The natural gas market a necessity for Albania?

The natural gas market a necessity for Albania?

Analysis by Dr Lorenc Gordani

Head of the Department of Professional Masters

Tirana Business University (TBU)

natural gas market; Southern Gas Corridor; NMG2017; MOU; MEI; US; ExxonMobil; LNG Market; Excelerate Energy

1. The subject of gasification and gas having a more significant role in the Albanian energy system has been discussed for many years. So why have such initiatives made so little progress so far?

This is a complex issue to be detailed in few lines, but searching to summarise in three main points:

First, the natural gas market development does not depend only on Albania will, or even that of the countries of the region itself, as well as it is benefit is not only limit to the commercial purpose only. It is related to the geopolitics initiative of the Southern Gas Corridor (SGC) proposed, at least clearly for its first time, by the European Commission’s Communication in the “Second Strategic Energy Review” at 2008, for the supply of natural gas from Caspian and Middle Eastern regions to Europe.

This is one of the EU’s highest energy security priorities. Among the six priorities infrastructure actions of that time, that the Commission proposes: “A southern gas corridor must be developed for the supply of gas from Caspian and Middle Eastern sources, which could potentially supply a significant part of the EU’s future needs”.[1]

The above introduction can permit the following with in-depth analysis, particularly in the South East region of Europe and the WB countries (included Albania) shaped by the participation in the EnCT.

Second, the difficulty of the progress has to do with the fact that the economic and energy landscapes in the Western Balkans (part of the 8th regional European area). The countries of the here region are very different, but at the same time have many features in common, that can constitute solid and weak points, as well as the opportunities and threats.

The region consists of small and fragmented markets. It is mainly dependent on energy imports. At least only some years before, natural gas was primarily imported from a single source (Russia) via the main transit route (Ukraine). The prevailing gas networks are positioned at the end of import routes and lack interconnections with neighbouring countries. At the same time, a large share of the coal and lignite-fired power plants are either close to or have already passed their expected life spans.

The region’s greatest strength is the large and diverse renewable energy potential and other natural resources, even on a smaller scale (lignite, black coal, etc.). Moreover, the relatively low energy consumption per capita indicates that the region has good growth potential. Similarly, although markets are small, and they are rapidly growing. In more, in most of the Contracting Parties (CP)/WBs members, there is a robust political perspective to gain the full membership of the EU.

Focusing on the power generation market, it is dominated by a few incumbent companies that limit the competition. The region’s market reforms are incomplete and at different levels. As a result, the markets have being not fully functioning and not liquid enough to be attractive. In addition, the capacity allocation for cross border interconnections tends to lack transparency. As a result, prices and tariffs are still not reflecting the full costs of generation, network operation and supply.

Third and final, the above has made to be challenging to have sound studies, which have to adapt to continue the situation in changes. In Albania, for example, with the support of donors has released the National Master Plan in 2017, but notwithstanding its short release period, it already needs to be redone.

However, lately, there is a change of trend. There are now direct international companies that are working on. The most notably base to the Memorandum of Understanding (MOU) between MEI and two US global energy giants. It was signed among ExxonMobil LNG Market Development Inc. (ExxonMobil), Excelerate Energy L.P. (Excelerate), and the Ministry of Infrastructure and Energy (Republic of Albania) in Woodlands, Texas, March 12, 2021.

Above all, it agrees to conduct a feasibility study mainly to develop a liquefied natural gas (LNG) terminal in the Port of Vlora. Furthermore, under the MoU, Excelerate is expected to explore the potential of an integrated LNG solution that includes converting and expanding the existing Vlora power plant and creating infrastructure facilities for small-scale LNG distribution in Albania and around the region.

The National Master Plan for the country’s gasification approval also foresees the Underground Natural Gas Storage project in the Dumre area. In this context, a memorandum of cooperation for the Underground Natural Gas Storage Project in the Dumrea area was signed on March 3, 2021, by the Minister of Infrastructure and Energy, Belinda Balluku, representative of the Italian company SNAM, Alessandra Pasini.

Currently, through the activity of technical assistance in infrastructure financed by the Western Balkans Investment Framework (WBIF), with EBRD funds, in April 2020, work began on the implementation and execution of the project for the study of feasibility and assessment of the Environmental and Social Impact of natural gas storage on land in the Dumrea area.[2]

Same for the previous Ion-Adriatic Pipeline (IAP) to which now MIE have to announce on 03.06.2021 the Public Consultation for the development of public hearings with the community and stakeholders regarding the Environmental and Social Impact Assessment of the IAP. The project, by € 618 million gas corridor between Albania, Bosnia and Croatia, will be the backbone of the northern part of the Albanian gas transmission system.

Furthermore, the IAP is expected to facilitate gas supply to Kosovo through the already studied Alkogap pipeline in the future. The feasibility study of the € 215 million between Albania and Kosovo has recently been completed, with continued support from the EU (EBRD) and the US.

2. What are the main rationales for gasification/increased gas use in Albania?

Then, as explained above, the first ratio has to do with the Euro-Atlantic approach, but this does not make without relevance the strategic choice made on Albania among the four pretended, including the renowned Nabucco Pipeline Project. On the contrary, this came due to the strategic role given to Albania and economic interest as the cheapest option to connect to Italy and through the SNAM Grid to the EU network.

Based on what was mentioned above, of particular interest for the here topic, in the same document, the Commission also proposes the following with the priority regard “… create a common gas transmission system operator and the Energy Community Gas Ring”. On these grounds, the work on the Gas Ring concept and the related Gas-to-Power Initiative, which started in December 2007, intensified last year.

Second, if externally is the European internal energy market is a strategic drive, internally is moved by a strong economic one such is the reform of market liberalization, need to industrialize and keep the low level of CO2 in place. In particular, the Albanian public incumbent KESH will be liberated by public service obligation and will become a champion in the region’s power exchanges.

In more, it will cope with the extensive planned RES capacity, increasing the need to balance the volatile system, make feasible the start looking at the natural gas not only as a backup reserve (referring to already installed Valona CCGT 97 MW) but also for proper development of a capacity market. In fact, from years are in discussion plans about CCGT Vlora II and III, respectively 120 MW and 160 MW, to come online within 2025.

Then, based to the most updated analyses offered by the Albania Gas Master Plan (GMP) 2017,[3] the decrease of fuel costs, make to predicted the total rate of penetration of the potential thermal demand in Albania to 1.5 bcm within 2030 and to 3 bcm within 2040. However, GMP foresees as realistic, with an economic optimization, the future natural gas consumption for electricity generation at the level of 770 mcm within 2040.[4]

But last, without question, the country needs to improve the security and sustainability of its energy sector. All developed countries have gone through the golden phase of natural gas development, which, fortunately, we are entering with the TAP project. Thus, in this context, the association with other alternative solutions of LNG from the US would ensure reliability in the country’s energy network by complementing traditional and alternative renewable sources, such as sun, wind, etc.

3. There have been several developments recently. For example, Albania has expressed interest in building an exit point for gas from the Trans-Adriatic Pipeline, and plans are afoot for an LNG regasification project in the country. What is driving these developments, and are they likely to lead to serious progress?

To opinion on this aspect, the most arouses interest is that all the latest developments – only within the arc of a month about 7-8 of primary importance – can be considered related to the Mandatory Phase of TAP Openings on the Market Test, announced on May 17, 2021.

However, the TAP notice states that the procedure to be followed for submitting bids at the Interconnection Point (IP) Nea Mesimvria can be consulted on the DESFA website, while for IP Melendugno, on the Snam Rete Gas website. So, the procedures to be followed for submitting bids at the interconnection point (IP) Fier were not mentioned.

However, developing a gas market is a long process and pass through a combination of different scenarios. Lately, the involvement of the US is making a further drive to this process. The new panorama is quite uncertain and difficult to explain (it seems that are some part of the puzzle that very few may know), that, notwithstanding, it makes possible the identification of some clear principle of a cluster is happening.

Indeed, the above is the main premise that is fortunately associated with the will and desire of the American authorities to work in a strategic partnership in developing an integrated, reliable and affordable solution for the sustainable development of the energy sector and the entire economy in Albania.

Will which was proved earlier on 3 October 2020 regarding the signing of the most important Economic Agreement after 90, which was initiated with the construction of a large hydropower project (i.e. HPP Skavica), to which is also added the finalization of the agreement with ExxonMobile for the conversion and the start operation of the Vlora power plant with American liquefied natural gas.

This is a new priority that aims to increase the solid political ties with the US adding the economic component with significant US direct investment and, in this case, sees even the growth of direct trade volumes. This is very positive because it has never been achieved before that Albanian and US relations are raised to such a high level of economic policies and strong results in such a short period.

Developments that, of course, cannot find any other explanation except in expressing the conviction that unconditional support for the country in the economic field is essential for fulfilling transformational reforms currently underway in Albania.

Thus the completion of the TAP project now paves the way for the 511 km IAP project, which aims to connect TAP with the European gas centre in Baumgarten (Austria). The 215 km ALKOGAP project seeks to create a new supply route in the south-east of the Western Balkans area towards Kosovo, Serbia and Macedonia with an annual transmission capacity of about 2.1 bcm (by 2040).

In this regard, on December 29, 2020, the Albania-Kosovo Pipeline “ALKOGAP” was confirmed by the Ministerial Council of the Energy Community as Projects of Interest of the Energy Community “PECI” (Gas 13). The same goes for the Ionian Adriatic Pipeline, recommended as the Common Interest Project “PCI” (Gas 16).

Moreover, in January 2020, the Minister of Infrastructure and Energy (MEI) intensified meetings with the highest US sector representatives, discussing plans to make Albania one of the main gateways to LNG projects in Europe. Activity that brought to the MOU between MEI and two US global energy giants ExxonMobil and Excelerate), on March 12, 2021.

4. What potential does Albania have to become a gas hub?

Following underline of events, it has to be confirmed a hidden will to create a kind of virtual gas hub in Albania, but contrary to what happens in the past, even the politician does not say this (typically, in the past have been very interested in butaphorism) than it is advised the taken with caution.

However, developing gas trading hubs and price benchmarks is difficult and takes time, and many contenders fail to establish them for lack of critical components. Natural gas hubs tend to be at the heart of gas infrastructure networks such as pipelines and liquefied natural gas (LNG) terminals. And Albania is becoming a crossroad of TAP, IPA, both reversible, US LNG Vlora, and affected by Durres/Porto Romano and Petrolifera Port. All of this makes possible the hypnotizable transform to a central pricing point for the network’s natural gas.

The gas hubs also require pipeline networks and storage sites that allow supplies to be traded and moved about at short notice. Then, diverse gas supply sources, including domestic output, pipeline imports and overseas LNG shipments, are seen as favourable to avoiding domination by a few producers. However, establishing a gas trading hub takes time, investment and political will to let prices develop without regulatory intervention, and this remains to be tested in practice.

In more, it needs an oversupply of gas in the early stages of developing a trading hub to allow the commodity to be exchanged in significant volumes. However, recent developments in the hydrocarbon sector, particularly the discovery of Royal Dutch Shell, have led to new natural gas reserves and oil-related ones.

As needed, a solid consumer base with competing buying interests – for example, household, power, and industrial consumers is crucial to developing a diverse marketplace. In addition, regulation allowing domestic and foreign participants to trade and access pipelines and storage facilities is essential to establishing a gas hub.

In this regard, we can summarize that the electricity generation sector is seen as the largest consumer of natural gas with 720 MW installed capacity by 2028, which accounts for 42% of total gas demand in 2030. Although penetration in the industry sector starts ahead of the services sector, the services sector grows to 25% of total demand in 2030, followed by housing and industry by about 12% each.

Whereas if we would specifically mention some of the Albanian market actors currently, Albgas, Alpetrol, TAP, Bankers Petroleum Albania, SHELL Albania, Eni (Saipem), SNAM etc., and many large and small companies are dealing with import and trade. In addition to small actors, some large ones deal with the business of hydrocarbons in general, including natural gas.

In optic of region security aside from the political significance, it sees the involvement of two global energy giants like ExxonMobil, officially known as Exxon Mobil Corporation, a US multinational oil and gas corporation based in Irving, Texas.[5] As well as the Excelerate Energy L.P. is a USA based LNG company located in Woodlands, Texas.[6]

5. Is gas the rational choice for Albania?

The question may be, would the creating of the Albanian natural gas market be a good option, or is it already a necessity?

As far as the background is concerned, I can say that Albania has a historical tradition in natural gas. However, consumption decreased from 1 bm3 in 1982 to 0.01 bm3 in recent years (for example, around 77000 m3 in 2019). Moreover, until today, the country was not connected to the international network and out of the total number of drilled gas wells, once over 500, only about 20 wells are active today.

From my point of view, its creation has to be considered a necessity for the following reasons:

Put into operation the Central of Turbo Gas Vlora

First, it is helpful to put the fuel power plant into operation with a capacity of 98 MW, representing 3% of the total installed capacity, which has not been put into operation since its construction in 2011 (due to a failure in its cooling system).

In January 2019, MEI launched a tender inviting for a public-private partnership (PPP), to revive the power plant converted into a natural gas plant and the construction of the Fier-Vlora pipeline to supply gas. According to the feasibility study, the project’s value is about 58.7 million euros, while the contract includes rehabilitation, operation, and transfer after 20 years to the authorities.

The failure of the first attempt, the lack of natural gas, the start of TAP operation, and the approach of building a US liquefied natural gas terminal make it possible today to have a new development in this direction.

Develop independent power produced from natural gas

At the same time, of particular interest present the mix of products with the development of power produced from natural gas. In particular, different options have been offered, were more notable, the CCGT Korça project of 480 MW proposed by the Austrian company IVI-COM Holding, with feasibility financed by WB/IFC. However, its temporary suspension following the reactions of representatives of civil society and environmental organizations and above all the decision of the local authority and the Ministry of Environment, make it clear that there is a need for a better solution of procedures to obtain the opinion of communities without hindering the implementation of projects, to enable the country to receive benefits from this strategic project concerning natural gas that is passing through our territory.

Taking a leading role throughout the unique potential for gas storage

Albania offers several suitable areas for gas storage, including the salt diapir in Dumre (up to 2 bcm) and the depleted gas fields in Divjak (up to 1 bcm). Based on a preliminary feasibility study[7], Dumrea deposits are among the cheapest gas storage costs ($ 76 mm3). Moreover, as these gas storage plants will be connected to the regional gas network, Albania can also provide regional depots for other Balkan countries. In this context, these areas have attracted the interest of many important companies, including recently the international ENI.

The first significant beneficiary in the timeline of this development will be primarily the Albanian industry, which will benefit from the possibility of supply from a much more stable alternative source and with more competitive tariffs than the current electricity ones.

The full implementation of MPG for Albania will lead to potential gas consumption in 2040 to 927 mm3 for the residential, service and industry sectors together, and 684 mm3 for anchored customers (i.e. power generation and petrochemical industry).

The role to boost the liberalization and integration of the natural gas sector

Above all, moving on to the additional component of the EU integration strategy, concerning the considerable progress towards the electricity exchange platform, the country is following with particular emphasis the setup of its power exchange ALPEX. A process that will consist in parallel with the balancing market and expanding network management by the Podgorica Joint Auction Office (SEE CAO). Moreover, the Albanian market has started to join Kosovo and is expected to follow in the broader context with Italy, Montenegro and Serbia (AIMS project) within the first term of next year.

However, it remains that all actors in Albania will be interested in PX staying in Albania. Moreover, maintaining an energy exchange in Albania only for electricity based on the size of the country would be difficult. Thus, the upgrade options with trading natural gas and green origin, white certificates, and other products will be attractive. For this reason, Albania must first and foremost accelerate the implementation of the Gas Master Plan during this period.

So, in summary, natural gas is not just another fuel but turns Albania into a supply centre and strengthens the country’s energy security and the possibility of an investment that creates a value chain for many industries. An entirely new framework that is a prerequisite to transform the country into a much more attractive investment destination that requires a large energy consumption, which would otherwise be a challenge and a major obstacle to overcome for our market small energy.

6. Might increase solar and wind development also offers solutions. Could the less supportive stance of EU financiers towards natural gas be a hindering factor?

The Albanian energy market is advancing with simultaneous innovations, which are expected to change its background completely. A particular interest in this regard is the significant developments in alternative renewable energies. The new NREAP 2019-2020 has increased the planned PV capacity from 120 MW to 490 MW, wind from 70 MW to 150 MW and biomass from 8 MW to 41 MW by 2020. This means that for every MW of production, renewable requires 1 MW of baseload.

Albania was the first country in the Western Balkans region to present an auction for renewable energy producers with the support of the EnC and the EBRD. Thus, large renewable energy plants, which will benefit from a Premium Tariff through a Difference Contract (CfD), are projected to have a duration of 15 years. A significant transformation is also coming with the creation of ALPEX, ready to be put into operation this autumn, where many small HPPs will find it worthwhile to enter the market using natural gas as a backup.

As for the future, new opportunities unfold from evolving transformations. Referring to the new strategy until 2030, it is planned to continue the integration of two main pillars: which are related to the completion of market liberalization reforms in the context of regional integration and the promotion of sustainable development, within the framework of five analytical scenarios, built to pave the way for the pursuit of priorities to be determined by concrete action plans prepared and presented by interested private actors.

Regarding the above, concerning the Natural Gas Promotion Scenario, the forecast for natural gas demand for all sectors is expected to be 1,307 ktoe (1520 Mm3). In this context, the penetration of natural gas versus the total supply of primary energy sources is expected to reach 20% by 2030. All of this is coming and will continue to find the direct interest of EU to see the setup of a mature gas market also in Albania.

Author: Dr Lorenc Gordani, is an Energy Lawyer and Pedagogue and Director of the Department of Masters at Tirana Business University (TBU), in addition to being a guest lecturer at many universities, including the Metropolitan University of Tirana (UMT) and Barleti University (UB), University of Shkodra Luigj Gurakuqi, as well as involved in many projects, including AFD/Gas Suez, IRENA, European Delegation, etc.

Disclaimer: All opinions expressed pertain to the author. While all efforts are made to ensure this publication’s accuracy, it is not intended to provide legal advice as individual situations may differ and should be discussed with an expert. For any specific technical or legal advice on the information provided and its related topics, you can contact us through “lorenc_gordani@albaniaenergy.org”.

[1] Therefore, the necessity to improving the security of supply make the undertake the most complex gas value chains ever developed in the world that include at least six separate components (with a total investment of approximately USD 45 billion): the wells project in the Caspian Sea, the offshore facilities and platforms, expansion of the Sangachal Terminal, and then the three pipeline projects in Azerbaijan/Georgia (Scp), Turkey (Tanap) and Europe (Tap).

[2] The Underground Natural Gas Storage Project approved at the meeting of the National Investment Committee on July 30, 2018, will contribute to increasing the country’s energy security and a more comprehensive regional plan.

[3] Meanwhile, the Gas Master Plan for Albania has been completed, with the support of a grant of 1.1 million euros given by the European Union (under WBIF). The same applies to ongoing preparations for gasification and gas infrastructure projects, especially for electricity generation (TTP Vlora, CCGT Korça, etc.).

[4] Regard the legal form of engagements, it is still to wait for the outcome of the feasibility on regulatory and market analysis, financed by IFC, about the IPP CCGT Korça 500 MW.

[5] It is the most significant direct successor to John D. Rockefeller’s Standard Oil and was formed on November 30, 1999, by the merger of Exxon (former New Jersey Standard Oil Company) and Mobil (former Standard Oil Company of New York). ExxonMobil is currently one of the largest oil companies in the world (part of the well-known group of 7 Big Oil companies). In 2008, it accounted for approximately 3% of world production, making it one of the largest companies in the world in terms of revenue, with 37 oil refineries in 21 countries by a combined daily refining capacity of 6.3 million barrels.

[6] It is considered the pioneer and market leader in innovative LNG solutions, providing integrated services throughout the LNG value chain. In particular, it offers a full range of redistribution services through floating terminals known as FSRU, up to the supply of LNG in infrastructure development.

[7] Presented at the Third Gas Forum in Ljubljana.

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