Spain: Europe's potential regasification port
LNG is playing an increasingly important role in the gas market. Before the pandemic, its growth was continuous over the years, and it is estimated that it will grow by 3.4% per year until 2035. This gas subject has its advantages in that, by liquefying it, its liquid state and its substantial reduction in volume (600 times smaller) makes it much easier to transport by ship or lorry. On the other hand, it avoids dependence on gas pipelines that cross other countries and cover long distances, and inter-oceanic connections are made possible, thus having access to more suppliers and avoiding dependence on close neighbours.
But the characteristics of the LNG value chain prevent Europe from turning to this energy source overnight.
Regasification plants to transform LNG back into a gaseous state are very expensive and Structures very sophisticated, so their construction requires a high investment and a certain deadline of time. German Chancellor Scholz, after cancelling the controversial Nord Stream-2, has already announced the construction of two terminals in Germany, a country that until now had none.
Apart from this more technical problem, the LNG sector has a contractual problem. Due to the high cost of liquefaction plants, exporters operate on the basis of long-term contracts; this means that the limited amount of global LNG is already almost entirely "allocated". The main consumers of this gas are Asian, with a market share of 71%. The main importers are South Korea, Japan and China, which became the world's leading importer last year.
The world's main LNG producers are Australia, Qatar and the United States. In recent weeks Washington has been at contact with the main producing countries and companies to urgently export LNG to Europe if necessary. European countries would have to compete, perhaps paying a higher price than Asian countries, to attract gas to the continent. However, it is also possible that countries such as Japan or Korea could be asked at the political level to divert part of their LNG to the EU to help an ally in need, as Europe and the US did in 2011 to help Japan after the Fukushima disaster.
This is where Spain has an opportunity. It is the country with the largest issue of regasification plants on the continent, with 6 of the 20 in total. Spanish terminals account for 30% of European storage capacity and 25% of regasification capacity. It is the European country most prepared to receive an increase in LNG imports.
More than 60% of the gas that Spain consumes already comes from LNG, and this allows it to have a diversification of energy sources with 12 different suppliers. The main ones are countries as diverse as Algeria, the USA, Trinidad and Tobago, Nigeria and Qatar. Spain's security of supply is therefore assured.
There is one impediment, however, and that is Spain's capacity to move gas to the rest of Europe. Spain's only route is the connection with France via two gas pipelines through the Basque Country, in the towns of Irún and Larrau. The problem is that their capacity is very limited: 7 bcm (billion cubic metres of gas) per year, compared to the 55 bcm carried by Nord Stream-1 (i.e. 13% of what is transported by this pipeline, which directly connects Russia and Germany via the Baltic Sea). France, focused on its electricity production from nuclear energy, has so far shown little interest in gas connectivity with the Iberian Peninsula.
A separate option would be the alternative of being able to reship LNG tankers to other European countries directly from Spain, but not all countries have regasification plants in operation.
entrance 's gateway to African riches
The solution to Europe's dependence on Russian gas lies in diversification of sources. But European energy policy has always looked eastwards: historically towards Russia, and in recent years towards the Caucasus, the Middle East and the Eastern Mediterranean.
There are projects under development that could be alternatives in the future. For example, the EastMed is an offshore gas pipeline project that would link the rich offshore gas fields of Cyprus and Israel with Greece to supply Europe. But tensions with Turkey, which claimed part of the exploitation rights of the Turkish Republic of Northern Cyprus, and, above all, the withdrawal of US support for project, may have mortally wounded it.
One project that is in operation is the TAP, a pipeline linking Azerbaijan's gas fields with Europe via Turkey, Greece and Albania to Italy. Its promoters have already announced that they plan to bring forward the increase in capacity to meet demand.
And one option on the table would be a Trans-Caspian pipeline that would carry gas from Turkmenistan, the country with the world's fourth largest gas reserves, across the Caspian Sea to Azerbaijan, and from there through the TAP to Europe. This project has been in the air since the 1990s but has not materialised. Russia and Iran as competitors for energy supplies to Europe have already announced that they would block project.
However, there is an alternative that has been supplying gas to Europe for years and could be the solution: Africa.
The African continent holds 7% of the world's natural gas reserves. But Africa's strength is that its true potential is not yet known. Forty per cent of new gas discoveries in the last decade were in Africa.
For years, Europe has been importing gas through pipelines from Algeria or Libya that connect to southern European countries such as Spain and Italy.
Algeria is a country with significant domestic reserves and an established connection to Europe, but in the short term deadline is not expected to be able to leapfrog to supply Russian imports. The extension of the Medgaz (gas pipeline connecting Algeria to Spain) has been completed, but has not yet been inaugurated. And the Maghreb-Europe pipeline, which connected Algeria to Spain via Morocco, has not been in operation due to a diplomatic crisis between the two North African countries since October last year.
The case of Libya is complicated, as it has been a state at war since 2011 and cannot currently be a reliable partner .
Other African countries such as Nigeria, Mozambique, Tanzania and Senegal have significant reserves and have seen the crisis following the Russian invasion as an opportunity to export to the European market. They should do so via LNG, given that there are no pipeline connections.
A commitment to African gas requires heavy investment in infrastructure on the continent. North African countries already have good connections with Europe; it is the sub-Saharan states that are the most underdeveloped in this respect.
Nigeria is a good example. It is the African country with the largest gas reserves, and already exports large quantities of LNG per year to Europe. The advertisement of the signature of project of a trans-Saharan gas pipeline with Niger and Algeria could allow it to connect its reserves directly to Europe through Algerian connections and considerably increase its gas imports. It would be in Spain's and the European Union's interest for it to go ahead.
European investment in this subject of projects will be core topic if Africa is to be taken as provider. But the agreement of committee and the Parliament to stop EU funding for fossil fuel projects would seem to close the door to funding. The EU intends to only go for "green" energy, but determining which energy sources are "green" is still on the table and will have strong political implications. The discussion on energy taxonomy will be vital, and countries such as Germany are pushing for gas to be considered "green" in order to have the approval as a clean energy source and allow EU funds to be used for it development.
The Ukraine crisis and the fear of extreme Russian dependence could lead the EU to recognise gas as "green" in order to speed up and more easily finance gas projects to supply the continent. To pretend to survive on renewable energy alone still seems like a pipe dream.
Another potential problem for the African alternative would be security of supply. The instability of regions such as the Sahel, a transit zone for gas pipelines to hypothetically reach North Africa and then on to Europe, may scare investors, and it remains to be seen whether supply can be continuously assured in such a volatile and insecure region.
Thanks to its geographic status Spain can be the entrance of African gas to Europe, but for this to happen, the relationship with Algeria will be core topic. The Vice-President and Minister for Ecological Transition, Teresa Ribera, has already contacted the Algerian government to increase gas deliveries. The Spanish government will have to act carefully and measure its actions so as not to become immersed in the regional conflict between Algeria and Morocco and find itself splashed as it was with the closure of the Maghreb-Europe gas pipeline last year. It would be in Spain's best interest to try to mediate in the conflict in order to have a secure southern front and thus secure gas supplies.
However, if gas were to arrive in Spain, there would be the same problem as with LNG, as the connections it has with the rest of Europe are currently poor.
A possible competitor for African gas could be Italy. Italy's foreign minister Luigi di Maio visited Algeria a few weeks ago to call for an increase in gas deliveries through the Transmed pipeline connecting Algeria to Italy.
From "energy island" to connectivity with the rest of Europe
Spain may have plenty of gas from different sources, but its problem is that it does not have the capacity to bring it to the rest of Europe. Spain's opportunity lies in promoting the trans-Pyrenean connection to stop being an "energy island" and to be connected to the rest of the continent.
The connection to France should be implemented quickly. The Spanish Prime Minister has already order Spain's energy interconnections with the rest of Europe to be financed with European funds. The crisis has brought to the fore the project MidCat, which came to a standstill in 2019. This project was intended to connect Spain's network with France's through the Pyrenees via Catalonia. Although it is advanced, it will take a few years to be completed, but its implementation could allow Spain to supply greater quantities of gas to the rest of Europe.
Portugal can be an important ally at the European level. Its prime minister, Antonio Costa, believes that greater interconnection between Portugal and Spain and between Spain and the rest of Europe is decisive in tackling European supply problems. A common Iberian position can be of financial aid when negotiating in Brussels.
In the short term deadline Spain can help alleviate the energy crisis, mainly because its supply is guaranteed and because it is the leading European country in regasification plants in case emergency LNG is sent to the EU. But the solution to Russian dependence must be a long-term plan deadline. This is where Spain, if it plays its cards right, can be core topic as a recipient of LNG and a channel for African gas.
This requires: a rapid improvement of connections with the rest of Europe via France, a good relationship with Algeria to guarantee the supply coming from that country, and above all an investment of sufficient capital and time. This will require a great deal of political will on the part of Spain to obtain support in Brussels and to be able to receive specific funds from the European Union.