The global gas market: An international perspective

Events that have influenced recent gas market development Fifteen years ago, at the be- ginning of the millennium, the world had experienced a decade of economic growth built in part on increased international trade and supported by greater free- dom in global capital markets.

The current drive for a low-car- bon energy solution had its roots in this period too, with the 1992 UN Framework Convention on Climate Change, which commit- ted National signatories to reduce their emissions of Greenhouse Gases. This led to the adoption of the Kyoto Protocol in December 1997, which entered into force in February 2005. This was also the decade of new developments in information technology and web- based communication that were to survive the ‘.com bubble’1 and become the mainstay of many ac- tivities in the world today. During the 1990’s, the gas in- dustry continued to invest for the longer-term, and as we entered the 2000’s gas market growth, which had averaged 2.1% rate over the previous ten years, was set to increase to an average of 2.8%. People active in the gas industry could see the benefits of natural gas and there were optimistic fore- casts about even stronger growth of global and regional gas markets.

An important political event in the Baltic region took place in June 2004, when Estonia, Latvia, Lithua- nia, and Poland joined the European Union along with the Czech Repub- lic, Cyprus, Hungary, Malta, Slo- vakia and Slovenia. This profound enlargement of the European Union has brought further challenges and opportunities for the integration of the ‘Internal Energy Market’, not least for investment in natural gas infrastructure and diversity of im- ported gas supplies for Europe. But, let’s fast-forward a few years to 2007, when a financial crisis was starting to cause some of the world’s largest banks to fall into administration. At the same time commodity prices, including energy, were rising: the follow- ing year, oil peaked at over $140/ barrel (bbl) during the summer. Despite this, as seen in Figure 1, 2008 was the year that global gas demand reached 3000 bcm for the first time. But then, the effects of the global economic downturn started to bite and demand in sev- eral markets collapsed with severe

effects on manufacturing industry and on energy demand, notably in some developed economies. Furthermore, 2009 began in Europe with a disruption of Rus- sian gas supplies through Ukraine. Although this was resolved more quickly than the similar contrac- tual dispute in 2006, the disrup- tion led to concerns about supply security and a renewed interest in geopolitics and the need for energy diversity. Globally, the economic squeeze reduced energy demand even with oil prices tumbling to be- low $40/bbl and natural gas prices falling too. For the first time in re- cent history, annual global gas de- mand decreased significantly (by 2.3% in 2009 compared with 2008). The long-term outlook for the gas industry seemed very chal- lenging, particularly in Europe. Overall, however, the IGU 2030 Gas Industry Study, presented at the World Gas Conference in Bue- nos Aires, looked forward to natu- ral gas increasing its market share from 22% to 25% of global energy consumption, and an even higher percentage if Governments would properly recognise the environ- mental benefits of natural gas. The new decade started opti- mistically, but April 2010 was to be a month of disruption and disasters; Volcanic ash from the eruption of Eyjafjallajökull in Iceland led to the closure of airspace over most of Eu- rope and a few days later the Deep-water Horizon drilling rig explosion killed 11 people, caused the rig to sink and oil discharge in the Gulf of Mexico. The year overall saw a re- surgence of natural gas across the world, while in the US natural gas prices stayed low and production increased to over 600 bcm, support- ed by the increasingly successful exploitation of shale gas onshore.

On 11 March 2011, a 9.0 magnitude earthquake caused a tsunami wave, which severely damaged the Fukushima Daiichi nuclear power plant. There were almost immediate political reac- tions across the world, including a decision by Germany to perma- nently close all its nuclear capac- ity by 2022. Separately, on a socio- political front, popular uprisings and demonstrations spread across much of North Africa and the Mid- dle East in a phenomenon that be- came known as ‘the Arab Spring’. 2011 was the year that the Inter- national Energy Agency (IEA) asked the question “Are we enter- ing the golden age of gas?”. Cer- tainly this seemed to be the case for the global LNG market, which expanded by 10%. The shale gas ‘revolution’ was progressing rap- idly in the USA. With self- suf- ficiency of natural gas in North America established, instead of importing LNG the industry was now signing the first export deals for future US LNG exports broadly priced at ‘Henry Hub plus’.

By May 2012, Japan itself had shut down all its nuclear reactors, but thanks to LNG imports it was able to use natural gas to make up much of the 30% loss of power generation capability. Globally however, international gas trade changed little year-on-year and surprisingly LNG trade actually decreased. Whilst the global gas market had become better connected than ever before the high spot price for LNG and fierce com- petition with coal for power gen- eration was having a dramatic ef- fect. 2013 saw a return to modest gas demand growth of 1.4% in the global energy market. During 2014, probably the most significant event was the de- cline in oil prices from well over $100/bbl to a range of $50-60/bbl by the end of the year. This has profound implications for the nat- ural gas industry and we will look at natural gas price movements late in this article. At the time of writing, authoritative global de- mand data for 2014 is not yet published, but indications are that the gas market has continued to expand, despite a further squeeze in Europe caused by slow economic growth, highly-subsidised renew- able energy and warmer than av- erage temperatures that reduced demand for space heating. Natural gas consumption in the European Union actually decreased by 11% to 409 bcm in 2014, and the industry is seriously considering strategic adjustments for the future.

Throughout all this, the natu- ral gas industry has developed and adapted to change. As the gas busi- ness has grown globally the interac- tions across the world have become increasingly significant, in particu- lar with many more countries in- volved in LNG trade. International relationships and trade in natural gas will be even more important in the future. This is particularly the case in Europe, where the decline in indigenous gas production seems inevitable. Reshaping the gas mar- ket in Europe to be ready for future challenges may well need to take a new course. There will still be ‘mega projects’ in other parts of the world, and there may well still be signifi- cant natural gas resources to be found and developed in some locations in Europe, but we are already seeing a new approach to the gas value chain developing. So that we can explore this phenomenon, I would like to de- scribe briefly the traditional gas business, including some basic technical information, so that we can understand better the invest- ments throughout the gas business and how they have been linked into a value chain. This structure is now starting to behave like a global network, with new delivery routes, new market sectors and new market participants doing business in new ways.

The natural gas value chain Natural gas is a mixture of hydrocarbons, of which by far the largest component is the simplest hydrocarbon, methane (CH4). Methane is an odourless, colour- less, non-toxic gas which is lighter than air. Synthetic natural gas and bio-gas are examples of increas- ingly important components that are being integrated into natural gas systems, but conventional and unconventional natural gas pro- duction, still provides more than 99% of global gas supplies. The gas business throughout the world has involved long-term invest- ment ‘from drill bit to burner tip’ to bring natural gas to final cus- tomers. The IGU diagram (Figure 2) illustrates, in a simplified form, the main components of the tradi- tional gas value chain. Exploration, production and processing Most of the natural gas that has been discovered so far was al- most certainly formed by similar biogenic processes to those that created oil reserves. Over millions of years the residues of decom- posed organic material under in- tense pressures and temperatures, have become hydrocarbon miner- als, including natural gas. These hydrocarbon minerals can be found both in the original source rock where they were formed (including shale formations) and also in more porous reservoir rocks that are the conventional oil and gas fields.

Natural gas also includes some heavier hydrocarbons, such as ethane (C2H6), propane (C3H8), butane (C4H10), and there can be a wide range of different non-hy- drocarbon gases that also occur in the mixture in the reservoir rocks. Indeed, gas production has often been a by-product of oil produc- tion and is then termed ‘associated gas’. Three different types of natu- ral gas production can broadly be categorise by the type of reservoir.

• ‘Dry gas fields’ requiring very little processing of the reservoir fluids needed to achieve
• pipeline quality gas;
• ‘Condensate gas fields’ in which the heavier natural gas hydrocarbons can be separated as
• natural gas liquids (NGLs); and
• Oil fields with ‘associated gas’, sometimes with a natural gas

cap that can be produced sepa- rately or temporarily re-injected to enhance oil production. Development plans and in- vestment decisions depend on the expected relative revenue streams from the gas and liquid hydrocar- bons, but even for dry gas fields the reservoirs themselves can vary in fundamental characteristics like the permeability of the reservoir rock. Extremely tight formations (for example shale gas reservoirs) require stimulation to enable the natural gas to be produced. Natural gas is abundant, but the reservoirs that are simple in struc- ture and closest to markets tend to be developed first. This means that investors may face a choice between developing remote conventional gas reserves or more difficult unconven- tional gas that is closer to the market and requires use of new technology. In practice both types of investment has occurred; as new technology is developed and proven the tech- niques can be applied more widely and the global economic reserve base increases.

Natural gas occurs in other forms, most notably as methane hydrate crystals. This is potentially a vast future source of natural gas, but for which at present production technology has not yet found an economically viable solution. Once produced the natural gas is likely to need some processing. If it is dry gas with very few impurities then it might be sufficient to check the gas quality and make sure that it is adjusted to the correct pressure and temperature for the next stage of its journey. More likely, however, is that it will also be necessary to treat the ‘wet’ gas that has come from the upstream reservoir to deal with one or more components that need to be removed to satisfy the gas quality requirements for on- ward transportation. International and national high pressure pipelines The locations of natural gas reserves are more diverse than for oil, but even so a large proportion of natural gas needs to be transported from the producing countries and regions with more gas than is need- ed internally like Norway, Russia, Qatar, the Caspian area and North Africa to the consuming countries and regions with demand that can- not be satisfied by indigenous gas

supplies, such as Japan, China and the European Union. International high pressure pipelines provide direct links from producers to consumers. Good relationships with any transit country (through which the pipe- line passes) are essential to main- tain high reliability of gas supply. Technically, these high pressure pipelines are immense feats of en- gineering that continue to be the main way by which vast interna- tional flows of gas are transported. Because the pipeline usually locks the gas producer into a particu- lar route to a certain market, the commercial and political condi- tions both in the transit countries and in the downstream market are crucial. This leads investors to fa- vour projects that are backed by long-term contracts in which one party has a strong market position midstream or downstream. Globally, however, there is, in total, far greater investment in gas transmission pipelines tak- ing place within individual coun- tries, for example in the USA and in China. The shale gas revolution in North America changed indig- enous supply patterns and led to many new onshore pipeline pro- jects to enable higher levels of gas production to be brought to mar- ket. In the USA, however, several of the main shale gas formations are relatively well positioned, ei- ther with good proximity to the final market or in economic reach of existing infrastructure. In con- trast, the geographical challenge to deliver indigenous natural gas to the main consuming areas has been far more demanding in Chi- na. The final length of the second West-East Pipeline linking gas production in the west to con- suming areas in the east was over 8,700 kilometres, including both east and west sections and eight branches, making it probably the world’s longest natural gas pipe- line. Construction of a third West- East Pipeline, to bring additional supplies from Turkmenistan as demand for natural gas in China continues to grow, is scheduled for completion before the end of 2015.

Liquefaction, LNG shipping and regasification Gas liquefaction, so that nat- ural gas can be more easily trans- ported by ship (or occasionally by road tanker) to the market where it is then regasified, has become almost as important as pipelines as a means of international deliv- ery of natural gas. Liquefaction involves pre-treatment to remove oil condensates, purify the natural gas from pollutants like sulphur or carbon dioxide, remove any traces of heavy metals and control the moisture level. Then the processed natural gas is refrigerated to reach a temperature down to approxi- mately minus 161 degrees Celsius.

This refrigeration process involves compression, condensation and expansion of refrigerants that ex- change heat with the natural gas until it becomes a liquefied natural gas (LNG) occupying 1/600th of the volume. A large enough LNG fleet of ships (or road tankers) is essential to prevent bottlenecks developing in the supply chain. Since January 1959 when the Methane Pioneer set off for Europe with its modest cargo of liquefied natural gas from the Louisiana Gulf coast of the USA, international LNG trade has developed a global fleet that now amounts to over 380 active ships, the largest carrying up to 266,000 m3 of LNG. Annual worldwide de- liveries are equivalent to well over 300 bcm of natural gas, about 10% of global consumption. Some countries have long been reliant on LNG, and like Japan and Korea have based successful downstream markets on a range of LNG supplies, but with the growth of international gas trade many more countries now have LNG re- ception terminals and there is a flourishing market in LNG deliver- ies and diversions to the markets with highest value. This flexibil- ity is of course only possible when there are sufficient ships available (a diversion may well result in a longer route) and sufficient capac- ity in the regasification terminals to where a ship might be diverted.

The capacity in the regasification terminal comprises not only the delivery slot to enable the ship to be unloaded, but also short-term storage of the unloaded LNG and regasification (in which LNG is warmed up) before compressing the natural gas into a national or local transmission pipeline. LNG is set to be an exciting growth area, with bold and inno- vative solutions being applied both upstream and downstream. An example of upstream innovation is the Shell operated Prelude gas field development off the NW coast of Australia. Rather than pipe the produced gas to the shore, the pro- ject involves a very large liquefac- tion ship that will float above the gas field and load LNG into con- ventional LNG carriers for onward delivery to market. Downstream, there are many more innovations in the LNG market, as illustrated in Figure 3, which is taken from the IGU 2015 LNG Review. The ‘re-export’ market from receiving terminals is evolving to distribute LNG as a fuel to further downstream mar- kets. Thus supplying off-grid net- works with gas and fueling the heavy trucking business (e.g. in China, the USA and Europe) and bunker business for barges notably in Europe. In the not too distant future we might also see the deep sea shipping fleet becoming an im- portant market for LNG.

Storage The ability to liquefy natural gas means that it can be stored and made available at very high delivery rates, but the process of liquefaction and storing LNG is often expensive. In many parts of the world gas demand is very sea- sonal and the storage of very large volumes of gas that are needed (for example for residential space heat- ing in northern hemisphere win- ters) is best achieved underground in natural geological formations, particularly if such structures can be found near the local pipeline grid that serves the centres of gas demand. Most of these structures used to be oil or gas reservoirs, which benefit from unproduced ‘cushion’ gas as well as confidence that the natural integrity has been proven for containing reservoir fluids at high pressures. Occa- sionally the geological conditions are right for gas storage in highly permeable rock that benefits from a hermetically sealed cap, like the sandstone formation in Latvia that allowed the development of the 4.4 bcm (2.3 bcm working volume) Inčukalns Underground Gas Stor- age (UGS) Facility, one of the largest in Europe. In all forms of UGS an im- portant component of the storage facility is the ‘cushion’ gas that remains in the store so that a rea- sonable withdrawal rate can be achieved. The ‘working gas’ in the store is injected (compressed) into the UGS on top of the cushion gas and it is this working volume that is taken out for the heating season or for other commercial reasons during the storage cycle.

Another form of UGS, which offers potentially higher delivery rates albeit sustainable perhaps over a number of weeks rather than throughout the winter months, is salt cavities. Here, the storage cavities of the optimum shape and size are leached out from the un- derground salt formation. The ability of storage facilities to add flexibility to the gas net- work and to help balance the in- puts and off-takes of gas suppliers is extremely important. Increased

use of intermittent renewable en- ergy sources creates more stress on energy grids. The ability of fast- response gas storage to respond to within-day fluctuations is allowing new dynamic ways to use storage, particularly for portfolio optimisa- tion and improvements in overall efficiency in liberalised markets. In comparison with the dif- ficulties of storing electricity or stockpiling coal, natural gas pro- vides very efficient and highly ef- fective ways of storing potentially vast amounts of energy with mini- mal impact on the environment and with the ability for rapid re- sponse through already connected networks. In aggregate this may also provide sufficient flexibility for national or regional ‘strategic’ purposes.

Local transmission and distribution The energy carried though a typical gas transmission pipe is far more than can be transmitted through the biggest high voltage electricity cables. Gas in the trans- mission system is at high pressure (typically 50-80 bar) and, depend- ing on the final use, may pass through a series of pressure reduc- tions, metering and quality checks leading to low pressure distribu- tion pipeline systems with their own pressure and flow controls and final metering at the supply point of the end consumer. Technology is enabling gas operations and gas markets to develop in ways that should lead to further efficiency improvements in grid operation and utilisation. Smart grid tech- nology as well as Smart metering still have a long way to go but have already demonstrated significant fuel savings through grid optimi- sation at Transmission level. The regulatory focus in com- petitive supply markets tends to be on the pipeline systems, with regional groupings of energy regu- lators aiming to enable third party access (TPA). In Europe, of course, we have ACER, the Agency for the Cooperation of Energy Regulators, which is instrumental in encour- aging a consistent approach to all

the gas transmission grids in the EU. Other regional regulatory ini- tiatives aim to foster competition and introduce incentives particu- larly for the interconnection or expansion of gas infrastructure in less developed markets. Whilst transmission and dis- tribution pipelines can become relatively safe cash-generating as- sets in a mature market, the ini- tial investment typically requires large capital input for a low-mar- gin business that is not provid- ing an economic return until the market has grown, and may take decades to reach payback. Initial downstream investment is often at least partially in public ownership, with the distribution (pipeline) ac- tivity in the same company as the local monopoly gas retail business. Clarity about government policies for public and private ownership is essential to avoid problems for po- tential investors. The regulatory regime must also be clear, so that the access conditions are under- stood and the tariff structure does not distort the market. LNG provides an alternative approach to the local distribu- tion of natural gas, by LNG road tanker (sometimes referred to as a virtual pipeline). As the markets expand for natural gas as a land vehicle fuel, either as LNG or CNG (Compressed Natural Gas), as well as fuel for ships, the use of these ‘virtual pipeline’ routes could add greater flexibility and security to the energy system as well as ena- bling locations to be serviced that might otherwise be sub-economic.

Utilisation The economic availability of natural gas combined with its quali- ties of efficiency, quality, reliability, convenience and responsiveness to the consumers’ needs make it an ideal choice for a wide range of uses in many part of the world. High efficiency gas boilers are the mainstream residential gas appliance in many countries. Commercial customers also pre- fer natural gas for space heating, either directly or as the fuel for a Combined Heat and Power system. Gas is also an ideal fuel for district heating systems and makes an excellent partner with intermit- tent renewable energy sources like wind and solar power. Industrial gas demand requires a more competitive offering in rela- tion to other fuels, but the proven high efficiency appliances that al- ready exist for natural gas could be a springboard for further growth in the manufacturing sector. Natural gas is also a useful feedstock for the petrochemical industry, and there are indica- tions that this use is developing in some producing nations as an alternative to exporting LNG or constructing a new international pipeline.

Whilst at a relatively low level, the use of natural gas as a trans- port fuel is possibly the most rapid- ly growing sector across the world. There are encouraging signs both onshore, with compressed natural gas fuelling millions more cars, trucks, busses and lorries, and off- shore with LNG-fuelled ships be- ing favoured over more polluting rivals in environmentally sensitive areas like here in the Baltic Sea re- gion. The Gas Target Model for Eu- rope, published by the Agency for Cooperation of Energy Regulators in January 2015, includes projec- tions of new uses of gas in the EU across four main areas, which are closely linked either with renew- able energy or LNG: • Natural Gas Vehicles (NGVs) using CNG or LNG; • Water transportation; • Power to Gas (P2G) technologies, using surplus renewable energy; and • Virtual Pipelines (Truck loading of LNG). With the right political support and economic stimulus, Fig- ure 5 shows that the contribution from these sectors could be very significant on a European scale within just five years. Globally, however, the use of natural gas for high efficiency, low-emission power generation re- mains the largest and most impor- tant growth sector, but the pros- pects vary across different regions of the world. How much and how rapidly the global gas market will grow is dependent on fundamen- tal economics, which in turn are influenced by political attitudes to energy and to climate change.

Wholesale gas prices and how they are formed? Natural gas prices, and how they are formed, influence the economic viability of investment and market development. One as- pect of the IGU Committee work over the last ten years has been to monitor wholesale gas price trends. There are several aspects to this work, which are described in detail in the 2015 Report by the IGU Strategy Committee. Whilst the global energy markets are better connected than ever before, the average wholesale natural gas prices at the beginning of this year at Henry Hub in the USA were under $3/million British thermal units (mmBtu), Europe was around $7-8/mmBtu and Japa- nese LNG over $15/mmBtu.

Figure 6 shows how natural gas prices rose in these three mar- kets during 2007 and 2008, and then collapsed following the oil price fall in summer 2008. Whole- sale gas prices are formed in dif- ferent ways throughout the world. Where price formation is based on traded gas markets, as in the USA and the United Kingdom, an adjustment to the perception of available supply and demand for natural gas is quickly reflected in the wholesale price. Price forma- tion that contractually links the natural gas price to an index of a competing fuel (e.g. crude oil as in many Japanese LNG purchase con- tracts, or oil products as in many Russian international sales con- tracts) both delay and dampen the changes. By the summer of 2009 natural gas wholesale prices across the world had ‘bottomed- out’, but with the oil-indexed prices re- maining significantly higher than the traded gas market prices.

Then, in 2010 divergence into three clear pricing areas occurred, with the US shale gas surplus keeping Henry Hub prices low and, with no physical ability to export the surplus gas (instead the USA exported some displaced indig- enous coal) while the gas prices in Europe and Asia were pulled up

by the higher oil price and the in- creased gas demand. IGU has carried out several sur- veys to determine how the methods of gas price formation have changed over the last decade. During this time there has been a slow move- ment away from ‘oil’- indexation and an increase in gas market based pricing where this is technically pos- sible. Regulatory and government determinations of wholesale gas prices still remain important, par- ticularly in less developed markets, but the types of regulatory controls are themselves changing to more cost- reflective methods. The trend towards wholesale natural gas prices being based on the prices in traded gas markets has been driven by the expansion of gas-on-gas competitive markets in which consumers have been able to seek suppliers with the lowest price offerings. At the same time, the contractual linkage of the nat- ural gas price to relatively high- priced oil products has placed the agreements with traditional large gas supplying countries like Russia under considerable pressure. With the fall in oil prices the differen- tial between oil-indexed and gas hub traded prices is now changing. But already in Europe2 overall, as shown in Figure 8 there has been sufficient confidence in the traded gas markets to link more than 60% of the physical wholesale gas sales to the prices at gas hubs in com- petitive markets.

A partnership with renewable energy There is a growing realisa- tion that natural gas can be a per- fect partner for renewable energy. There are, however, difficult chal- lenges in making investment deci-

sions in capital intensive projects when the plant is not expected to operate most of the time. Some bespoke projects already successfully combine gas and re- newable energy because of the lo- cal circumstances, but in general an energy market design is needed to ensure that there can be widespread and large-scale implementation. The way natural gas is priced can also influence whether the best environmental choice are made, and this can work both ways. Where the wholesale natural gas price is too high then efficient low emission gas-fired CCGTs can- not compete with cheap coal-fired plant, whereas if the gas price were unusually low (as occurs in parts of the Middle East, for example) then worthwhile renewable energy pro- jects face undue economic barriers. Governments or their agen- cies have an important role to help the market achieve the best eco- nomic solutions for sustainable and secure development of the energy system. Among the things that IGU has recommended are:

• to encourage investment in re-search and technology to deliv-er their political objectives;
• to avoid picking winners and losers, but rather to incentivise those industries that deliver re- sults (e.g. better to have a ‘cost for carbon’ than ongoing sub- sidy of a particular source ofenerg y);
• to ensure that there are no un-due subsidies or taxes that dis-tort the market; and
• to see first if the removal ofexisting incentives or obliga- tions would be a more efficient solution than adding a new in- centive or obligation on energy companies.There are already signs that, with such good practice, the world might be turning a corner and get- ting CO2 emissions on a downward trend. In March 2015, the IEA an-

nounced that global anthropogenic CO2 emissions had stabilised in 2014 while world GDP increased (by 3%). This was the first time in 40 years that the global economy grew without increasing emissions, and was attributed to changes in ener- gy consumption patterns in China and OECD countries. Increased use of solar and wind energy no doubt contributed to this success, but the continuing shale gas revolution in North America combined with the expansion of the Chinese natural gas market were probably decisive factors that have enabled CO2 re- ductions from the world’s two dom- inant energy consumers. Adapting gas business models to the changing energy world Investor groups associate companies with a particular part of the natural gas value chain be- cause the risks, required skill sets, and critical success factors vary considerably. Often there are dif- ferent laws and fiscal systems gov- erning the upstream, midstream and downstream components. To manage the commercial risks, however, companies have often sought to integrate along the value chain, particularly if there are is no developed trading hub availa- ble to enable them to manage price and volume risks.

Throughout the gas chain the investor assesses and manages the risks in the hope of achiev- ing a return on their investment. Commercial risk relates primarily to the investment and operating costs and the volumes and prices of gas. Political and regulatory un- certainties can be the determin- ing factor as to whether or not the commercial risk is acceptable.

Whatever the prevailing ide- ology and legislative systems, suc- cessful natural gas development and continued industry growth needs to be based on co-operation and mutual commercial prosperity all along the value chain. Business models, however, continue to change. Physically, the gas industry still relies on large infrastructure to create the back- bone of the business, but increas- ingly there are many smaller pro- jects that, joined together, create an even stronger market. We can image this as a large single chain being slowly replaced by a woven mesh that is both more flexible and more resilient for the benefit of the final customers. Within this mesh there should be room for local en- ergy sources, whether synthetic natural gas, bio-methane or shale gas, as well as a diversity of tradi- tional and conventional deliveries of LNG and pipeline gas.

In conclusion: the Baltic Sea re- gional gas market in focus The gas market in the Baltic Sea region is quite diverse internally, but until re- cently it was characterised by a lack of connectivity with the rest of Europe and a lack of supply diversity in most countries. There have already been some investments made to address these issues, notably with the LNG reception terminal at Świnoujście in Poland and the Klaipėda floating LNG storage and regasification facil- ity in Lithuania. Since 2010 Finland has had an LNG production facility in operation at Porvoo in the South of the country. Plans for LNG terminals at the port of Turku and at Tornio in BSR Policy Briefing 1 / 2015 the North aim to bring LNG directly to Finland, making the gas and fuel markets more versatile and supplying LNG for vessels operating on the Baltic Sea. There are several other LNG im- port, storage or redistribution pro- jects under consideration, including a large-scale terminal at Inkoo near the landing point of a proposed Bal- tic Interconnector offshore pipeline linking the Estonian and Finnish gas markets. A further dimension would be a St Petersburg LNG facility. This idea was re-launched last year as a project in which the plant’s output would be supplied to the Kaliningrad area and also used for bunkering and

small LNG cargoes in the Baltic Sea region. Encouraged by the new SECA (Sulphur Emission Control Areas) rules, ferries are changing fuel to LNG. In Sweden (Gotenburg), fer- ries have already switched to LNG as bunker fuel, being much more environmentally friendly than the Marine Fuel Oil that was previously used In addition to the well-known Nord Stream offshore pipeline de- velopment, there have also been enhancements to the onshore pipe- line systems to allow reverse flow from Germany to Poland, and to in- crease the capacity to Denmark and Sweden. Plans for further intercon- nection seem limited because of un- certainty about future gas demand growth in the region. Transporting gas as LNG may well allow better economic options in such cases. In Poland, where natural gas is recognised as an environmentally advantageous replacement for coal- fired power generation and where indigenous shale gas production remains a real possibility, the na- tional demand for natural gas is ex- pected to rise significantly. In some countries in the Baltic Sea region however, the national energy plans suggest that natural gas consump- tion is expected to be displaced by renewable energy. Each country may well have a different optimum balance, but we can learn two les- sons from what is happening in the rest of Europe and indeed through-out the world. Firstly, gas markets that are better connected can sup- port each other at times of stress or disruption of the energy markets, and secondly the increase in the use of intermittent renewable energy sources requires a reliable low-car- bon partner such as natural gas. For a sustainable future it is important to retain, and better to grow, the share of gas in the energy mix.

Technology continues to de- velop and to provide solutions for the variety of energy challenges faced in the region. Here you are at the cutting edge, breaking new ground with the Klaipėda floating LNG terminal in Lithuania, exploit- ing bio-gas potential for vehicle transport in Sweden and creating Synthetic Natural Gas from wood in Finland. Developments in the fuel and bunker market already make this the primary local growth area Notes:

for LNG. Further developments in utilisation of gas in all its forms will help to expand the global market and establish natural gas new sec- tors with overall benefits for energy efficiency and the environment. We live in a complex world of change, with wide ranging risks that are faced by countries and com- panies. Here in the Baltic Sea re- gion, as in the rest of the world, we need to strive for closer cooperation and to improve our shared commer- cial and technical understanding of what is needed to facilitate invest- ment in the gas market. This will help to deliver a secure low-carbon energy future for us all. Let the dynamic evolution continue! Published in BSR Policy Briefing 1 / 2015, Centrum Balticum, www.centrumbalticum.org