Europe’s Gas future is full of acts of god, banana skins and black swan events

By Nicholas Newman

In recent years, Europe has experienced a gas glut caused by the US becoming self-sufficient in gas (mainly due to unconventional gas production), which has also caused traditional US suppliers to divert exports to the European Market. However, there have been acts of god, banana skins and black swan events that have affected in recent times the EU gas market. These have included Japan’s massive emergency imports of gas and the Libyan war that halted gas exports to Europe, although Libyan gas exports are beginning to recover.

We are in the midst of on-going changes in the European gas market framework, in part due to European Commission intervention, but also due to the development of alternative gas import sources both domestic and foreign. We have seen the rise in the use of hub pricing, as there has been a decline in the dominance of oil indexed long-term gas contracts and a greater range of contracts made available. The trouble is the market is asking will the new trading environment depress prices or support Gazprom’s ability to influence the market. It is also being asked is too much world gas production capacity coming on stream too soon.
As for shale, America is not the only source for shale gas E&P so is UK, Poland, China, India, Australia and Argentina. Nevertheless, for the EU shale E&P is at an earlier stage of development than in the US. There are fears that US shale gas could flood the EU gas market, thus delaying development of EU domestic production for years. In addition, there are fears that Europe is still not ready to fully exploit shale gas production on a large-scale.
Factors affecting the EU gas market include developments in Asian pipeline gas and LNG demand. The black swan in the market could be China, Beijing could insist that the Central Asian gas resources it has developed should be paid for at below market prices or even in kind. Or even that it will replace gas imports with its own massive reserves of unexploited unconventional gas, which it could switch too, instead of importing from Central Asia, Gulf States, South East Asia and Australia.
In addition, the timing and slippage of North American shale gas projects. Also the future pricing and production policies of gas producers together with market developments, including how soon will Europe’s economy recover and the impact of rival fuel sources on gas demand. However, forecasting about the future depends on how many acts of god, banana skins and black swans will occur to affect the European gas market.
Loosely based on notes of a seminar  given by Howard V. Rogers Senior Research Fellow OIES on 16 November 2011

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