Thursday, 30 November 2017

Why are preventive actions for supporting gas security of supplies to the EU Member States guided by selective approach countering against some supplies opportunities in favour of others albeit less affordable?
The imminent advance of winter reminds all of us of the need for reliable readiness for the next heating season of 2017 -2018. It goes without saying that in this case, it is important to take into account past experience, especially one that was associated with overcoming difficulties and even crisis situations. It should be recalled that last winter a number of European countries did not avoid significant energy supply problems. One of previous blog posts described a sharp drop in the electricity generation by renewables in the north of the continent earlier this year, particularly in Germany that affected the gas market.

At the same time, in the middle of last winter, Spain's energy market experienced an even more difficult situation caused by serious disruptions in gas supplies during the January cold snap. As it was characterized by E&C Consultants, "tourists in search of mild winter weather were caught in snowstorms and frost. The Siberian circumstances are exceptional and obviously cause a peak in demand for electricity and gas. The power system struggled to cope with this peak. In the Communidad Valenciana, 32.000 clients were without electricity and utility Iberdrola had to rush in 23 emergency generators. Álvaro Nadal, the new Minister of Energy is all over the press, warning the Spanish citizens to get adapted to more costly energy."

Spanish consumers appeared to be really caught by an unpleasant surprise as an unprecedented jump in energy prices occurred in January 2017. On 19 January, the day ahead electricity price averaged 88 euro per MWh. That was the highest level since February 2006. The new Spanish hub for natural gas, MIBGAS, created by integration of companies Mercado Ibérico del Gas (MIBGAS) and Iberian Gas Hub (IBGH) in 2016, set a price record, racing to 41.87 euro per MWh on 12 and 13 of January.

For comparison, at the same time in the North West European natural gas market the Daily Reference Price at the TTF hub was 20.856 euro per MWh. On January results, as the infographic shows below, at the Spanish hub MIBGAS the average price turned to be about 85% higher than at the Dutch hub TTF - 37.20 euro per MWh compared with 20.13 euro per MWh respectively.


The main reason for the serious disruption to gas supplies to Spanish consumers in January 2017 was the unanticipated reduction in LNG supplies from Algeria. The Skikda LNG plant of 4.7 million mt per year went down drastically at the end of December due to a heat exchanger issue, according to Algerian company Sonatrach source.

Besides that during the winter of 2016/17, weak rainfall and low wind speeds reduced significantly hydro and wind generation by 31% and 18% respectively. As stated in Global Gas Security Review 2017 by the International Energy Agency, because of low temperatures at the beginning of 2017, conventional demand for natural gas rose by 21% compared to a year earlier.

At this time, unfortunately, the European market responded to an unprecedented gas demand in Spain with a very considerable delay. Although, following the logic of the market, suppliers usually can only dream of grabbing a chance of that kind representing a unique business opportunity. However, suppliers actually did not take advantage of this situation on time, including companies delivering LNG via the Port of Zeebrugge in western Belgium, which is considered one of Europe's largest terminal for LNG, or directly from Qatar or Nigeria

It is also a matter of concern that the widely advertised US LNG terminal in Louisiana turned to be unable to make up for the missing Algerian gas. Anyway, one would think that a prompt response by means of shipping the US LNG to help Spain to overcome the January gas crisis might have a positive impact on the image of the North American shale gas. Given Spain is in fact one of the nearest destinations at the European market for the US LNG supplies. In this context, it is, of course, relevant to recall that such cases already occurred in practice when, if necessary, loaded LNG tankers being on the route changed their final destinations. But in the case of Spain this did not happen, and therefore the effect on the shale gas image turned out to be rather the opposite.

The Spain's case revealed that the current scheme of LNG supplies to the European market is incapable to respond in a timely manner to sharp weather-related fluctuations or technological accidents. Therefore, those in Spain who are responsible for the security of energy supply need to think about how to minimize the occurrence of stressful situations primarily by creating the appropriate reserves of energy resources.

It would be also necessary to take care of the diversification of supply routes using more reliable pipeline transportation. As, for example, it is in Germany or Austria, where LNG by sea does not reach. These countries are steadily increase gas supplies delivered by pipelines, therefore, the January gas stress like in Spain is unlikely to be possible. It turns out that many countries in Europe, except for the few as the countries of the Iberian Peninsula, attain much better position with regard to security of supplies since they have a greater or lesser potential to benefit from reliable natural gas flows by pipelines mostly from Russia, and the latter have been growing progressively. As Platts reported in the current mid-year, Russia had increased gas supplies to Europe and Turkey by 12% year on year in the first half of 2017. It has come to the attention of those who look into recent news published online that in the period from January 1 to August 15, 2017 gas imports from Russia increased by 14.5% in Germany, by 66.7% in Austria, by 28% in Slovakia, by 27.9% in the Czech Republic. Now hardly anyone can be surprised that European consumers of the pipelines from Russia more often take the opportunity to nominate volumes of gas they plan to get that exceed the contractual obligations.

Meanwhile, the same scenario as the Spanish one was already carried out by European Commission in 2015 and included the simulation of stress tests entailing in theory the disruption of gas deliveries from Russia as a basic assumption, which was made with a view to implementing the EU policy to ensure the security of gas supplies. Spanish energy stress demonstrated in practice that the security of supply policy actively promoted by Brussels has not yet proved to be effective in addressing genuine needs of gas consumers in EU Member States.
Someone perhaps could not help noticing how the newly adopted revised Directive EU No. 994/2010 has introduced the solidarity principle stipulates that "Member States will have to help their neighbors out in the event of a serious crisis so that European households do not stay in the cold". However, this innovation unfortunately failed to cope with the energy emergency in Spain, because both Portugal and the northwestern part of France happened also to be far beyond the boundaries of energy well-being. For example, according to MIBGAS Monthly Report, the volatility of prices on the gas hub PEGnord in the part of French gas market adjacent to the border with Spain reached 173% (for comparison, MIBGAS - 110%) by the end of January 2017.

The question that arises on this occasion is whether the EU policy on security of gas supplies is intended pointedly for the EU Member States importing gas from Russia. But then it has to be recognized that this policy as it currently stands is a targeted action pursuing the goals, which failed to reflect the interests of gas consumers, at least in those countries that do not have supplies from Russia.

Is not one precedent of the Spanish scenario enough to understand that the newly revised Directive EU No. 994/2010 adopted in September by the European Council primarily aims at restraining gas imports from countries that, in the opinion of Brussels policy makers, are not sufficiently reliable? The same can be said for new requirement that natural gas companies will have to notify long-term contracts that are supposedly relevant for security of supply. However, existing practice shows that taking care of the security of supply, above all, it is necessary to take into account the supplier's ability to overcome any unforeseen risks in performing of its contractual obligations and to be economically attractive to European gas consumers.

It should also be borne in mind that, when forecasting the future of energy, international experts have predicted a stable development of natural gas consumption in the long term in the EU countries. This is expected despite a likely significant declining trend in total energy consumption in Europe, which, according to the recent forecasts of the International Energy Agency, will be reduced by 200 Mtoe by 2040. At the same time, it is now quite clear that, the continuing substantial decline in gas domestic production will additionally increase the EU Member States needs for much high imports.

In such future conditions, the EU competition policy should even stronger seek to spur gas suppliers to offer better deals to consumers. And do not fulfil it by means of policy-oriented measures focusing on stronger controls for commercial activities of European energy companies with regard to their long term gas SPA (Sale and Purchase Agreement), assumed stress situations under far-fetched pretext, etc.

Why should not the European Commission try, instead of intimidating member states with hypothetical stress tests, show real concern for market positions of those gas suppliers that have already proved their reliability and are ready to ensure it at the proper level, including through the diversification of gas supplies routes?