The key to unlocking European gas supplies

Hello and welcome back to Energy Source, coming to you today from London.

The weather has been unrelenting around the world recently, with several institutions reporting that this past month was the warmest June on record. Ironically, warmer weather was one of the reasons why Europe was able to avert a full blown gas crisis last winter, but there are doubts it can be so lucky again.

In today’s note, I talk to Mathios Rigas, chief executive of oil and gas company Energean, who argues that Europe should look to the east Mediterranean for secure gas supplies.

In Data Drill, I look at how big energy companies have been the ones snapping up new contracts for liquefied natural gas.

Thanks for reading. — Shotaro

Should we care about east Mediterranean gas?

Despite Russia cutting its supply of pipeline gas by more than 80 per cent since its full-scale invasion of Ukraine, Europe managed to avert full-blown shortages last winter owing to warm temperatures and massive imports of liquefied natural gas.

But the continent needs to make it through more winters without the roughly 150bn cubic meters of Russian gas once provided, and will need to continue importing molecules from all corners of the world.

Much has been made about the increase in LNG imports from the US. But Europe should also look to other sources closer to home such as the east Mediterranean, according to Mathios Rigas, chief executive of the London-listed oil and gas company Energean.

Russian gas “needs to be replaced with something”, Rigas, whose company has multiple interests in gas projects in the region, told Energy Source.

“Some gas will come from the US, some will come from the North Sea, some from Algeria and Qatar. But the closest area with gas resources that can become a supplier of gas to the wider region is the east Mediterranean,” he said.

The region has seen major discoveries in the past decade or so, mainly off Israel and Egypt, with global energy companies such as Eni, Chevron and TotalEnergies holding interests in the gasfields.

Gas from the east Mediterranean already makes its way to Europe in the form of LNG from Egypt, the only country in the region that has an export facility. It accounted for about 3 per cent of the LNG volume that Europe imported in 2022, according to data from Refinitiv. But Rigas said the gas in the region was still “underexplored” and had the potential to contribute meaningfully to Europe’s energy security.

“I don’t think it has the ability to completely replace the 150bn cubic meters, but it can contribute towards the solution that Europe needs.”

Cyprus, which has more than 400bn cubic meters of recoverable reserves, is also angling to be a new exporter. The island country is looking to discuss with Israel a pipeline that sends Israeli gas to Cyprus to be liquefied and shipped to Europe.

Nikos Christodoulides, the Cypriot president, believes that the region could eventually provide 25bn cubic meters a year of gas for export.

Politics has been a significant roadblock in the speedy development of gas in the region, especially as it pertains to the contested maritime boundaries between the Republic of Cyprus and Turkish-controlled northern Cyprus.

Rigas added the biggest issue had been the “lack of willingness from the politicians in Europe” to recognise that the world will need to use natural gas for longer than anticipated.

“[The] green transition has to happen but it is not going to happen overnight. Energy security is extremely important to all of us, so we have to exploit our own natural resources,” he said.

But the fundamental question remains: how much east Mediterranean gas will actually make it to Europe?

Fellows at Columbia University’s School of International and Public Affairs noted in a March report that “on an aggressive timeline for field development” the region could have a surplus of 50bn cubic meters a year by the early 2030s, but how much of that could be available to Europe remains to be seen.

“Eastern Mediterranean countries, especially Egypt, have strong domestic demand that governments in the region will prioritise,” they added.

And if the gas was to come via LNG, a fundamentally fungible commodity, the gas may be shipped to the highest bidder, which may not be in Europe. A pipeline could solve that issue, but a €6bn project to ship the east Mediterranean gas to the European market has proved difficult due to regional politics and the distance involved.

Moreover, will Europe need the gas from the east Mediterranean when the world expects a surge in LNG supply from other sources such as the US and Qatar over the next five years?

Rigas said: “We need multiple sources [of gas]. That’s why the east Mediterranean is important because it could be one of many.”

Data Drill

Big energy traders have been gobbling up LNG contracts.

Of the 103.2mn tonnes per annum of global LNG purchase agreements signed since 2022 through to the end of June this year, portfolio players — the likes of Shell, BP as well as trading houses such as Vitol and Trafigura — have accounted for just over 50 per cent, according to data from S&P Global Commodity Insights.

The strong appetite from the traders has allowed the progress of new LNG projects in places such as the US and Qatar; these long-term purchase agreements are needed to underwrite the financing for new projects as well as the expansion of existing ones.

In a way, the traders are stepping in for Europe, which needs more LNG to replace Russian pipeline gas, but is reluctant to sign long-term contracts which would lock them into gas for longer and go against their net zero targets.

Volumes signed by Europe accounted for only 11.8 per cent during the same period, although the mood music on long-term contracts may be changing.

Power Points

• Glencore tries to do the “unthinkable” — spin off its coal business

• Austria’s OMV will continue to import Russian gas

• Asia’s chipmakers are struggling to go green

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Energy Source is written and edited by edited by the FT Energy and Natural Resources team. Reach us at [email protected] and follow us on Twitter at @FTEnergy. Catch up on past editions of the newsletter here.