By Roger Bezdek President, Management Information Services, Inc. for Cornerstone
“Can Europe stop buying Russian gas? In my opinion it is impossible.” – Vladimir Putin1
Europe is dangerously dependent on Russian natural gas (NG): 13 European nations rely on Russian NG for over 50% of their requirements (see Figure 1). In addition, Europe relies on Russia for about one third of its oil imports.
Figure 1. European reliance on Russian NG. Source: Eurogas
Note: Belgium, Croatia, Denmark, Ireland, Portugal, Spain, Sweden, and Britain have negligible gas imports from Russia
Europe is acutely aware of this high level of energy dependence, which has been, once again, highlighted by the Ukrainian crisis. The European Council March 2014 Brussels Summit Meeting focused on Europe’s energy dependence on Russia, especially for NG.2 The Summit recommended that efforts be intensified to reduce Europe’s gas energy dependency and that the EU accelerate diversification of its energy supply. However, via a carefully thought out strategy, Europe can significantly reduce its dependence on Russian energy supplies through greater utilization of clean coal.
Europe’s Natural Gas Problem
The International Energy Agency (IEA) forecasts that Europe’s NG production is likely to gradually decline while consumption increases, and the need for imports thus increases over the next two decades (see Figure 2). Given current trends, the EU will import over 80% of its NG needs by 2030, and the gap between consumption and production will continue to widen.3 Shale gas may be available for incremental production, but no major forecasting agency is projecting significant European shale output for the foreseeable future. High population density, a lack of mineral rights ownership, public opposition, and unique geology are the main impediments.
Figure 2. Forecast European NG consumption and production. Source: IEA
Without sufficient production, Europe has historically imported NG, but an increasingly tight global market may make it difficult to reduce reliance on Russian NG. World LNG demand is forecast to grow strongly over the next two decades, especially in Asia—where prices are already the highest. China is in the process of dramatically increasing its LNG import capacity, and some believe that China could become the major driver of demand in the international gas market.4
European LNG prices will continue to increase, and forecasts of U.S. LNG prices in Europe are in the range of $13–14/MMBtu (2013$) by 2025.A NG prices are likely to continue to trend higher than projections because 50% of Europe’s current gas is price indexed to oil.B LNG at $11–13/MMBtu for Europe is highly optimistic: Oil-indexed NG prices (2012$) could exceed $14/MMBtu within a decade, and this implies that in current (nominal) dollars NG prices could be in the range of $20–25/MMBtu.
Identifying Other Options
The EU’s share of global energy resources—about 3%—is relatively small.5 Out of the EU’s total resources, supplies of coal and lignite are the largest component, comprising 88% of energy reserves and 95% of resources (see Figure 3). Accordingly, the EU’s endowment of coal is orders of magnitude larger than that of oil and gas combined.5 In fact, the EU has a 97-year supply of coal, but just a 12-year supply of oil and gas.6 Initiatives that increase the use of coal will thus diversify Europe’s energy sources and enhance its energy security.
Figure 3. Comparative energy supplies in the EU. Source: BGR and DERA Rohstoffinformationen
Although Europe is still a large coal producer, it supplements its coal production with coal imports.7 Russia and Colombia are the two leading sources, with each furnishing about 25% of Europe’s coal imports. The U.S., Australia, Indonesia, and South Africa are also major suppliers.
Through the deployment of two clean coal initiatives the EU can achieve major progress toward its energy security and international treaty objectives: 1) In the near term, bring 21 GW of idled coal-fired electric power capacity back into service and displace significant quantities of imported NG; 2) for the longer term, build gasification-based coal-to-gas (CTG) substitute NG (SNG) plants and use the captured CO2 for enhanced oil recovery (CO2-EOR) in the North Sea. If implemented, these proposals would provide economic, energy security, and environmental benefits to the EU.
A Near-Term Opportunity
In Europe, there are currently over 21 GW of recently idled coal power plants that could be brought back online relatively quickly. Nearly half of this idled capacity is in the UK, over one third is in Germany, and 12% is in the Netherlands, with lesser amounts in France, Italy, and Spain (see Table 1).
Table 1. Retired coal plants
Increased coal utilization would displace significant NG in the electric power sector and would be an expeditious means of reducing Europe’s current high dependence on Russian NG. This initiative supports the EU’s energy security objectives per the European Commission’s recommendation to begin “increasing EU energy production and diversifying external supplies”.8 Thus, restarting recently retired coal plants is an attractive near-term opportunity for reducing the EU’s dependence on Russian gas imports, for the following reasons:
- If the 21 GW of coal generation was brought back online, EU gas demand would decrease by 2–3 bcf/day.
- Despite the institutional barriers, this initiative represents the easiest, quickest, and most economical way for the EU to reduce its dependence on Russian gas.
- Restarting retired coal plants would require relatively limited capital compared to, for example, building new LNG terminals and infrastructure.
- Coal demand would increase by about 40–50 million tonnes annually, but excess coal import capacity already exists in Europe to accommodate this increased demand.
Many of these retired coal plants were initially removed from service because it was deemed that retrofitting them with environmental controls was not cost-effective at the time. Therefore, it may be necessary to add more SO2 and NOx controls, and perhaps other environmental upgrades, to the units. These would require about a year to design and 6–10 weeks to install. However, the plants could operate before the upgrades are completed if they use low-sulfur coals. The upgrades would likely cost in the range of €75–400 million per facility. Thus, upgrading all of the units would likely cost in the range of €5–9 billion. Assuming that the plants would go back online over the five-year period 2016–2020, this would involve capital expenditures of about €1–2 billion per year.
Bringing the 21 GW of idled coal capacity back online would eventually result in requirements for an additional ~45 million tons (Mt) of coal annually. The ramp-up in demand would occur over the period 2016–2020, and would remain constant after 2020. The increase could be satisfied using Europe’s indigenous coal resources, increased imports, or some combination of the two. This initiative will displace about 5% of Europe’s current NG consumption—nearly 15% of Russian gas imports.
Today there is strong momentum to “[e]nsure that efforts to reduce Europe’s high gas energy dependency rates are intensified, and to accelerate further diversification of its energy supply.”8 An aggressive CTG initiative will assist Europe in diversifying its energy supply and ensure that Europe’s gas dependency on Russia is eliminated by 2030. IEA notes that “[c]oal gasification is a versatile conversion technology adding flexibility to energy systems, and there is a huge potential for coal gasification worldwide.”9 Specifically, there is much to recommend about CTG:10 It is a proven process, allows flexibility in feedstocks, allows conversion of carbonaceous feedstocks into high-value products (such as SNG), facilitates CO2 capture, and decreases energy import dependence.
Table 2. Basic CTG plant parameters
Basic CTG plant parameters are given in Table 2, which indicates that if feasibility studies begin in January 2015, the first plants would be operational by mid-2023. Thereafter, the plant schedules could be accelerated by mid-decade and then wound down by 2030 (see Figure 4); by 2030 all 45 CTG plants that are needed could be completed.
Figure 4. Number of CTG SNG plants to be completed annually
To fuel all the proposed CTG plants, incremental coal requirements would total 20 Mt annually by 2024, and reach over 150 Mt by 2030. Again, this fuel could be from Europe’s indigenous resources or from sources that are stable and friendly to European interests.
Gasification CTG SNG facilities can come with a high initial price tag, but the economic benefits can also be substantial. CTG SNG is price competitive with LNG and Russian NG; therefore, reducing reliance on Russian NG can also offer the economic benefits associated with less expensive NG. As shown in Figure 5, under a range of assumptions, in 2025 CTG SNG is price competitive with Russian NG, imported LNG, and NG indexed to the price of oil.
Figure 5. Estimated 2025 prices in Europe. Sources: EIA, IEA, EC, SEEC, and MISI
CO2-EOR in the North Sea
CO2-EOR provides the dual benefits of tertiary oil recovery and effective long-term CO2 storage with nearly 100% of the initially acquired CO2 for CO2-EOR operations stored at the end of injection.11–13
The UN, G8, EU, EC, UK, and others have recognized carbon capture and storage (CCS) as a critical source of the CO2 required for CO2-EOR. Studies indicate that CCS deployment around the North Sea region could play a significant role in providing low-cost, low-carbon, and secure energy for Europe and have identified the enormous potential of the North Sea for CCUS through CO2-EOR.12,14,15 CCS can be implemented through the CTG plants proposed here (CTG CO2-EOR).16
There is, thus, strong rationale for CTG CO2-EOR in the North Sea:17
- It can utilize the vast oil and gas infrastructure already in place.
- There are decades of experience with the technology.
- There is less public opposition for CO2 storage offshore.
- The North Sea has the largest carbon storage potential in Europe—enough to store Europe’s CO2 emissions for many decades.
- There are more than five billion barrels of oil available for CO2-EOR.
- The North Sea requires huge amounts of CO2 for CO2-EOR.
By 2030, the CTG SNG plants will produce a cumulative total of about 1.2 billion tons of CO2 for North Sea EOR (see Figure 6). Assuming that CO2-EOR revenues are $10–15/ton CO2, cumulative CO2 revenues (2023–2030) total $12–18 billion (€8.8–13.2 billion).C By 2030, CO2 production from the CTG plants would total 293 Mt/yr. Assuming a 2030 CO2-EOR average price of $15/ton CO2, such revenues by 2030 will total about $4.4 billion annually (€2.9 billion).
Figure 6. Cumulative CTG CO2 for North Sea CO2-EOR. Source: MISI
Under the CTG SNG CO2-EOR initiative, 4.7 billion barrels of EOR oil are cumulatively produced from the North Sea through 2030. This represents more than 80% of identified EOR production potential. Assuming oil prices escalate from $100/bbl to $150/bbl (2014$) by 2030, cumulative CO2-EOR revenues (2023–2030) total about $600 billion (2014$), or about €441 billion.
If we assume that the idled coal plants come back online over 2016–2020 and the CTG SNG plants come online 2023–2030 the reduction in dependency on Russian NG can be estimated. If the two proposed coal initiatives were to be fully implemented, Europe’s dependence on Russian gas imports would begin to decline in 2016 as the first idled coal plants come back online; this decline would continue through 2020 as all of the 21 GW of coal capacity is brought back into service. Between 2015 and 2020, Europe’s reliance on Russian NG would decline from about 34% to less than 30%; it would remain at this level until 2023, when it would begin to decline again as the first CTG SNG plants come online. Thereafter, this dependence would decline rapidly as more CTG plants come online every year, and by 2030 it would decrease to a net of zero (see Figure 7).
Figure 7. Europe’s reliance on Russian NG under both coal initiatives. Sources: Eurogas and MISI
Thus, by 2030 the two coal initiatives can entirely eliminate European dependence on Russian NG. Further, the scheduled certainty of reduced gas dependence resulting from the coal initiatives will immediately increase Europe’s energy security and bargaining power. This is critical and supports the EC’s objectives as stated at the March 2014 Summit and in the May 2014 EC European Energy Security Plan.2,8
Reducing Dependence on Russian Oil Imports
The EU imports 90% of its crude oil requirements; about one third of the imports are from Russia.8 The CTG/SNG/CO2-EOR initiative proposed here can significantly decrease the EU’s dependence on Russian oil imports. Oil production from CTG North Sea CO2-EOR grows rapidly starting in 2023, and by 2030 totals over 1.1 billion bbl/yr annually (see Figure 8). Assuming that without the CO2-EOR initiative Russian oil imports will continue to comprise about one third of the EU’s total allows us to estimate the potential impact of CTG North Sea CO2-EOR on Europe’s dependence on Russian oil imports.
Figure 8. Annual CTG North Sea CO2-EOR production. Sources: IEA and MISI
As shown in Figure 9, oil production from North Sea CO2-EOR could begin to reduce Europe’s dependence on Russian oil imports in 2023, after which the displacement of Russian oil imports increases rapidly. By 2030, it displaces nearly one third of Russian oil imports.
Figure 9. CTG North Sea CO2-EOR displacement of Russian oil imports. Sources: IEA and MISI
In addition to the economic and energy security benefits, the two initiatives are compatible with EU climate goals. These initiatives will not increase GHG emissions from power generation in Europe. Since the CTG SNG CO2 emissions can be captured at the plant level, CTG SNG life-cycle GHG emissions compare favorably with Europe’s other alternatives: shale gas, imported Russian NG, and imported LNG (see Figure 10).
Figure 10. Comparative life-cycle GHG emissions
Overcoming the Challenges
The recent events that have occurred in Eastern Europe have highlighted the need to reduce dependence on Russian imports. The two initiatives proposed in this article could lead to a major advancement in Europe’s energy security. Undoubtedly, implementation of these initiatives would meet with opposition as some would protest any increased deployment of coal in Europe. However, I believe that the reduced greenhouse gas footprint of the CTG SNG, the economic revenue generated from production of domestic European oil, and the energy security benefits are too important to be ignored. Whatever institutional challenges exist, they are worth overcoming.
The content included in Cornerstone is based on the opinion of the authors, and does not necessarily reflect the views of the World Coal Association or its members.
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