How Europe is getting ready for another gas crisis!

The New Year season is usually seen as a time of holidays for most Europeans. However, in recent years, this period has become notorious for the regular gas disputes between Russia and the Ukraine. Currently, 80% of Russian gas exports to Europe are delivered via the Ukraine, reports German Broadcaster Deutsche Wella . Such disputes have led, at times, to disruptions to gas deliveries reaching not only the Ukraine but the 18 European states that use the same pipeline system to import gas from Russia. In 2008 European gas consumption was some 517 billion cubic metres, reports Eurogas.

In the latest dispute, in January 2009, the countries that were most affected were Bulgaria, Moldova and Slovakia, they were forced to implement emergency measures. It was estimated by the European Commission at the time, that the countries of Central and Eastern Europe, that were affected by the dispute, experienced shortages of around 300 mcm/day.
What Was The Problem?

Even at times of disruption, Europe tends to have an overall surplus of gas, observes Dr. Colin Lyle of the European Federation of Gas Traders. The main problem was one of lack of sufficient interconnected infrastructural capacity and a failure to make such capacity available to the market. There are a number of reasons for Europe’s disappointing state of preparedness. In part, it was a failure of governments and operators to have policies in place to deal with the political, market, contractual and infrastructural issues that arose when dealing with the crisis.

For Europe, cooperation has proved difficult between the numerous pipeline operators and markets for a number of reasons. The lack of a single standard of European wide legislation to deal with such emergencies has meant that in some countries domestic competition and energy laws have made it hard to cooperate. Further, there is the issue of pipeline and storage capacity, not all Europe’s gas networks are linked up to each other. In addition, many cross border links (where they exist) do not have the spare pipeline capacity to cope with additional emergency volumes of gas, nor share a common pipeline operating management software, installed to reverse gas flows.

Adding to these difficulties was the lack of transparency of market information, due to operators’ efforts to protect commercially sensitive information. Lastly, much of Europe’s gas supplies are tied up in long term contracts, leaving little spare to be diverted in an emergency, particularly given that last winter EU’s gas stockpiles were low. Current European gas stockpile capacity is estimated at around 81bcm, suggests Eurostat.

In January 2009, many governments did not have the policies in place to deal with such eventualities observes Ian Cronshaw of the Energy Diversity Office International Energy Agency (IEA). This meant such states could not switch to emergency backup plans to mitigate the impact of the crisis of last winter.



What Has Changed?

However, since last winter, Europe’s energy sector working with the EU and governments have conducted risk assessments and developed measures in order to be better prepared for gas supply disruptions in future. Dr. Colin Lyle, notes that due to the current recession, that European annual gas demand has dropped by 10%. Further, due to increases in global gas production and the completion of various EU gas transmission systems, there is an increasing volume of gas available in the European market.

For instance, the continent’s gas storage levels are much higher than before the crisis of January 2009, several of the emergency measures have been made permanent, and more bilateral arrangements are now in place between neighbouring EU member states, in order to facilitate cooperation, together with improvements in the development of common standards of information sharing and technology.

Through the work of the EU’s Gas Coordination Group various market and infrastructure barriers to the free flow of gas across Europe are being steadily removed. The Balkans is a case in point with plans being implemented to integrate the various pipeline networks into a single system. In addition, Greek pipeline operator DEFSA has been improving delivery capacity to neighbouring Bulgaria, with gas sourced via Greece’s recently upgraded Liquefied Natural Gas (LNG) import terminal near Athens, which imports gas from overseas.

This year has seen the opening of LNG terminals in Wales and near Venice. The Italian initiative is an engineering marvel, costing €2 billion and built offshore, and it is the size of two football stadiums, ten storeys high, able to supply 10% of Italy’s needs. Such terminals play a vital role in adding to Europe’s gas storage capacity and ability to diversify its gas sources, so it is less vulnerable to geopolitical disputes.

Further, the opening of the Central European Gas Hub at Baumgarten in Austria, this December, is already improving the ability of the region to store and distribute gas to neighbouring states in Central and Eastern Europe.

As for the Future

There are proposals for further LNG gas terminals including the one planned by Austria’s OMV on the Croatian island of Krk, to supply Croatia and neighbouring states. There are also plans to fill in the gaps in Europe’s high pressure gas network, including the proposed construction of an undersea gas pipeline between Greece and Italy.

Throughout Europe, energy companies including 3Legs Resources and Exxon are exploring for ‘unconventional’ gas sources. This is gas trapped in shale rock, a flaky sedimentary rock, which until the recent advances in the drilling technique known as hydraulic fracturing, was too expensive to exploit. In North America, which is at a more advanced stage in the exploration cycle, the impact of these new technologies has dramatically cut the price of domestic gas in the United States, reducing the country's need to import LNG gas from overseas.

As a result, traders have been sending LNG shipments to Europe. Today, gas prices on the UK's National Balancing Point have dropped to almost parity with that of the US Henry Hub gas price index. The IEA estimates that there are sufficient unconventional gas reserves to replace Europe’s gas imports for 40 years at current levels, though it will probably take a decade before Europe sees the full effects of such investment. Further, as Simon Pirani at the Oxford Institute for Energy Studies, concludes the prospects for avoiding a repeat of the January 2009 Russia-Ukraine crisis have improved and the potential for such conflicts to cause disruption in Europe will be greatly reduced following the completion of the first Nord Stream pipeline in 2011-12.

It is therefore clear that Europe is now in a better position to deal with gas supply disruptions, caused by geopolitical factors, that so paralysed parts of Europe in recent years.

News Update As of 8 January 2010:

According to Dr. Jonathan Stern at the Oxford Institute of Energy Studies, on current estimates, despite the exceptional weather conditions in Europe, gas supplies should prove adequate, because of sufficient gas reserves are in place.