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When László Varró speaks, people in the energy industry are all ears. The Chief Economist of the International Energy Agency (IEA), his specialities include energy demand analysis, energy and climate policy, regulation and financing of energy infrastructure, and portfolio modelling in energy. He has also served as Head of Gas, Coal and Electricity Markets at the IEA, and as both Strategist and Economist at Hungary’s MOL Group after working a stint at the Hungarian Energy Office.
In preview of the Budapest LNG Summit, at which Mr. Varró will be speaking, he provided us an exclusive interview, offering his expert perspective on the development of a single gas market in Central & Eastern Europe (CEE), as the region taps into new sources of natural gas via liquefied natural gas terminals in the region and the vital interconnections that link up the markets and allowing them to tap into new sources of gas, and provides insight into what he believes will be a key competitive advantage for the growth of the LNG industry.
As the Chief Economist of the International Energy Agency, how do you view the natural gas market integration that is happening in Central & Eastern Europe?
László Varró: First of all the infrastructure is much better than it used to be, the efforts of the European Commission to facilitate the development of a genuinely integrated single market are bearing fruit.
The second thing that is happening is that the LNG shortage following the events of 2013-2014 very quickly turned into an abundant LNG supply. This was partly due to a rapid ramp up of American production and the emergence of the US as a major exporter – of course there is a huge industry in Australia as well, but the Austrian investment consisted of long lead times and projects which were reasonably predictable.
The US had a very rapid ramp-up in shale production and quickly turned from a significant LNG importer to an LNG exporter.
But, I should also add, the imports to Japan, which is the largest LNG importer in the world economy, were stabilized and then they began to decline, because nuclear power is coming back to the Japanese energy system, several new coal plants were built, solar power is doing very well in Japan, and of course the country has always been very successful in energy efficiency and in squeezing energy demand.
So, overall, we saw a ramp-up of supply and declining demand at the largest importer coinciding, and all this created a very abundant LNG supply in global markets.
Gazprom is quite a smart company and did not stand idle in the midst of this. The company reacted and the subsequent action was that they changed their marketing strategy quite significantly: they renegotiated long-term contracts, adopted more flexible, market-oriented pricing. They are prepared to compete very hard to maintain market share.
Despite the abundance of LNG in international markets, Russian gas exports to Europe are at an all time high – they’ve never exported more gas to Europe than last year. This was achieved by a sharp competition between LNG and Russian gas.
If I combine the better infrastructure, better regulation and better competitive conditions in global markets, the effects are quite significantly positive for Central & Eastern Europe.
How do you see the future of natural gas in Central & Eastern Europe in terms of security of supply and decarbonization?
In the region in general renewables are lagging behind the leading European countries. Romania, for one, has a decent wind and solar fleet; Poland has some wind in the Baltic Sea region, but overall the growth of wind and solar has been less rapid in CEE than in the West.
At the same time, in general the political environment is much more favorable to nuclear power in Eastern Europe than in most European countries. In our region there are several important countries where the government has declared publicly nuclear power as strategically important.
This means that gas will have to find the niches, there is a fair amount of ageing coal capacity in Eastern Europe. I can foresee some coal plant construction here and there but not to the extent that the old coal plants will be decommissioned.
So if I combine the future decommissioning of coal, the slow growth of wind and solar, and even with the pro nuclear politics, there are some interesting opportunities for gas.
Considering the future of gas in our region and the various infrastructure projects, LNG terminals, etc., how much of the actual LNG will be consumed? Or is it just part of creating diversification of sources?
The entire point of the drive towards a single integrated market in Europe is that in a genuine single market it doesn’t really matter where the LNG is coming in.
Take the example of Germany. It doesn’t have an LNG terminal at all and many German companies have investigated the viability of an LNG terminal in northern Germany, near Hamburg, and the result was always that it is not commercially viable. However, Germany is very well interconnected with the Netherlands, with France and the North sea system via which the Norwegians can send gas either to Germany or to the UK. That region has four gigantic LNG terminals – Dunkerque, Zeebrugge, Rotterdam and South Hook – all more than half empty.
That LNG region has a very powerful impact upon the German gas market, even without a single LNG terminal in Germany.
Of course, this is not nearly the case in Central & Eastern Europe – it doesn’t have that very intensive infrastructure integration that Germany has with Northwestern Europe and the distances in CEE are also bigger. So projects like the Polish LNG terminal, the Lithuanian LNG terminal, a possible terminal in Croatia, they do make a difference in terms of integrating the region into LNG markets.
But the fact that the gas pipeline system in the Czech Republic, which plays a very important role as a hub, is fully reverse-flow capable and can deliver gas from the east to the west and from the west to the east, is also a very important development. It was not the case just a couple of years ago.
Are there any interesting LNG takeaways you could tell us about from the International Energy Agency’s latest outlook?
We currently see a strong decline of LNG investment as the big projects in Australia are completed.
The investment spending is still sizeable, but most of the spending is committed to projects that were launch before 2014 – that was the year when global prices collapsed.
It’s fair to say that a long period of high prices for oil and gas at the first half of the decade made the industry a bit complacent, so several large LNG projects experienced cost inflation and project delays. There’s a very strong realization in the industry that they have to shape up and get better.
One interesting thing that we see is an increasing interest in brownfield projects, e.g. adding one more liquefaction train to a US project, taking advantage of the existing pipeline structure in the US and independent shale upstream. That’s an interesting area.
We also see an increasing interest in 1 – 2 million tons/year-sized floating liquefaction units. In fact, some of the most interesting projects that succeeded in attracting investment finance in the current market environment, like Cameroon or one of the projects in Mozambique, they used this smaller sized floating LNG technology. Instead of taking a decade to build a gigantic land-based facility, they construct a floating unit of 1-2 million ton size in three years, and if market conditions allow they can bring in another one.
Last but not least, not all projects are created equal, and some displayed better project management than others Papua New Guinea LNG for example is located in an extremely challenging remote region nevertheless it came online on-budget and ahead of schedule. I think project management capability is going to be one of the key competitive advantages for the industry.
László Varró will be speaking in a session entitled “LNG in Transition” at the Budapest LNG Summit on 16-17 October.