Introduction

On 8 July 2015 the European Commission launched a public consultation on an EU strategy for liquefied natural gas (LNG) and gas storage. The consultation is part of the Commission's strategy to explore the full potential of LNG and gas storage in the mid to long term, and to assess the potential role of LNG in the EU's energy mix, and in enhancing security and competiveness of supply in the EU. The consultation seeks the views of stakeholders on the challenges and opportunities for LNG in the EU by 30 September 2015.

The Commission stated that the "The EU Communication commits us to developing a comprehensive LNG and storage strategy that will explore the full potential of LNG and gas storage in the mid-to-long term, and to identifying how it can enhance security and competitiveness of supply."

EU Security of Supply

The completion of a single, integrated, transparent and interconnected energy system in the EU is imperative for the European Commission. In its Work Programme 2015, the Commission identified a "resilient energy union with a forward looking climate change policy" as a priority. The Commission stated that it intends to adopt a strategic framework for the Energy Union that will not only ensure energy supply security and reduce dependence on imports from third countries, but will further integrate national energy markets and improve participation of consumers, enhancing energy efficiency and decarbonising the energy mix through the promotion of research and innovation. The Commission is fundamentally concerned with the supply of secure, sustainable, competitive and affordable energy for consumers, households and businesses.

It is evident that the EU's prosperity is ultimately contingent upon a stable, abundant and competitively priced supply of energy. Thus, the diversity of fuels, suppliers and supply points is integral to ensuring EU energy security. The EU currently imports approximately 53% of the energy it consumes at a cost of more than €1 billion per day. Energy also makes up more than 20% of total EU imports, with EU Member States (across the board) importing about 90% of their crude oil and 66% of their natural gas. Despite the fact that EU oil consumption is decreasing (13% 2005-2012) it remains the largest single primary energy source within the EU. This dependence leaves the EU exposed to the adversities inextricably linked with the global oil market such as supply shortages, price shocks and thus supply disruption. However, it is the EU's dependency on gas imports that is the greater source of concern for the Commission. Nine EU member states have 100% gas import dependency with Russia as the single source of imported gas to Finland, Estonia, Latvia, Lithuania, Czech Republic and Bulgaria. Russia supplies 33% of Europe's oil and 39% of its gas; and such a strong dependence on a single external supplier poses an ever increasing threat to the security of Europe's gas supply.

EU LNG Regasification Capacity

There are currently 23 LNG terminals in Europe with 5 under construction and a further 32 being considered (with varying degrees of progress). Total regasification capacity in Europe's 23 LNG terminals is approximately 200 bcm/year at the end of 2013 with its main capacities in Western Europe. However, average capacity utilisation rates in European regasification terminals have fallen dramatically since 2009 and are much lower than pipelines (at about 25%). One of the primary reasons for low utilisation rates was a stagnant demand for natural gas in Europe due to subsidised renewables and the continued supply of cheap coal that dominate the market.

Despite current low utilisation rates in Europe's LNG import terminals, with falling oil prices and huge quantities of LNG liquefaction taking place in the US and Australia, the Commission stated that work should be progressed in developing liquid gas hubs in Central and Eastern Europe and in the Mediterranean area. The Commission's strategy will also identify the necessary transport infrastructure linking LNG access points with the internal market. The Commission will also explore the potential of gas storage in Europe; the regulatory framework needed to ensure sufficient gas in storage for winter; and it will work to remove obstacles to LNG imports from the US and other LNG producers. The Commission will also support the construction of the infrastructure needed to deliver new sources of gas to the EU through the use of all available community funding instruments.

EU Projects of Common Interest

To aid the creation of an integrated EU energy market, the European Commission has drawn up a list of 248 projects of common interest (PCIs). The European Commission has identified 27 PCIs in gas as critical for EU's energy security. PCIs include North- South gas interconnections in Central Eastern and South Eastern Europe to connect the Baltic, Adriatic, Aegean and Black Seas. It is estimated that €40 billion will be required to upgrade and build new gas interconnectors. The PCIs include twelve possible LNG import terminals (some to be co-financed with dedicated EU funds from the Connecting Europe Facility (CEF)) to be located in Croatia, Estonia, Greece, France, Ireland, Latvia, Poland and Sweden.

It will be interesting to evaluate the responses to the Commission's consultation. It is possible that the low utilisation rates in the EU's existing LNG import terminals will deter some investors from participating in new EU LNG projects, and it is expected that most of the proposed new EU LNG projects will need significant EU funding to be constructed.

Nina Howell
London
+44 20 7551 7543
nhowell@kslaw.com