Over the last two decades, liquefied natural gas (LNG) has emerged as a booming industry, meeting 31.4 percent of the world鈥檚 energy needs or 241 million tons per annum of global gas trade in 2014, according to the world LNG report. There are several reasons that can be given as to why LNG consumption has increased and what key advantages the industry has been offering to attract more demand.
Firstly, the transportation of LNG over long distances is both economically and technically feasible.聽 The concentration of gas reserves in the world is limited to certain countries, and given the fact that two thirds of natural gas is consumed in the countries where it is produced, accessibility to natural gas through pipelines is restricted. This can be overcome through LNG carriers. Abundantly available natural gas can be delivered through LNG carriers and therefore, natural gas consumption does not have to be consumed in the region where it is produced due to the inflexibility of natural gas pipeline transportation.
Secondly, the construction of pipeline networks is a costly business, not just in money terms but also in terms of physical security, such as being an attractive target in times of war, or for terrorist activity. In this regard, LNG offers an alternative by obviating the need for pipelines.
Lastly, LNG offers energy security by helping energy importing countries diversify their supply sources. Both importer and exporter countries can benefit from LNG鈥檚 flexibility by way of diverting LNG carriers en-route to where demand is strongest, and therefore maximizing the commercial value of their cargoes. The flexibility of the LNG market stems from the fact that it can be sold at any stage along the value chain.
Spot market trading created by EU deregulation has also contributed to LNG鈥檚 flexibility in the EU鈥檚 gas market.
聽Independent expert on international energy trade, Ralf Dickel, considers LNG as 鈥渢he most promising alternative source of non-Russian gas supplies to Europe.鈥�
Europe is the second biggest LNG import market in the world. LNG supplies reached re-gasification capacity of 202.7 billion cubic meters (bcm) as of 2014, according to the International Group of LNG Importers. In 2014, LNG met 13 percent of overall natural gas consumption in the EU, corresponding to an import volume of 52.1 bcm according to the Eurogas statistical review.
Among the EU member countries, Spain was the largest LNG consumer, followed by the United Kingdom, France and Italy, respectively. LNG demand has been driven mainly by the increase in gas demand for electricity generation as well as by the decline in domestic gas production.
Although the volume of gas imported through pipelines reached 320.8 bcm for the EU in 2014, the demand was not met because of the gap created by the decline in the natural gas production of Denmark, the Netherlands and the U.K. in the North Sea. Thanks to the flexible nature of LNG, this additional demand was closed with the help of LNG imports.
Therefore, the main motives for an upward trend in LNG consumption have been related to security of supply sources and the diversification policies of the EU. An example of the latter is the recent Energy Union Framework Strategy initiated by the European Commission in 2015, as an initiative for 鈥渁ccess to sufficiently diversified gas supplies and stronger infrastructure connectivity,鈥� which would strengthen EU gas supply security. Clearly, LNG would meet these requirements for the EU鈥檚 diversification strategy.
Although a significant volume of LNG regasification capacity has been established which would have reduced the EU鈥檚 overall reliance on Russian natural gas, still, the biggest share of natural gas imported into the EU market has been transported via pipeline networks at an increasing rate. Gas has also been supplied through LNG cargoes, which, as a percentage of the total volume, has been increasing between 2005 and 2014, according to Eurogas 2014 data.
Nevertheless, this substantial LNG capacity in Europe has not been fully utilized, leaving Europe with plenty of room for manoeuvre to pursue its goal of diversifying its supply sources away from Russian gas. As the overall trend shows, a progressive increase in LNG cargo shipment lessens the dependence on pipeline-based gas supplies coming from Russia. This trend is likely to continue in the foreseeable future as the number of the recently constructed LNG terminals, such as in Poland and Estonia, is on the rise.