Points of View

Laura Rejon Perez, Head of Division, Wholesales and Gas Trading, Repsol

• Natural gas markets have become global. Today, what happens in the EU has an impact on Henry Hub prices in the US, which is unprecedented.
• The invasion of Ukraine and the decrease in flows of natural gas from Russia exacerbated the existing mismatch between supply and demand.
• Norway and UK increased production, while massive cargos of LNG have been delivered to cope with the increase in demand.
• Due to high prices, there has been a reduction in gas demand between 6 to 9 per cent with many industry players engaging in fuel switching to coal, naphtha, and liquid fuels among others.
• We are experiencing an unprecedented level of volatility in the market. The spread between the JKM (Asian index for LNG) and the TTF (European index) has turned negative, allowing Europe to attract all of the LNG that would have gone to Asia.
• Under REPowerEU, the European Commission presented the EU Energy Platform, which would serve to aggregate demand between EU member states in order to achieve economies of scale and facilitate the negotiation of long-term SPAs.
• Increasing LNG imports requires certain infrastructural changes such as increasing regasification capacity, adding new regasification terminals (either onshore or floating (FSRUs)), and improving transmission possibilities within Europe.
• The Commission is allocating 10 billion euros to invest in infrastructure projects of common interest, which will be hydrogen-ready.
• It is important to accompany the above policy measures with a reduction in overall natural gas consumption by 10% mainly through efficiency gains, which would be around 40 billion cubic meters (bcm) and higher than the overall consumption of Spain.
• The European Commission has also set gas storage, hydrogen, and biogas targets.

Luis Ignacio Parada, Energy Policy & Global Regulation Director, Enagás

• There is no certainty of natural gas flows for next winter. Russian gas flows to Europe have been declining while Norway is committed to maintaining high export levels with maximum flows. Algerian exports are below 2021 levels, but this is due to a reduction in flows to Spain which have been partly compensated through flows to Italy.
• REPowerEU includes a target of importing 50 bcm of additional LNG.
• However, internal EU bottlenecks prevent full usage of existing regasification capacities. Most of the spare LNG capacity in the EU is 100% booked, with the exception of Spain which has around 38% of the EU’s total regasification capacity. Because of a lack of export infrastructure, this capacity cannot directly be used for the EU in the short term; nevertheless, Spain can make a contribution as a logistical hub for LNG.
• The new storage regulation requires a legal obligation to fill gas storage to 80% of its capacity by 1 November 2022, rising to 90% for subsequent years until December 2025.
• Storage levels in the EU are currently at around 60% (at the time of the webinar, early July 2022). The main challenges are the (uncertainty on the) availability of gas and whether Russia will continue to ship gas through Nord Stream 1.
• In terms of hydrogen, a target of 20 million tonnes of renewable hydrogen has been set by 2030; half of that amount is foreseen in the shape of imports. EU production will be facilitated by the following measures:
  • Delegated Acts on the definition and production of renewable hydrogen
  • Hydrogen quality standard
  • Important Projects of Common European Interest (IPCEI) assessment + funding
  • Dedicated workstream in the EU Energy Platform
  • Steps towards dedicated hydrogen infrastructure, including three corridors connecting outside the EU
• However, other recommended measures include:
  • Adding infrastructure targets to existing supply or consumption targets
  • Permitting: Member States should establish temporary frameworks to handle hydrogen infrastructures until the package is approved and transposed
  • Promote independent hydrogen network operators through ownership unbundling
  • Facilitate market uptake by ensuring unbundling models are interpreted with proportionality

Giulia Laura Cancian, Secretary General, European Biogas Association

• The crisis response that is REPowerEU represents a positive historic shift for biomethane, with a target of producing 35 bcm by 2030.
• Reaching this target entails multiplying existing production (3 bcm) by 12. This can be done using only sustainable feedstocks such as industrial wastewater, livestock manure, food waste, agricultural residues, and sequential cropping. The biomethane could substitute 20% of Russian gas imports, equivalent to 10-14% of the EU gas demand foreseen in 2030.
• Biomethane production grew by 25% in 2020 (most of the growth in the biogas sector was in biomethane). In order to reach the 35 bcm target, there needs to be a flat growth rate of 28% each year until 2030.
• In the biomethane action plan, there are five areas of measures:
  1. Promoting production, use of and injection
  2. Providing incentives for biogas upgrading into biomethane
  3. Promoting adaptation of existing gas networks and exploring regional potential
  4. Addressing research and development gaps
  5. Improving access to finance
• There is a very positive political recognition for biogases at the EU level with a call for Member States to politically prioritise through their own national biomethane strategies.
• The plan offers a bottom-up approach to infrastructure planning for biomethane integration
• Nevertheless, the 35 bcm target is not incorporated in the amendment of the Renewable Energy Directive, which means that the target remains indicative.
• Other concerns include the specific guidelines on the final utilization of biomethane, which offer limited flexibility for the different end-use sectors such as the transport, where the target for advanced biofuels has remained unchanged.

Topics of debate

During the discussion round, Laura Rejon Perez discussed the worst and best case scenarios for natural gas in Europe next winter. She mentioned the worst-case scenario would be a lack of sufficient gas to meet demand, which would require energy rationing, while the best-case scenario would be to not suffer any further import disruptions, experience a mild winter, see Nord Stream 1 resuming throughflow at higher levels, and successfully start operation of FRSUs.

Addressing the policies that need to be in place for a cost-efficient transition to a decarbonized gas future, Luis Ignacio Parada emphasized the importance of targets for both production and infrastructure, and addressed the definition of renewable hydrogen and the role of unbundling, particularly for hydrogen.

On the sustainability of biomethane and possible risks to food security, Giulia Lauran Cancian explained that existing regulation calls for 70% of greenhouse gas emission savings in biogas and biomethane used for electricity, heating and cooling production, and 80% for installations starting operation from 2026; these provisions ensure that large-scale, monoculture energy crops will not be an option for the generation of biomethane. Moreover, new biomethane capacity installed from 2018 has been using a decreasing and barely visible share of energy crops.

Further talking points included the floating storage regasification units expected to be operative in Europe in the coming years; the impact of the inclusion of natural gas in the EU taxonomy, especially in the importation of LNG to Europe; the synergies between different gases and adapting them into existing infrastructure; as well as demand-related measures including energy efficiency policies and potential rationing.

Next steps

Since the webinar took place, Gazprom resumed its gas deliveries via Nord Stream 1 on 21 July 2022, albeit at reduced flows (at 40%), and further reduced them to 20% on 26 July 2022, citing technical problems. As a response to what the Commission has dubbed ‘Putin’s Energy Blackmail’, the EU body has announced a European Gas Demand Reduction Plan, to diminish gas use in the EU by 15% between 1 August 2022 and 31 March 2023. Other measures include accelerating work on supply diversification, including joint purchasing of gas to strengthen the EU's possibility of sourcing alternative gas deliveries.

The new regulation was initially designed to include a voluntary gas demand reduction, but with a clause giving the Commission the ability to impose a 15% reduction in gas demand (by declaring, after consulting Member States, a ‘Union Alert' on security of supply, which would trigger mandatory demand reductions). After pushback from several Member States, the system was modified in two main ways. First, the voluntary agreement would become mandatory through a Council implementing decision, upon either a proposal by the Commission to trigger a ‘Union alert’ if supplies reach crisis levels, or if five or more member states request the Commission to do so. Second, the Council has specified several exemptions to the mandatory reduction target, including: member states not connected to the EU’s gas pipelines such as Malta, Ireland and Cyprus, as well as Baltic states that are heavily reliant on gas for power generation and whose electricity grids are not synchronized with the European’s electricity system. Further derogations include countries that surpass the gas storage filling target of 80%; countries that require gas as feedstock to sustain their critical industries; or countries whose gas consumption has increased by at least 8% in the past year. 

Since the regulation is an exceptional measure, it will apply for one year and will be reviewed by May 2023. The next informal meeting of energy ministers will take place on 11-12 October; discussions are  likely to include discussions on the implementation of this regulation. 

On May 18, 2022, the European Commission launched the REPowerEU plan, detailing the actions to be taken to end dependence on Russian fossil fuels while also tackling the climate crisis. To analyze this plan and the impacts of the Russian invasion of Ukraine on the EU’s energy system and relations, the EsadeGeo Center for Global Economy and Geopolitics and the Repsol Foundation organized a series of webinars.

This brief summarizes the conclusions of the second webinar, “Energy Security in the EU: Preparing for an EU without Russian Energy”, which was held on July 6, 2022 and focused on the main gas-related elements in REPowerEU (the conclusions of the first webinar can be found here).

Giulia Laura Cancian (European Biogas Association), Luis Ignacio Parada (Enagás), and Laura Rejon Perez (Repsol) analyzed key elements such as diversification of natural gas supplies and increasing relevance of liquified natural gas (LNG), increased production of renewable gases such as hydrogen and biomethane, as well as the growing importance of gas storage and mandatory filling requirements to face periods of crises.

Dario Quadri, who moderated the webinar, explained how the invasion of Ukraine has exacerbated the tightening supply of natural gas underway since mid-2021 and gave a brief introduction to the central aim of REPowerEU, which is to end the dependence on Russian fossil fuels by 2027 through diversification of gas supply, demand reduction, and an acceleration of the energy transition.