Coming Down the Pipeline: Russian Gas
As the European calls for diversification away from Russian sources of natural gas continue in the wake of the Ukraine crisis, a just released study from The Brookings Institution shows that the European Union is likely to be using a lot of Russian gas even by the year 2040.
A 30-page white paper, entitled "Business as Usual - European Gas Market Functioning in Times of Turmoil and Increasing Import Dependence,” it outlines several scenarios for Europe's future gas supplies, taking into consideration things like the price of oil, whether Ukraine gas transit will be used or not, and whether the controversial South Stream pipeline will be built.
A fellow in the Energy Security Initiative at The Brookings Institution, Tim Boersma, one of the four authors of the document, has been at the think tank for a bit over a year now; previously, he's worked in the Dutch electricity production sector as a corporate counsel. It was then, he recalls, that he began his dissertation on European natural gas market functioning and European decision-making structures that are entailed. Since, his focus has remained on natural gas markets, in particular in Europe.
Mr. Boersma recalls that the research team, which includes Tatiana Mitrova, the head of the Oil and Gas Department at the Energy Research Institute, Russian Academy of Sciences, Geert Greving a nonresident senior fellow with the Energy Security Initiative in the Foreign Policy program at The Brookings Institution and chairman of the taskforce geopolitics with the International Gas Union (IGU), and Anna Galkina, Research Fellow at the Centre of International Market Studies of the Energy Research Institute of Russian Academy of Sciences (ERI RAS), were interested in looking behind the rhetoric coming out of Brussels and Washington at a time early in the year when the Ukraine crisis was in an aggravated state.
“We wanted to look at what we think is realistic in terms of diversifying away from Russia, which became sort of a catch phrase used by many politicians and commentators. We wanted to give a sense over whether we thought that was actually going to happen,” he explains. “In the longer-run, assuming that the sanctions will in due time be lifted again, what do we think will happen to Russian supplies in Europe?”
He admits that by June things had escalated to a greater extent and sanctions were heavier than anticipated, but the result is still the same – no substantial changes for European sources of supply.
“We don't know what's going to happen in Ukraine, don't know what other sanctions Europe and the US will install, but assuming that at some point the situation will stabilize and get somewhat back to normal, then our study sheds a good light on what we think is almost a given in European gas markets: that Russia's going to be a prominent supplier.”
Mr. Boersma contends that sheds a different light on the desire, as has been expressed so often, of diversifying away from Russian gas. Surely, there are uncertainties, he says, given that the gas dispute between Russia and Ukraine is ongoing.
As a European, he says he finds talk of US natural gas shipments making their way to European shores in order to rescue Europe very interesting. “Business as Usual,” he says, also seeks to put such solutions into perspective.
He offers: “Similarly, in Europe there's always been a lot of talk about the Southern Corridor and, here too, these are important alternative sources of supply and supply routes, so therefore should not be underestimated, but they also should not be overestimated. It seems to me that in these debates, such things do get overestimated.
“If you do analysis on marginal cost, and ask how competitive these resources are in comparison to the traditional suppliers – not just Gazprom, but Sonatrach, Statoil and domestic producers – you get a much more nuanced picture, and it will not be the case in our view that Europe will evolve in a continent where you have supplies coming from all over the world, a lot of North American supplies, from the Caspian, Turkmenistan, you name it. Our analysis suggests that indeed in the medium to long term alternative supplies will reach European markets, but in modest numbers and moreover, these largely replace dwindling European domestic production, not replace traditional supplies,” explains Mr. Boersma.
The Brookings' report also suggests that down the road LNG looks more likely to make a significant contribution to natural gas demand in Europe than the Southern Corridor.
“There will be roughly 10 BCM of gas coming into Europe from the Southern Corridor roughly by the end of the decade, 2018-19,” he explains. “But from then onward it's uncertain what will happen. Among potential supplies, we've accounted for another 20 BCM from Iraq and Iran together in our scenarios, but we don't really know of course and this may turn out to be optimistic.”
He says Eastern Mediterranean sources are not expected to come into Europe in significant amounts. The role of LNG, meanwhile, he says is very interesting.
“Of course, Europe is today already positioned to import large amounts of LNG, but Asian buyers are paying more for it, and as long as European buyers are not willing to pay those prices then LNG will be sold in Asia, where there's a lot of demand and more importantly demand growth, which Europe doesn't have.”
Europe's share in global LNG trade, he notes, has been declining substantially, but according to “Business as Usual” LNG's role in Europe is set to increase. Mr. Boersma explains: “More LNG supplies are expected to come onto the global market in the coming years, and among those of course, significant resources form North America, from both the US and Canada, and we think that a part of those will be competitive in Northwestern Europe: the UK, Netherlands and Belgium.”
However, according to the study, LNG will not replace Russian supplies, but more-so dwindling domestic supplies, which will continue to decrease. “Even when one accounts for some shale gas production in the UK and Poland for example, which we've done, domestic production decreases. In our analysis we've assumed that 20 BCM of shale gas will be produced in the longer-run, but even then you see that LNG is replacing domestic supplies, and not Russian supplies, by and large.”
The sale of Russia LNG, he adds, is also expected to increase in Europe from 2030 onward, assuming that the sanctions are lifted at some point. “We do not foresee this to be a problem, as LNG is seen as a global commodity that can be re-shipped. Thus, while Russian market share is expected to decrease substantially after 2030, this is partly compensated by Russian LNG, and Russian market share then stabilizes at around 130 BCM.”
Overall, this means Europe will be able to utilize its regasification capacities, according to Mr. Boersma, who says the question remains whether Central & Eastern Europe (CEE) can benefit from that.
“In the very short-term, no,” he says. “In the coming years, hopefully we will see a new push for further market integration, establishment of investments in interconnectors, reverse flow options, storage facilities and such, and hopefully this is done soon in CEE, whose countries could benefit from other sources of supply coming into Europe if they were better connected to neighboring countries.”
Still, with a cut of Ukrainian transit in the short-run, according to the Brookings report, CEE markets are in trouble, seeing price spikes at the Austrian hub Baumgarten. He comments, “The gas just cannot flow to certain parts of Europe.”
A lack of infrastructure investments in that region has shown that European markets have been developing at different speeds, he says. “In Eastern Europe the challenge is that you have markets that use very modest volumes. Even a country like Poland, a very large member state, only consumes about 15 BCM/year, which is not a lot.
“The challenge there is, to develop that gas market – how do you do that from a private sector perspective if the volumes are not that large? From a security of supply perspective it's important. Those questions have been on the table for a long time, ever since these countries joined the EU European policymakers have struggled with this and have not come up with effective solutions. We should also note that policy makers in countries in CEE have not stepped up to the plate, even though since 2006 it has been apparent that work had to be done to address single source dependence,” explains Mr. Boersma.
Brussels, he admits, in recent years has chipped in funds for such investments which have made for improvement. Poland and the Czech Republic for example, he says, are in much better standing in case of Russian supply cuts. But more work remains, and quite frankly, he says, national policy makers in CEE should take initiative, come up with incentives for investments, and not just look at Brussels for support.
“One of our main conclusions is: further integrating markets, further collaboration between European member states has really worked – it generates results in that member state have access to alternative sources of natural gas,” says Mr. Boersma.
“It is for good reason that in our scenario of a full stop of Ukrainian transit, where roughly 40% of Russian gas to Europe comes through, at seven of the eight hubs in Europe this does not have any meaningful impact. Only at Baumgarten, as described, prices would spike,” he concludes.
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Drew Leifheit is Natural Gas Europe's new media specialist.