Europe’s stagnant gas market—where does the opportunity lie?

January 2016 | Rembrandt Sutorius, Anders Norlen

Of the world’s gas markets, Europe looks set to be the tightest in terms of commercial opportunity over the next few years, as a slowing of demand coincides with lower prices and a surplus of supply.

With an increase of LNG on the market to 2020, flows originally diverted from Europe to Asia in search of higher prices will remain in Europe, further adding to an already over-contracted market.

After 2020, when the LNG overhang in the market is set to contract, increased energy efficiency and competition from renewables will see demand pegged to 0.2%.

Europe’s gas market by sector

Currently limited gas demand for transport will see a boost of around 11.6% between now and 2030, thanks to a shift towards gas-fired vehicles and ships.

But with GDP and population growth expected to level off, and milder winters and energy efficiency measures creating lower demand; industry, and the residential and commercial sectors will decline by around 1% and 0.2% respectively over the same period.

However it’s in the power sector that we’ll see the most complex market dynamics. Though gas prices have fallen to a five year low as a result of oil-linked indexing and a loose gas market; cheap coal and subsidies to shift to renewables, have made it a tough time for merchant producers. For gas to outperform coal, prices would need to drop by a further 25% to around $3-4/mmbtu.

At current rates, for gas to outperform coal, prices would need to drop by a further 50%.

Securing supply

Domestic supply in Europe is set to decline at 0.9% as a result of lower conventional production in the UK and Netherlands. Norway looks set to fulfill at least 30% of required supply by 2030 from fields currently under development or in discovery in the Norwegian and Barents seas, but this won’t be enough to serve the region post-2020, despite stagnant demand.

Additional supply will likely need to come from piped imports, with Russia looking the most obvious source due to infrastructure restraints with other potential contenders. LNG imports will be limited post-2022 as an anticipated global shortage kicks in, but Europe may be a preferred recipient as a result of partial convergence and political incentives to diversify flows.

Could European shale be the answer?

Shale is an unknown quantity long-term. The industry continues to struggle with a series of structural barriers; anti-fracking regulation, fragmented land ownership, issues around disposing of contaminants and a widespread lack of knowledge – and that’s before the $4/mmbtu higher production cost is taken into account.

Estimates vary, but shale is likely to fulfill around 2-3% of total European gas demand by 2030, and will mainly come from Poland and the UK.

Whether the region switches its attention to conventional or unconventional sources long-term, one market dynamic does look set to change. With growing hub liquidity the European market will continue to move away from oil-linked to hub-linked pricing to reflect the complex nature of the region’s supply and demand dynamics.


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About the authors

Rembrandt Sutorius is General Manager - Gas & LNG at Energy Insights in McKinsey's Amsterdam office.
Anders Norlen is a Senior Analyst - Gas & LNG at Energy Insights in McKinsey's London office.

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