Europe's Energy Market & Gazprom: Our Evolving Relationship
While many may be counting on US LNG as an alternative solution to solve the diversification dilemma in Europe, Sergei Komlev, Head of Contract Structuring and Price Formation Directorate, Gazprom Export, says "not so fast."
In a speech at the European Gas Conference in Vienna, Austria on the future of the European gas market and the role Gazprom can play on it, Mr. Komlev countered: “A comparative analysis shows that US LNG delivered to Europe on a cost-plus basis will never be cheaper than gas on the British hub NBP. This means that if these supplies eventually reach the European market, they will be too modest in volume to change the continent's landscape.”
Gazprom's share of the European market should remain stable, he added.
Of Gazprom's role, he said that Russia is one of the most affordable sources of gas, especially in light of the low price of oil. “When it comes to gas on gas competition, there is no question that Russian pipeline gas is still one of the choice options in Europe,” he explained.
Mr. Komlev shared his views on a variety of aspects of the Russian - European gas relationship.
“It's evident the current commercial and political environment are exceptionally challenging for the industry and natural gas as a commodity,” he observed, explaining that long-term relationships being under strain made for turbulent times. He continued, “There's no doubt that Europe remains and will remain Gazprom's extremely important gas market – nearly half a century-long history binding us together.”
Mr. Komlev noted that Gazprom has been on the lookout for new business opportunities, some outside of Europe. He cited “the historic deal” of supplying 38 BCM of Russian gas to China for 30 years, and said that the amounts could soon be comparable to the volumes supplied to Gazprom's European partners.
“Gazprom is going eastward,” he reported, “so how will our relationship evolve in the coming years?”
He then presented the prospects for the European market, a forecast based on predictions from a dozen organizations, which showed that European demand will reach 165 BCM in 2025 and 208 BCM in 2035.
He commented, “Russia's ample gas reserves, supply capacity and competitive pricing, combined with a moderate-yet-gradual growth in demand and decline in indigenous production in Europe, will ensure that Gazprom will continue to play a vital role on the European market.”
While some believe gas might have already lost it's chance, Mr. Komlev said that in the long run Gazprom expects natural gas power generation to rebound, for example. “We also expect that new applications for gas – mainly small scale combined heat and power stations, bunkering and road transport – will result in additional demand of 140 BCM by 2035."
This, he said, is a figure comparable to the gas currently delivered to Europe along with Turkey. The fastest pace of demand growth will be in transport, according to him.
Mr. Komlev offered that Gazprom operates CNG networks in several European states and promotes use of LNG in transport, but offered: “Despite these positive developments, the future of natural gas in Europe is currently being called into question due to other newly emerging challenges.”
One of those, he said, is the use of cheap, dirty coal. “This can't be accepted as a sensible approach,” he commented.
Recent political turbulence, he explained, sometimes had resulted in negative international sentiment, which is now turning into what he called “anti-gas sentiment.”
“This is a worrying trend, both for Gazprom and its European partners, industry, energy development strategy, and for dealing with emissions and climate change challenges.”
According to Mr. Komlev, a 1% increase in the share of the natural gas in the EU energy mix can reduce emissions by 3%. Cheaper and cleaner than traditional fuels like petrol or diesel, the gas-driven vehicles market is more advanced than those for electric or hydrogen powered cars.
“Natural gas, unlike renewables, requires no subsidy,” he pointed out. “It needs fair competition and a level playing field.”
“Today, local production in Europe is declining, the political situation in North Africa remains unstable, and reserves in the Middle East are far from coming online soon for Europe,” he observed.
In line with its commitment to Europe, Mr. Komlev said that Gazprom has done its best to solve the differences with Ukraine's Naftogaz, continuing to supply Ukraine months after having received the last payment. “We've concluded the current winter package deal will help Ukraine in the cold season of high demand.” Gazprom, he said, did this because being a reliable supplier is its top priority.
“We cannot allow ourselves to endanger the well-earned trust and confidence of our European partners,” he explained.
Lack of sufficient volumes in Ukrainian gas storage, he said, would have increased the risk of gas being siphoned from the transit pipe: “It's a risk we're not willing to take.” That's why, he said, Gazprom has been working on building more reliable supply routes, drawing lessons from the 2009 gas transit crisis.
“Now, Nord Stream has been up and running for a few years and has proven to be a highly reliable route to deliver gas streams from Russia to Germany and further on to other European markets,” reported Mr. Komlev, who said that Gazprom had wanted to do something similar in South-eastern Europe.
“We know how difficult it is for these countries to ensure that gas reaches their grids,” he said, explaining that Gazprom's plans had clashed with the European Commission, which was not interested in implementing the project. According to Mr. Komlev, last December Gazprom's cooperation with Turkey received an upgrade with the announcement of the Turk Stream pipeline, so the South Stream project will be re routed to the border of the EU.
He explained, “The plan is to pump 63 BCM of Russian gas through the proposed Turk Stream pipeline, while 14 BCM is destined for the Turkish market, the rest would be available to our European customers at the hub on the border with Greece. I'm convinced this new project will serve the best interests of all parties involved.”
Besides pipelines, he reported that Gazprom is investing heavily in gas storage infrastructure, which provides a stable and flexible supply of gas in Europe.
In 2014, according to him, volumes of Russian gas in European underground storage exceeded 5 BCM and the company plans on expanding its own underground storage capacity in Europe another 5 BCM by 2017. He cited a project in the Czech Republic as one good example of such investment, as well as the extension of the “Katarina” facility in Germany.
“This all allows us to continue our work as a reliable supplier of gas to Europe. We stand ready to provide European markets with the gas they require, but Europe needs to make sure the right conditions are in place to let market forces play their part,” he said.
“Gas is not a political weapon; it is a commodity.”
Of Gazprom's strategy going forward, Mr. Komlev said that China had provided the company with an opportunity it could not refuse. He said Gazprom retained its commitment to Europe and that supplying gas to China would not affect existing gas contracts with Europe.
“We have grounds to believe that the political environment in Europe will be restored to a situation in which we feel welcome again. We're akin to continue doing business and hope the European Union in the future will foster exactly that – pure business without any political motives.”
Reiterating that Russia Russians and Europeans are bound together by their history, geography and, ultimately, common interests, Mr. Komlev concluded: “Let's allow gas to do what it does best – provide clean energy for the future.”
-Drew Leifheit