Go East, Caspian Gas
When it comes to customers, Russia’s Gazprom knows where its khleb is buttered, according to Julian Lee, Senior Energy Analyst at the Centre for Global Energy Studies: Europe, he said, was clearly Russia’s best customer for natural gas exports.
In an interview with Natural Gas Europe, Mr. Lee explained that Gazprom basically had been willing to accept exports eastwards of Central Asian gas and one of the reasons for that was it helped to keep that gas out of the European market.
“Whatever Gazprom says about diversifying towards Asia or turning its back on Europe, you only have to look at where it’s actually putting its money: the Nord Stream pipeline to Europe, the South Stream pipeline to Europe, and the building of auxiliary infrastructure at the Bovanenkovo field carrying gas to Europe,” he explained.
Deals with others just had not yet come to fruition.
“There’s all this talk about gasifying the Far East, exports to China, but they’ve been trying to negotiate an export contract with China for more than a decade and the actual money is going into exports westward – that is Gazprom’s absolute priority market. Everything that they can do to keep as much Caspian gas out of Europe as possible, they will do. So they’ve been very happy to see it go to China.”
Meanwhile, everyone concerned with natural gas in Europe was paying attention to developments regarding the Southern Gas Corridor. Mr. Lee provided his insights, saying that now, for Nabucco it had been a case of “evolve or die.”
He explained: “Azerbaijan has made it clear that the route for getting Shah Deniz gas and probably subsequent volumes of Azerbaijani gas across Turkey is going to be a pipeline that is majority owned by SOCAR, and this will mean that the Trans Anatolian Pipeline ‘Tanap’ will be how gas will get across Turkey.”
Then, decisions needed to be made about when the gas reached Turkey’s western border.
“The consortium has already chosen a route that they will use if that gas goes to Greece and that’s going to be the Trans Adriatic Pipeline. Now they’re making a decision on what route will be selected if the gas goes northwards to the Czech Republic and Austria.”
He opined, “I think the only way that Nabucco could still be a part of that was to come up with an option that put them in that race against a proposal that’s been put together by BP (the South-East Europe Pipeline), of linking together bits that already exist.”
According to Mr. Lee, there was likely considerable discussion between BP and the Azerbaijani government.
“We’re seeing in both the gas and oil sectors that the Government and SOCAR want to be an end seller of gas and oil; they don’t want to put their gas into a pipeline at the Georgia-Turkey border and have somebody else sell it in Western Europe, but want to control that flow all the way through the value chain, as close to end users as possible.
“I think there is a sense that if perhaps SOCAR can find an alternative for the western leg of the export corridor in which it has a majority or substantial stake, it may well go for that,” he said.
One of the big stumbling blocks that Nabucco always ran up against, he explained, was that it didn’t have producer representation in its shareholders. “There’s all the obvious problems of size: where do you find 30 bcm per year of gas to fill a pipeline from day one? And if you’ve got a line that doesn’t work at less than that volume then you’re automatically causing problems for yourself.”
At least as big a problem, according to Lee, was the fact that the interests of producers had not been represented in the Nabucco project.
He commented: “You don’t have to look very deeply into the way SOCAR has behaved to understand it wants a role as far down the value chain as possible.”
Azerbaijani gas looked to be clearly a manifestation of source diversification for Europe.
“It’s an important first step,” he said. “The other obvious source diversification in the medium term is Northern Iraq. There are huge political obstacles to overcome and I don’t suggest that that’s going to be easy, but Northern Iraq does share a land border with Turkey, making it relatively close in terms of deliverability; there are clearly very substantial gas resources in Northern Iraq, both associated and non associated gas. The resource base is definitely there – what’s lacking at the moment is any sort of agreement between the Kurdish Regional Government and Baghdad over development and export of gas resources. There’s perhaps little sign of that changing at the moment, but it will change at some point.”
Central Asian gas, he said, was also a possibility in the future for Europe.
“My own view is that we won’t see Central Asian gas moving to Europe until Azerbaijan has placed all of its gas in Europe and after that it may then be prepared to transit Turkmenistan’s gas. And if there were to be a change in the political relationship between Iran and the West then there is the potential for substantial volumes of Iranian gas, but that takes a major political shift, perhaps both in Europe and in Iran.”
Meanwhile, South Stream, he said, was at least in part aimed at undermining Southern Corridor gas routes and providing extra competition.
“I actually think that Gazprom is going to be helped in this, perhaps unwittingly, by Azerbaijan, because I don’t think Azerbaijan is committed to providing a transit route for Central Asian gas to Europe – certainly not at the moment. Azerbaijan, very much like Gazprom, wants to sell its gas in Europe; it doesn’t want to be providing a transit route for Turkmenistan’s gas,” explained Lee.
Speaking of transit routes, how about the one in Ukraine that set everything into motion following disputes between that country and Russia? Lee said it was understandable that Gazprom wanted to have control over as much of the delivery chain for its gas to its end users as it could.
“It’s not comfortable with this relationship of transiting gas through third parties, particularly when those third parties used to be a part of a Soviet system which in some ways Gazprom is very much the inheritor of.
“At the same time, I think you’ve got a Ukrainian situation, where perhaps they have overvalued the transit network,” he said. “They see its obvious importance to Gazprom and Russia and there is a solution that involves perhaps Gazprom taking a stake in the transit network. So far, Gazprom has shown that it’s prepared to invest the billions of dollars necessary in bypassing Ukraine if it can’t get that.”
According to him, on a global scale that might seem to be a huge wasted investment, “But at some time the two countries need to sit down and hammer out a post Soviet relationship, which they really haven’t done in 20 years of independent existence. It’s difficult to see at the moment how that might happen.”
Ukraine, he said, seemed intent on reducing its dependence on Russian gas, but it was going to be a challenging place for anyone to operate.
Lee explained, “They haven’t been really able to develop their conventional gas resources, let alone their unconventional ones, and there are big concerns in foreign investors’ minds in the sanctity of contract and the stability of contract and the unfortunate situation that politics in Ukraine seems to very much revolve around fighting political battles with the opposition rather than actually taking the country forward, and that’s not what Ukraine needs.”
Given all that, where does unconventional gas development in Europe stand?
“I think there’s a potential for it to play a role,” he said. “I think we’ve certainly seen a very significant role played by unconventionals in North America, but there is a huge overestimation of how quickly this could happen in Europe.
“Part of the problem is that people, politicians in particular, look at what they see having happened in North America. They sort of look back to 2005 when there was nothing and now, when there’s a huge volume of production, and translate that into a seven-year ramp-up from start to finish. What they don’t see is the two decades of early exploration and technology development and other things that went before that.”
He continued, “Some people argue ‘the technology bit’s been done, so you just apply that.’ Others suggest that every shale is different, the technology that works in one place may not work in another, so actually there is technological development that needs to go on, certainly regulatory development, the development of the service sector and drilling capability.”
Geopolitical interests sometimes fuelled the overly optimistic prospects for shale gas in Europe, according to Julian Lee.
“I think a big part of the problem is that there are a bunch of governments for whom indigenous supply and the potential to reduce their dependence on a single import source is extremely important, both politically and perhaps economically. And they sort of got caught up in an unjustified enthusiasm or belief that this will happen very very quickly. I think this is what everyone’s trying to deal with at the moment.
“It’s not so much about ‘will unconventional gas play a role in Europe?’” he explained. “It’s more about ‘When will unconventional gas play a role in Europe?’ And it’s probably beyond 2020, not 2013-14 as some people seem to suggest.”