March 17, 2013 5:03 pm

European gas projects falter on low demand

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The eurozone crisis has set back European Union plans to diversify gas supplies by more than a decade, according to one of Europe’s largest natural gas storage and transportation companies.

The EU has been actively seeking to reduce its dependence for gas on Russia and declining North Sea production, but the chief executive of Snam, the Italian utility recently spun out of Eni, told the Financial Times that new projects were struggling to attract investment because of weak European demand.

“It is difficult for suppliers to sign long-term contracts with Europe because there has been an oversupply of gas since the financial crisis,” chief executive Carlo Malacarne said. “That means final investment decisions are unlikely before 2025.”

European gas demand has fallen sharply in recent years as the economic crisis has weighed on demand and power companies have also opted to burn cheaper coal or subsidised renewable fuels to generate electricity.

That is raising doubts about long-planned pipeline projects, such as rival proposals to bring Caspian Sea gas from Azerbaijan to Europe. A decision between the Nabucco and Trans-Adriatic Pipeline is due this year.

To secure financing producers need long-term contracts and guaranteed prices, but European buyers are trying to renegotiate or escape existing long-term contracts.

“It is hard to see new pipelines before 2020 because sellers still want long-term oil-indexed contacts, but for buyers that is part of the past,” said Thierry Bros, European gas analyst at Société Générale.

Gas transportation companies such as Snam, Fluxys of Belgium and the distribution and storage units of integrated utility companies such as RWE and Eon, stand to benefit from new pipelines, which would need to be linked to the existing pipeline systems they operate.

Two of the proposed pipelines, the Trans-Adriatic and the Galsi pipeline from Algeria, are expected to terminate in Italy. Mr Malacarne said delays would have little impact on Snam’s profitability, because the lion’s share of its revenues are guaranteed by the Italian regulator irrespective of the level of usage of its pipelines. But analysts warned the projects are important for future growth.

“The regulator incentivises Snam to invest in interconnections between new pipelines by guaranteeing high rates of return, so any slowdown in future projects takes away future earnings growth,” said Stefano Bezzato, a utilities analyst at Credit Suisse in London.

Mr Malacarne’s comments came as Snam announced plans to invest €6.2bn within Italy by 2016. Pipeline investments must be discussed with the Italian regulator, but when approved provide guaranteed returns.

Snam is also in exclusive talks with Total to buy TIGF, its transport and storage system in the south of France. That would leave Snam well placed to build connections between the Spanish gas market, which has a surplus of liquefied natural gas imports, and the rest of Europe.

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