Europe's Gas Advisory Council: Reducing Uncertainty

As the biggest natural gas supplier to Europe, just how will Russia cope with the rules of the European Union's 3rd Energy Package?

Delegates at the European Gas Conference in Vienna, Austria got a feel for the situation from the EU-Russia Gas Advisory Council (GAC), members of whom appeared at the event, which makes recommendations on EU-Russian gas situation, and monitors the EU 2050 roadmap.

Professor Jonathan Stern, Chairman Natural Gas Research Program and Senior Research Fellow, Oxford Institute of Energy, explained that the GAC had been formed in 2011 by EU Energy Commissioner Guenther Oettinger and Russian Energy Minister Sergei Shmatko.

He explained that the Commission was tasked with looking at the main drivers for development, the relationship between energy policy and decisions and how global developments influence EU-Russia relations, among others.

"Interestingly," he remarked, "and something we've spent quite a lot of time on is, 'what kind of infrastructure do we really need?'"

Prof. Stern said the question often arose as to why the GAC was needed. "The reason is several-fold: Russia supplies a great deal of gas to the EU, more than any other country, and crucially, the number of borders crossed where Russian gas must flow is much more than any other supplier."

He said that for most other suppliers, their gas was consumed in the country to which it had been delivered. "In the case of Russia, you've got gas crossing 2-5 borders before it's consumed. This means that Russia's much more impacted by EU 3rd Package developments than other suppliers," he added.

He said the GAC had three workstreams: the first looking at supply-demand scenarios; the second at the EU and Russian internals markets, and the third infrastructure, interconnections, and new infrastructure.

"We recognized at a fairly early stage that gas is of great importance for both sides but that they have quite a lot of problems and uncertainties, particularly around decarbonization and how the 3rd Package is going to unfold," he explained, adding that the group's goal was to reduce those uncertainties to tolerable levels.

In terms of scenario, policy and investment uncertainty the goal, he said, was to try to clarify the risks.

According to Prof. Stern, decarbonization scenarios showed the significant decline of gas consumption up to 2050. "The scenarios are looking at decarbonization; they're not looking at individual fossil fuels," he noted, "and so we have come to the conclusion that these were not very useful scenarios for the analysis of future EU-Russia flows and we've finished our examination of them."

There were two scenarios, he said, which the GAC found useful.

"One of these, from the Russian side, the possibility of declining post 2008 could be a permanent phenomenon. In other words, Europe doesn't need any more Russian gas compared to 2008-2012 levels. But actually, that's not the case. The EU may need far more Russian gas than it currently is importing, and it may be erecting barriers to those supplies, which will mean that when we discover we need them they may not be available," he explained, saying scenarios should not be confused with policy instruments.

"One of the questions about decarbonization is that it depends very much on political will, whether certain technologies are or are not going to be introduced, and when. The key message here is, the Russian side needs to look at what we in Europe are doing and, in some cases, not doing, and we need to look at what the Russian side is doing in relation to gas in terms of fields being developed and infrastructure that's being built."

For the Russian side, Prof. Stern contended, the institutional uncertainty was the biggest obstacle. "This is a hugely complicated subject: the unfolding of the network codes, the whole question of how transportation tariffs will be organized in the future and this transition to a competitive market for transportation, which is producing huge uncertainties for everyone involved, but moreso for Russia, because of the very large volumes they're moving across large numbers of borders," he said.

If, he explained, the reduction of gas demand meant a reduction in demand for Russian gas was not a temporary phenomenon, then there was a risk that any investments on the Russian side might not be used to capacity. "Then the question is, if the Russia is going to build capacity like Nord Stream and South Stream, can the Russian side be assured that it will be able to transport gas coming from those offshore pipelines across Europe to the customers that it's seeking."

This, he said, meant a lot of investment risk for Russia and gas supply risk for the EU, which lead on to regulatory risk.

"Essentially this is a very unstable investment environment, and it's unstable for everyone, not just the Russians, but Russia has rather more at stake financially than most other players - and that's one major reason why we at the Gas Advisory Council are spending time looking at this integrative detail," said Prof.Stern, who recalled that the last year of the group's work surrounded trying to deepen the gas relationship and clear up all misunderstandings and conflicts between Russia and the EU, which had arisen mainly from the internal energy market and gas target market process.

This summer, he reported, the Council would be trying to gain further clarification and a resolution on some of those risks, upon which a decision would be made on whether or not to continue the group's activities.

Stern handed over to the co chair, Vladimir Feigin, President of Russian Institute for Energy and Finance.

Of the Commission, he recalled, "When we started we recognized what was the major issue at this stage: to make a choice between two options: develop a deeper partnership in gas relations, moving towards integration, and thus becoming strategic partners, but are we already strategic partners or not? I don't see enough confirmation, which should be in agreement, practical steps, but there are many contradictions, problems in relation to the 3rd Energy Package."

He opined that in reality the EU and Russia were very significant trading partners in energy, which was something mutually important for both sides; still, there were unresolved questions surrounding this.

Regarding energy security, he asked, "Looking at the European side, there are deep relations with Russia and to some extent it's a question of energy security issues, but who is in charge of this on the European side? We don't have a clear answer and this would be very important in a time of change, now the liberalization. This doesn't provide energy security itself; there are many additional efforts to ensure it."

Mr. Feigin said that at each stage of the process there should be clear signals who was in charge and which instruments were in place for guaranteeing security of supply.

He said of the EU and Russian Federation, "As simply trading partners in the energy sector, each side can make their own decision - they may be good or bad, pragmatic or selfish, but we must understand what is at stake."

There may be logical ways of acting for both Russia and the European Union, but he said there needed to be structures and instruments towards cooperation between the two. Mr. Feigin commented: "The Council is one instrument. There should be agreements, instruments and preparation at various levels. The Energy Roadmap should be agreed and we will do our best to do it."

He said that 2020 could be a decisive year for the two sides working together in a positive way.

Tatiana Mitrova, Head of Oil and Gas Department at Energy Research Institute RAS, called the GAC a "strange animal," explaining that it was focused on international cooperation, but included not only government officials but from academia and independent think-tanks as well as from industry.

"The explanation for this is the very subject of the discussion," she explained. "If you're trying to explain to government representatives how a modeling exercise works, if you running the model and focusing on something until 2050, minor assumption changes can be very important."

She said dealing with these intricacies required specialists in the subject at hand; it wasn't just a group of friends drinking coffee, but a group focused on producing results.

Ms. Mitrova opined, "I do believe that cooperation is really important and want to save it. The situation reminds me of a couple that is thinking about divorce - they have two options: getting divorced or going to therapy.

"I hope we will save this marriage," she continued. "Can Russia live without increasing gas exports to Europe? It's possible we will survive. Europe can survive without additional gas exports, which is an option, but the critical question is, whether it will be good for Europe and for Russia."

"It's an engagement on the part of all the participants to make sure this is a relationship that continues to work," added Simon Blakey, Special Envoy, Eurogas, who said the GAC was also all about specifics.

He said that the scenario planning was being performed by the private sector in conditions of fundamental uncertainty to be able to make a concrete decision, but that was a bit different for governmental organizations. "One of the challenges that we have had looking at the options in front of us is that authorities have been trying to use scenarios to move towards diminishing the amount of uncertainty, and there is something concrete that the committee has done, particularly from the EC side.

"There is the risk on Russian side that there is simply too much investment being made against a market that ultimately could decide it doesn't need the gas, which could be the case if according to some of the EC scenarios, goes consumption goes down substantially.

Mr. Blakey continued, "On the European side, there's a risk in believing too much in our own ability to reduce gas demand as a part of the decarbonization strategy, we end up not achieving it, needing the gas anyway and finding out that the gas investment hasn't happened downstream, because we scared it off by believing our own propaganda, which could result in shortages for European customers and higher prices and a loss of competitiveness."

He said there was a missing scenario in the approach to decarbonization - with gas rather than without gas, which provided a lower cost, more realistic way. "Amazingly we seem to have succeeded in persuading EU authorities that that's the case."

For this reason, a sentence pointing out that gas was critical for the transformation of the EU energy sector was included in a European Commission report at the last minute. "It is now firmly on the EU agenda," reported Simon Blakey, "giving a much more robust basis for developing EU-Russia coordination."