The European gas market finds itself at cross roads, while investments in production and infrastructure are on hold
There is an air of uncertainty hovering over the Eurasian 'gas continent'. The availability of Eurasian gas, in particular Russian gas, was taken for granted for many decades. Even at the height of the Cold War, gas from the Soviet Union’s gigantic Siberian and Central Asian gas fields flowed uninterruptedly to European homes and industries. The foundations for this stable flow of gas from East to West had been laid in the sixties and seventies of the 20th century. The EEO spoke with Russian gas expert Irina Akimova, member of the Russian Gas Society's Expert Council and Corresponding Member of Academy of Technological Sciences of the Russian Federation. She argues that now is the time to decide on massive investments in the development of new gas fields in Russia and the building of additional transport capacity. Only then can future supplies to the European market be secured at reasonable prices for its consumers.
Time to invest
As an economist, Akimova, points out that the global economy is shaping the international and, as a consequence, the European gas market. This means that demand is rebounding and that it is time to start investing now. If we are to believe Mrs. Akimova, the European and Russian gas industries are facing challenging times. Although the situation on the markets will remain stable for the coming years, we will face a completely different situation after this period, with higher gas prices. In order to guarantee gas supplies to the European gas market for another couple of decades, massive investments are needed. According to Akimova, the scale of the challenge and the investments needed are reminiscent of the time when the first gas pipelines were built, that connected the Soviet Union with Europe. In order to meet future demand on the European market in the coming decades and prevent a possible shortage, the required investments should be made before hand, meaning now.
There are, however, some additional arguments for not delaying investment decisions any longer. In the wake of the financial and economic recovery, demand for gas is destined to increase. The longer such investment decisions are delayed, the more costly these investments will eventually become. Firstly, a recovering global economy, will not only bring higher energy prices, but also higher prices for other natural resources, such as a higher steel price. A higher steel price will, on its turn, obviously increase the costs of major gas infrastructure and pipeline projects. These projects require financing that runs into billions of euros each. Since conditions for financing will not return to favorable levels of 2005-2006, Akimova explains, both companies and government bodies should understand that only by combining their efforts they will able to face such challenging infrastructure projects.
But there is more to the equation than economics and financing, and that is EU regulation. The EU gas market currently finds itself at a turning point, with the European Commission (EC) introducing a new regulatory framework (3rd Energy Package). According to Akimova, this regulatory framework does not take into account the challenges that come with developing the needed infrastructure and its ultimate affect on the gas price for consumers. The EU regulatory framework should respect this, Akimova argues and explains why. Firstly, in order to provide the EU market with new supplies and infrastructural projects, meaning pipelines and UGS, economic incentives are needed. Secondly, what is need is a clear and predictable regulatory framework with equal evaluation procedures for all the projects. In the EC’ new Infrastructure Package there is still much uncertainty about how infrastructural projects can obtain a priority status.
Supply gap
Understandably, Russian gas will not be the sole source to meet the EU's 'supply gap'. LNG is becoming an important additional source of supply to the EU market, in particular LNG from Qatar, mainly as a result of the unconventional gas revolution in the US. As for Caspian gas, Akimova believes its chances for reaching the EU market are limited, since Russia has contracted most of it. Therefore, it is likely that the absolute volumes of Russian gas exports to the EU will increase, according to Akimova. Reasons for believing so are EU plans to increase the share of gas in Eastern and South Eastern Europe. However, despite the prospect of a growing gas market in these regions, it is still hard to find reliable figures on the future size of these gas markets, Akimova tells EEO. Another uncertainty are EU plans to tax future CO2 emissions, which is being detrimental to investment plans. A high CO2 tax would undoubtedly affect gas demand in the EU.
Like many other experts Akimova shares the opinion that it is hard to predict the precise size of the EU's 'supply gap'. The figures and data from different organisations and institutions vary significantly. Based on so called 'consensus forecasts', which are composed of various forecasts from respected companies and institutes, such as the International Energy Agency and WoodMacKenzie, Akimova believes the EU's 'supply gap' would vary between 250 - 435 BCM/a by 2030. Nevertheless, to Akimova it is obvious that the gap will be significant. To fill this gap, additional export capacity will be required. Nord and South Stream are good examples of such projects. However, according to Akimova, their joint capacity, including Blue Stream-2, will not be sufficient even if Nabucco materialises. This means that even more transport capacity will be needed. Therefore, she argues, it would be good if the European Commission (EC) granted South Stream a TEN-E status, as was granted to Nabucco and Nord Stream. Such a status would help speeding the project's development, as it would ease the securing of project financing.
South Stream
Besides gasifying South Eastern Europe (SEE) and contributing to a higher share of gas in the regional energy mix, South Stream will also provide liquidity and more security of supply to the market (63 BCM/a), with the first supplies scheduled for late 2015. In addition, South Stream will stimulate the development of underground gas storage (UGS) in SEE, more precisely in the countries it will run through. According to Akimova, South Stream will not just reduce transit dependency on Ukraine, but also the dependency on storing gas there. Still, there remains much uncertainty about Ukraine's political stability and its reliability as a transit country, Akimova concludes.
Moreover, Gazprom does not only dispose of the gas to fill the pipeline, it has already signed supply contracts with its European clients whom it can supply through South Stream. For the period of 2011-2030 Gazprom has already contracted 4 trillion CM of gas to its EU customers. As for the origin of the gas, Akimova tells the EEO that the gas will come from Gazprom's united gas transport system, which contains, besides Russian gas, also Central Asian gas. Although Gazprom and Turkmenistan had a supply dispute in early 2009, Akimova does not believe that Gazprom will have difficulties with increasing imports from Central Asia, in particular from Turkmenistan. True, China is taking an ever larger part of Turkmen gas export for its account, but Gazprom's long term contracts will nevertheless allow for a significant increase of imports if required, according to Akimova. A recently signed contract between Russia and Azerbaijan will allow Russia to further increase volumes from Azerbaijan significantly.
If there is on thing that is certain, Akimova concludes, than it is that the era of cheap gas is behind us, be it Russian or Middle Eastern gas. In this respect, the question whether South Stream is an economically viable project should be regarded from this perspective. In other words, not only the price for gas exploration and production will increase, but also its transportation.
The EEO spoke with Irina Akimova on the sidelines of the 4th Annual Oil & Gas Pipeline Maintenance & Reliability Forum in Amsterdam, on 16-17 February.
