Long-term natural gas supply to Europe: Import potential, infrastructure needs and investment promotion Manfred Hafner, Sohbet Karbuz, Benoit Esnault, Habib El Andaloussi Observatoire Méditerranéen de l‘Energie (OME) Due to increasing European gas demand and declining domestic supplies, Europe faces a growing import dependency over the next decades. Europe‘s neighbouring regions are endowed with substantial reserves and resources which can cover the increasing European import requirements in the medium to long term. W ith the development of its different uses, especially for power generation, gas is increasingly gaining importance for European energy security of supply. A substantial captive demand has indeed developed during the past decade, which explains the essential role the EU gives to natural gas in its energy policy. Securing and increasing gas supply will, however, require huge investments on all the segments of the gas chain, namely exploration and development, international transit and downstream infrastructures (gas lines and storage). These investments will be realised by energy companies and will, therefore, require an appropriate investment climate, which not only involves economic considerations but also a stable environment, a clear regulation and the possibility for operators to develop necessary strategic partnerships. This paper assesses the future long term (2010-2020-2030) gas import requirements and external supply potential for Europe, and identifies future gas corridor infrastructure needs taking into account a reserve/resource analysis, production and demand outlooks, export infrastructure and projects, supply costs as well as institutional, strategy and geopolitical issues, etc. Finally, the paper identifies investment barriers for different types of gas corridor infrastructure projects and proposes issues to be addressed by policymakers in order to put in place a favourable environment regarding investment promotion and to create a sustainable gas market for the long term. The paper is based on the work carried out by OME in the framework of the ENCOURAGED (Energy Corridor Optimization for the European Markets for Gas, Electricity and Hydrogen) project financed by the European Commission DG-Research 6th Research and Development Framework Programme. 1. Long term European gas import requirements Import requirements are the difference between domestic demand and domestic production. According to the two demand scenarios used in this study, import requirements in Europe-341 should increase from 220 bcm in 2000 to 470 bcm in 2030 in the low gas demand scenario and even up to 650 bcm in the high gas demand scenario (Figure 1), this represents a doubling or a tripling of import requirements over three decades. Such an evolution requires increasing supplies from the traditional European suppliers as well as developing additional sources. 1 Europe-34 corresponds to EU-27 plus Switzerland and all the Balkan countries. 1 Figure 1 Europe-34 future gas import requirements bcm 900 m 800 c b High demand scenario 0 700 5 6 m c 600 b 0 Low demand scenario 7 500 4 400 300 Import m c requirements b 0 200 2 2 100 European gas production 0 2000 2010 2020 2030 Europe-34 corresponds to EU-27 plus Switzerland and all the Balkan countries Source: DG-TREN and OME It should here also be pointed out that, in addition to the future European demand uncertainties, there exists a great level of uncertainty concerning future domestic gas production forecasts. The biggest question mark is the rate of decline of the UK gas production. For example, the EC DG-TREN estimate used here assesses UK gas production in 2020 at 88 bcm, whereas the UK Department of Trade and Industry estimates it below 20 bcm. A level between these two figures seems reasonable, but this illustrates the level of uncertainty associated to future gas import requirements. 2. Long term external gas supply potential to Europe In order to satisfy future import requirements, a thorough assessment of long term potential gas supply sources has been carried out. A large number of potential natural gas suppliers to Europe have been considered. Because of the long term character of this study, up to 2030, and the continued rapid evolution of the world of natural gas, the possibility for new suppliers to appear during the period under consideration cannot be ruled out. The assessment of the future supply potential by each exporting country to Europe has been based on the following bottom-up methodology. Reserves and resources (reserves which are not discovered yet) assessment combined with the countries‘ energy strategy and institutional framework as well as exploration and development efforts have allowed to evaluate a future production potential. Assessment of future domestic demand, the countries‘ gas exporting strategy, presence of international companies and export projects, economic, institutional, geographical and geopolitical considerations as well as arbitration possibilities between different export markets have allowed to evaluate the total gas export potential and the export potential to Europe. W henever possible and, in particular, up to 2015-2020, the analysis was based on existing projects and infrastructure capacity for exports (by pipeline and LNG) as well as contracts. The more remote the analysis, the more it had to be based on assumptions. 2 .1. Norway According to the Norwegian Petroleum Directorate, Norway‘s total gas resources amounted in 2005 to 6007 bcm (about 55% in the North Sea, 31% in the Norwegian Sea and 14% in the Barents Sea). By 2005, Norway had produced 948 bcm. The remaining resources are evaluated at 5059 bcm, of which 3159 bcm of proven reserves. The large percentage of proven reserves indicates that Norway will remain an important gas producer over the foreseeable future. Until today only about 60% of the Norwegian Continental Shelf has been opened to exploration. The North Sea is the best explored area and, after more than 30 years of exploration, while the average success rate is currently above 40%, the average size of new discoveries is declining. Exploration has progressively shifted from the North Sea, further north to the Norwegian Sea and recently to the Barents Sea, which represents major technological and environmental challenges. Gas production in Norway has been steadily increasing as new fields and export pipelines came online. Norway‘s gas production more than tripled during the last ten years, increasing from 28 bcm in 1995 to 87 bcm in 2005. W ith 1129 bcm remaining reserves, Troll is the Norway‘s largest natural gas field. Ormen Lange, with 375 bcm of reserves, is the second largest. It is expected to start operation in 2007. Norway is also developing the Snøhvit field, whose production is expected to start in 2007, in the Barents Sea. Many operators have ambitious plans to increase production from their existing fields. Gas production is expected to increase markedly in the future, especially after 2007 when Ormen Lange starts producing. Domestic gas consumption remains very limited (about 1% of Norway‘s energy consumption). Though gas fired generation could significantly increase in the coming years, we expect that about 90% of the future gas production should be for the export market. Norway‘s offshore transportation system (Figure 2) has mainly been designed for exports to continental Europe. Its present export capacity amounts to some 87 bcm/yr. Exports through these lines have strongly increased over the past years and reached 79 bcm in 2005. Norway‘s system is also connected to the UK through the Vesterled pipeline, from Frigg and Heimdal fields to St Fergus (13 bcm/yr). A new 1200 km offshore pipeline (the Langeled pipeline) will carry the gas produced from the Ormen Lange field, in the Norwegian Sea, to Easington, on the English east coast. This 22-24 bcm/yr pipeline is expected to start operation fully by October 2007, but the southern part of this pipeline began already gas deliveries in October 2006. There is moreover a plan to build a new export pipeline, with 20 bcm/yr capacity, from Kollsnes to either continental Europe or to the UK. In addition, Norway is establishing LNG export capacity by building two liquefaction trains (5.7 bcm/yr each) in Snovhit, which will be online by 2007 and 2012. All these developments will enable Norway to export some 130 bcm of gas, of which 120 bcm for Europe, by 2030. 3 Figure 2 North European gas infrastructure and projects Shtokmanovskoye Existing Gas Pipeline Snohvit Shtockman Gas Pipeline Project LNG SnohvitLNG 23 bcm 6-11 bcm Asgard fields/ ATS Haltenbanken 21 bcm FINLAND S Ormen Lange/Britpipe T A 22 bcm Ormen SWEDEN Lange NORWAY M urchison Troll Frigg/Vesterled Eastern axe 45 bcm 13 bcm Norpipe 11 bcm Frigg Europipe I 13 bcm HELSINKI Europipe II 21 bcm I I I I TALLINN Western axe 28 bcm STOCKHOLM e e p Zeepipe 13 bcm p i i p Franpipe 15 bcm p o o m r r a I I u u e r E E e e t p p S i i d NordStream p p r o o DENMARK o r r N 27-55 bcm u u e e p p E e e E e e i i COPENHAGEN p p p p p Easington p i i i i r r e p p p p p o o n n o e e r N a N a u e e r r - E F F Z Z Bacton al Balgzand am Isle of Grain BBL Y 5/10 20 bcm Source: OME 2.2. North Africa North Africa is a traditional gas supplier of Europe. In addition to their vast gas resources, North African countries benefit from their geographic proximity to Europe, especially of its fastest growing markets, the EU Mediterranean countries. W hile Algeria has remained almost the only exporter for decades, Libya and Egypt are rapidly developing their sales.