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Day One of the Flame Conference: Region-by-Region

Day one of the Flame conference, on the 15th May 2018, covered a range of topics, including everything from gas production and transport, to delivery of gas and technological improvements, with insights into how gas is traded and paid for. Here is a snapshot of a few of the topics covered.

Egypt

In the case of Egypt it was explained how the country is turning itself into a net gas exporter. Until the recent change of government, demand for gas was failing to keep up with demand for a number of reasons. These included a number of policy failures by the government including arrears in payments to gas producers, and artificially low gas prices, which encourage demand yet discouraged investment, combined with a bureaucratic business approval process.

However, since the new President has come in, much progress has been made to encourage new investment. This has included increasing domestic gas prices especially for industry and commerce, plus reform of the energy and business environment. As a result, Egypt is now a much more attractive place to invest; and in consequence of such reforms there has been much interest in the country, resulting in new discoveries including the mega gas field Zohr.

In the near future, it is likely that Egypt will be a seasonal exporter of gas during its winters, when there will be a decline in demand to allow surplus gas production for export. Nonetheless, given current growth rates in demand for gas, Egypt is likely to return to becoming a gas importer at the end of the next decade unless more gas finds arrive in the coming year. It is not surprising that Cairo has ambitions to be a regional gas hub, developing pipelines to actual and potential gas discoveries in neighbouring countries like Israel and Cyprus.

Europe

Europe seems to have arrived at a turning point when it comes to gas. 2017 saw a renewed surge in gas demand, the highest since 2011. In part this is due to an upturn in the European economy, but also the nature of the supply of gas had changed. In the case of North West Europe (comprising the UK, France, Benelux and Germany) gas deliveries from local output had continued to fall as aging Central and South North Sea fields such as Groningen declined.

As a result, there has been an increase in Russian gas deliveries mostly transited through pipelines via Poland and Ukraine or more directly via NordStream 1. What has surprised many experts is that 2017 did not bring the LNG boom that many American gas exporters predicted would happen. Instead, Russian pipeline gas deliveries are running at near full capacity, except for deliveries via Ukraine where capacity usage is at just 70 percent. In the short term, what is of concern to many observers is the lack of a new deal between the countries involved, which was due to be agreed by the end of the year.

By comparison, LNG import terminals have been running at around 30 percent capacity. Nevertheless, such facilities have been a good negotiating tool for gas customers. The option for LNG imports have encouraged Russia’s Gazprom to be much more flexible in its contract terms with gas. An additional help is that the Russian rouble has depreciated making it much cheaper and attractive for customers in Europe. In fact, the opening of Nordstream 2 can’t come soon enough for North West European customers, as it offers a cheaper and shorter route for Russian gas from the new Arctic gas fields in the Yamal Peninsula.

FSRUs and FLNGs

Both (FSRU) floating storage and regasification units and (FLNG) floating liquid natural gas units have been technically feasible for many years. But their backers have faced many hurdles including lack of standardisation in the technologies, and contradictory desires by various stakeholders. For example, governments wishing to encourage local content, and investors seeking to control costs.

Another concern is the question of how much of the processing takes place in a single unit. For instance in the case of FLNG, everything can take place on a single unit, as with Shell’s Prelude. Everything from the gas processing to the liquid faction process takes place in one giant vessel, which is larger than Britain’s new aircraft carrier the Queen Elizabeth. The ultimate location of the vessel will also affect the design, principally the question of whether it is to be located near the shore or deep water. In some countries the sea bed is too shallow for such vessels to be anchored offshore.

Finally, on the issue of finance, increasingly the Chinese are insisting that such if they fund projects they should also build them.

China

In Asia, China has been the growth leader when it comes to gas demand. Under government pressure, around 5million households switched to gas from coal in the last year. Unfortunately, gas supplies proved insufficient, resulting in gas shortages, and supply to industry and commerce having to be rationed. In addition, domestic output has failed to ramp up enough to meet new demand and the pipeline distribution network had failed to overcome congestion problems. One observer suggested that this was due to Chinese majors restricting output. In some areas, virtual pipeline operations were set up, to overcome regional shortages, including for instance, trucks carrying LNG in containers from Northern LNG ports to Manchuria.

In order to cope better with rising demand, as more households switch to gas, and future severe winters, there are plans to allow more price liberalisation as subsidies are phased out. In addition, new supplies from Siberia should also help solve many of Northern China’s gas shortages in the coming.