor to European gas supplies. The country supplies approximately one third of the gas used by Italy and Spain but is considered so unstable that Rome and Madrid are seeking ways to reduce their dependence on Algerian gas.
Algerian gas exports have already dropped to 50 billion m3 from approximately 70 billion m3 in less than 10 years. The country additionally faces rising threat from militant groups, especially in the south, close to borders with Mali and Libya, where most of its new gas supply reserves are.
BP announced in May that it would delay two major Algerian gas projects despite government efforts to attract new partners.
Analysts have also highlighted that potential new resources will be much more expensive to produce and connect to existing infrastructure, pushing up Algeria’s export price.
With a prospectively tight gas market, as well as security risks across Africa, analysts say that supply disruptions are almost unavoidable.
‘The tightness could make LNG cargoes harder to source and more expensive. This could feed through into wholesale gas prices’, Ofgem said.
Edited from various sources by Emma McAleavey.
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