Storage in Europe – short in the long-term

At the start of the new gas year, and the storage withdrawal season, GGA spoke to Paul Bieniawski, chief executive of midstream energy company Zechstein Midstream, to get his views on the outlook for storage in Europe and some of the challenges facing storage developments.

GGA: You have extensive experience operating in the midstream in the United States. How does your experience in the US influence your approach to operating in Europe?

Paul Bieniawski: The US markets are fully deregulated and they have been for an extended period of time. The US does not have governmental support for storage rates, for example. So, we do not expect that there will be price support when we develop projects – the only support we will get is from the market. The US also has transparency that goes far beyond what exists in Europe today. So, we come from a background of a fully liquid, fully transparent and highly competitive market and we approach European projects with that view. 

Having gone through the deregulation process in the US, we also understand that it is not necessarily smooth. That gives us perspective on what will work, and what will not work. I think that gives us a slightly different perspective from some of our European colleagues. Although the American market and the European market are not the same, we understand what open access looks like for producers and what it looks like for markets, and so we can look at Europe and think about our approach to the market and structuring of transactions with that experience in mind. 

GGA: How do you see deregulation in Europe progressing?

PB: Slowly. I have been a little surprised by how slowly it is moving, although there has been a start in the right direction in a number of areas. One example is transparency. The US is completely transparent – the customer, all the interconnect points, how much is being charged is all completely visible to market participants. In Europe, that is not the case today. Customers and the interconnection points that your customers have capacity on is all confidential. Part of the challenge in Europe is that it is difficult to form a business case for why you should develop an asset when the most basic information about how assets are being utilised isn’t available.

I am sure many of my European colleagues will tell you that information is available. There are data service providers who can tell you what the capacity and flows are on a pipeline. However, if you want to know who is flowing that capacity, and against what contract, you cannot find that information. So, you can see that asset appears to be underutilised relative to its design capacity, but you cannot unpack why that is happening or if the asset is, in fact, underutilized. 

The bottom line is that if, in fact, that asset is not fully utilised, the market is paying a price in terms of efficiency.  

GGA: How much of a challenge is cost when looking to develop new storage assets in Europe?

PB: It is everything. In the US, storage is a fully independent business. That is not the case in Europe today. In the US, developers and the asset owners are essentially fighting for storage on its own merits. In Europe, I don’t see that the storage operators have their own voice yet. In the US, an independent storage developer will be concerned about location on the grid because the only way to maximise your customer base is to be well located where there are multiple sources of supply and demand, good access to pipelines, and true grid optimisation opportunities. It strikes me that in Europe, we are still optimising single pipelines. That means a developer has to recover all the development cost over that single pipeline, and is therefore very dependent on that pipeline and its captive customers. In the US, if the storage is attractively located it gives the developer a number of ways to control cost that are not fully available in Europe today. 

The other issue is that because of the security of supply concerns we have in Europe, we see a lot of redundancy in assets. There are facilities that are located adjacent to each other and I question whether or not every single one of those assets need all of that installed infrastructure available all of the time. Our US experience has been that a balance of the technical, the operational and the commercial aspects drives a successful project for all concerned parties and leads to the grid being optimized for the benefit of the customers. 

When we first started in Europe, we saw tariff prices that were four or five times the market price - this was not sustainable. Now we see operators saying they need government support to keep these assets operational. We need to make a distinction between what is the price of storage and what is the value of storage. The market is telling us exactly what the value of storage is. Asset operators are telling the market what the price is. That difference in perception of the value will need to be reconciled before more substantial storage development can occur. 

GGA: Is it possible to make a return based on the price the market will currently pay in Europe?

PB: Yes, but how assets are being operated needs to be reassessed. Operators cannot keep carrying forward old business practices. They need to look at ways to cut prices to meet the market’s expectations through a combination of re-engineering, reductions in operating expenses, and perhaps rethinking exactly the types of services that the market requires and is willing to pay for. 

This also comes back to the point about the grid and how it can be optimized by gas storage. If an asset is well situated on the grid, as the market evolves, because it can optimise the grid, there are multiple opportunities to provide different kinds of services. The elements of gas storage, injection, withdrawal, capacity and interconnects, can be repackaged on a day-to-day basis to bring a service of value to the market. A single asset on a single pipeline with a very rigid tariff cannot do that. That kind of asset is stranded when the market moves. I think that is very much the case in Europe right now. Assets are not flexible enough – contractually, commercially, technically – to keep up with the market.  

GGA: Do you think we are seeing more moves in Europe towards the subsidy route?

PB: We do, and it is a huge issue. Subsidies appear to be targeted at the existing assets, and so, will work to structurally reinforce the issues that created the stranded assets in the first place. They will delay a solution to the problem at an additional cost, over and above the one that is already embedded into the system.

Second, it sends a clear message to the independents – we do not want you as we will not let market forces work. For an operator who is trying to develop an asset that will optimise the grid, having market forces act is critical. I know some of my European colleagues will disagree with me, but I do not see a truly independent storage developer in Europe. You need independents who want to see true competition on an asset-by-asset basis to optimise the grid and to wring out the inefficiencies that the customer is paying for today. 

GGA: Given the environment for storage investments in Europe, what investments is Zechstein looking at in Europe in the short and long term?

PB: We fundamentally believe in gas storage in Europe in the long-term – beyond the next five years. Some of my colleagues say Europe is over-stored, I do not accept that. Europe is over-stored in regions, it is not over-stored as a whole. 

Additionally, Europe needs to diversify its storage base. There needs to be more highly flexible storage that has a different mix of contracts, interconnectors and so forth. 

In the short-to-medium term – the next two to five years – Europe is long in storage. Many assets are operating below marginal costs, so I would expect some rationalization of assets to occur. This should lead to inefficient storage assets being retired or re-engineered to serve market needs at prices the market will accept. I am not particularly optimistic about storage developments in the short-to-medium term. There is no clear market rational for engaging in storage development in that time frame.  

GGA: The general outlook for gas demand for Europe is for decline. Do you think there is potential for a change in regulation or policy in Europe that could support gas use going forward? 

PB: I would like to believe there is always a chance. I do not see a way, economically, to have a zero-carbon economy as, I believe, you have to back the renewables up with a reliable, cost effective standby. I do not see an alternative to gas that meets this requirement.  The bulk energy storage alternatives to gas are not competitive. So, going to a zero-carbon economy without any consideration for gas – I struggle to see how that works.  

GGA: What impact will low oil prices have on gas storage in Europe?

PB: When prices were high and there were renegotiations, pricing was modified but producers took back flexibility. At some point in time, that flexibility will come back to the market. In a low price oil environment, buyer’s perception is that flexibility is cheap. When prices start to lift, the flexibility that the producers control could become very valuable. How that gets released on to the market could very well delay the emergence of independent storage developments.

Paul Bieniawski is the chief executive of Zechstein Midstream, a midstream energy company focusing on gas storage and processing activities throughout Europe. Bieniawski has 25 years of experience across the various disciplines in midstream oil and gas. He has been involved in energy development projects globally and has extensive experience in Europe and the United States.