European Union (EU) long-term natural gas contracts would not be extended after 2049 under a package of legislative proposals put forward by the European Commission (EC) last week to decarbonize EU gas markets, promote hydrogen and reduce methane emissions.
The proposals are part of a broader strategy to cut greenhouse gas (GHG) emissions by 55% by 2030 and reach net-zero GHG emissions by 2050.
“Europe needs to turn the page on fossil fuels and move to cleaner energy sources, “ Executive Vice President for the European Green Deal Frans Timmermans told reporters during a video conference on Dec. 15.
The EC’s rationale to end long-term natural gas contracts by 2049 is to avoid locking in the use of fossil fuels leading up to the net-zero target of 2050. The EC is the executive branch of the EU. The commission said the 2049 ban would encourage the phase-out of fossil fuels to renewable or low-carbon gases, and reduce the dependency Europe has on natural gas imports.
“If the EU and the UK are going to meet net-zero targets, then there can’t be more than 50 billion cubic meters (Bcm) of fossil gas demand across the entire geography in 2050, and all of that will need to be offset somehow,” Jonathan Stern, a senior research fellow at the Oxford Institute for Energy Studies, told NGI.
“The whole long-term contract ban by 2049 is a complete red herring,” Stern said.
“Already no one can sign contracts longer than 10-15 years,” he added, “and then only if they are replacing coal with gas. So, the market is going progressively towards contracts of 5 years or less because they can’t lock themselves into commitments to buy gas that – if they meet their [climate] targets – they will not need.”
Nearly 90% of the EU’s natural gas demand is met by imports. Europe imported 326.1 Bcm of natural gas in 2020, with 211.3 Bcm received by pipeline and 114.8 Bcm of liquefied natural gas (LNG) imports.
Long-term LNG and gas supply contracts often finance new gas production or LNG facilities. With the rejection of long-term contracts, Stern questioned how investments in fossil fuels and LNG production could continue if investors believe that demand will not be there in the 2030s and 2040s. Producers could take greater investment risks without the possibility of more long-term commitments.
Natural Gas Shortages
Europe faces a winter gas crisis this year. Earlier than expected cold spells, low storage levels, and potential supply shortages from Russia as regulators have yet to approve the controversial Nord Stream 2 pipeline project, have pushed prices to record highs. European benchmarks are currently at a rare premium to those in Asia, helping to attract more LNG cargoes, including those from the United States. Through September, Europe accounted for nearly 30% of all U.S. LNG cargoes, according to NGI data.
Future price volatility would be met differently under the EC’s proposed strategic approach to gas storage. Under proposals to improve the resilience of the natural gas system, the commission has introduced measures to maintain higher levels of gas in storage, including forms of joint procurement of gas stocks. The larger the volume of gas “in stock” the more the EU would be able to compensate for temporary shortages of gas supplies.
Another part of the decarbonization package, is a first-of-its-kind proposal on the continent to reduce methane emissions in the energy sector. The oil, gas and coal sectors would be required to measure, report and verify methane emissions, and detect and repair methane leaks to limit venting and flaring. Fossil fuel imports would also be monitored and face requirements to submit and verify methane emissions, along with a plan to offset these emissions.
By 2030, the EU aims to have a competitive, open hydrogen market, with a new governance authority, the European Network of Hydrogen Operators. Access to existing gas infrastructure, and renewable and low-carbon gases would be made easier by changing or removing cross-border tariffs. All these proposals would ensure a progressive phase-out of natural gas, according to the EC.
The International Gas Union (IGU) signaled support for the new EU regulations to decarbonize the gas market, and agreed new methane regulations should achieve the “maximum possible reduction of methane emissions in the shortest possible time.” But IGU also supports the view of the International Association of Oil and Gas Producers that there should be strong support for “low-carbon hydrogen development,” using natural gas as a transitional fuel.
Environmentalists objected to the EC fossil fuel phase-out plans, saying the EC is not setting solid targets, or including end dates for using unabated gas.
“The [EC] proposals focus on the creation of a European market for hydrogen and so-called low carbon [blue hydrogen] or decarbonized gases,” Greenpeace Europe said, “but fails to acknowledge the need to phase out gas in order to tackle the climate crisis.”
