Europe’s latest gas pipeline plan won’t solve its current crisis

Recently, plans have been announced by Spain, Portugal and Germany to connect the vast Iberian LNG regasification and storage industry to other European markets. While German Prime Minister Scholz has argued that the Iberian gas market should be tied directly to its European neighbors to avoid a major supply shortage this winter, French politicians seem less happy with this suggestion. It seems that Paris does not see the move as necessary or has internal political and economic objections to the plans.

Statements by German Chancellor Scholz last week regarding the establishment of a gas pipeline connection between Spain and Central Europe were enthusiastically received by Spain and Portugal. Berlin, it seems, is keen to lessen the risks of a potentially very cold winter and economic recession if Russian gas flows to the EU are completely blocked. Putin’s war on Ukraine shows no signs of ending and EU sanctions are hurting Moscow financially. In a reaction last week, Portuguese Prime Minister Antonio Costa called on European leaders and institutions to fully support the pipeline project. Spain’s Industry Minister Reyes Maroto has also put Madrid’s full backing behind the plans. Both countries, with their vast volumes of LNG regasification and storage, could help counter the Russian threat to other EU member countries. The LNG already in place, as well as new volumes, could be transported via a new gas pipeline to France and beyond. At the same time, there are also discussions about a new gas pipeline between Spain and Italy, avoiding France due to its objections to the first gas pipeline project. It seems that the main issues at stake here are environmental and economic. The pipeline project, initially attempted in 2013, was canceled in January 2019 for the same reasons. If this project had not been cancelled, European gas markets would be in much better shape today.

At present, the pressure on France is increasing, as Germany and many other countries in North West and Central Europe face a potential gas crisis in the coming months. Setting up the Pyrenees route is much more feasible than an underwater link between Spain and Italy. The projected costs of the new project should be around 600 to 700 million euros, a subsea link would be significantly higher.

The Iberian gas market has been strange in recent decades. Spain’s historically criticized approach of building excessive LNG regasification and storage capacity now appears to have been sound. The Iberian Peninsula not only receives LNG from around the world, but it is also connected by pipelines to Algeria, which means there are a host of incursions. However, there is no main interconnection between the Iberian gas pipeline infrastructure and the rest of Europe. Spain has six LNG regasification plants, including the largest in Europe, in Barcelona. Portugal has one too. The Iberian Peninsula holds around 30% of the total LNG processing capacity in Europe.

Now all eyes will be on the revived pipeline project. However, it is unlikely to be ready for the coming winter or even the next. The first attempt to pass this gas pipeline dates back to 2013, to connect Catalonia (Spain) to the south-east of France, but French objections and a lack of funding canceled it.

The optimism of Spanish newspapers and politicians that this pipeline could be built in 8-9 months is very strange. The France-Spain link would require the laying of another section of pipeline to connect the Spanish network to the French network, the normal completion time for which is between 2 and 2.5 years, if all goes as planned. Environmentalists and other NGOs should be forced not to interfere with the project. The Spanish network operator Enagas has clearly indicated that the pipeline could be completed at a cost of 600 to 700 million euros in 2.5 years.

In the coming months, it is likely that more of these large-scale projects will be presented, not only by Portugal and Spain, but most likely also by Greece or Italy. The need to change the previous approach of the EU, EBRD and others when it comes to financing and supporting new gas pipeline infrastructure projects is now evident. However, while politicians want to believe that a solution can be immediate, the market reality is often very different. Building a large-scale pipeline project is not just about money and environmental issues, but also about technical issues and realistic timelines. Europe, especially Germany, the Netherlands and Central Europe, will have to face the fact that the current crisis has no short-term solutions. For the next two years, at least until 2024, Europe will suffer from a shortage of gas and possibly even a shortage of energy. There are no short-term solutions to eliminate the dominance of Russian gas in EU markets. LNG volumes currently flooding Northwestern Europe and other locations will likely drop over the next two months as competition from Asia, the Middle East and Latin America affects supply . The optimism in European political circles is still the same, unrealistic. Brussels must put in place a real energy strategy, supporting all available solutions if it hopes to counter Russia’s energy domination in the future.

Europe’s hope that US LNG will continue to flow to Europe in its current volumes is also misplaced. The first signs of US LNG to Asia are already visible as winter approaches. US President Biden’s political future is also tied to natural gas prices for US consumers, which means pressure will increase on US politicians to keep more of their natural gas at home.

By Cyril Widdershoven for Oilprice.com

More reading on Oilprice.com: