AN END TO EUROPE’S GAS CRISIS?Nicholas Newman 11 November 2009· Europe’s gas crisis is at an end. · Europe’s Energy Security situation has improved as it is now well able to withstand supply disruptions. · It is time for Gazprom to stop wasting billions on political pipedreams. It has been interesting times for Europe’s gas sector. Since 2007 there has been increasing fears, in Brussels, about the potential threat to EU’s energy security from greater dependency on Russian energy supplies. Gas prices have rocketed to record levels with the 2007 forecast from Eurogas that the EU’s dependency on imported gas would climb from 41% in 2005 to 68% in 2020. Such forecasts sparked fears that Europe faced the prospect of gas shortages if new pipeline capacity was not urgently given the go-ahead and sparked a series of speculative pipeline proposals to meet the EU’s ever growing anticipated thirst for gas from fields in Siberia, Central Asia, Middle East and Nigeria. However, the situation has been transformed. The ‘gas bubble’ has burst, as the recession has caused demand to drop like a stone. Since 2008, demand has fallen in the top five leading EU economies by between 12% - 23%, in the past year, reports Eurostat. The first half of this year has seen European gas prices drop by nearly 50%, reports Liam Faulkner of Irish energy company Vayu. In response Russia’s Gazprom has announced that it is cutting back its estimated exports to Europe from 179bcm in 2008 to an expected 140bcm in 2009. Current EU forecasts suggest Europe could be importing up to a third less gas by 2020. NEW PIPEDREAMS?It is now clear that, current forecasts for gas demand in Europe, together with technological and market factors are now in a state of flux, at present make little economic and political sense as a basis for any for proposed pipeline schemes such as Nordstream, Sudstream, Nabucco and the Trans Saharan Pipeline. Clearly, if built they would change almost beyond recognition the market, and would be capable of adding possibly up to 179 bcm of gas per year to Europe’s already bloated market and bring about a further depression in gas prices, a prospect that enterprises involved in the production of gas would like Gazprom would find most unwelcome. There are also increasing doubts that Gazprom’s pipeline proposals have sufficient political and economic capital from Moscow to move ahead on such proposals, given the dire state of the Russian economy. Increasingly, with reference to the EU gas supplies the possibility of Moscow being able to exert influence and political pressure on Brussels is clearly becoming a pipedream. As for Europe’s Nabucco pipeline project, this would link Western Europe consumers, via the Balkans, to the gas fields of Central Asia, and the Middle East. This would both enhance Europe’s energy security position and aid the EU in its bargaining posture. Finally, any consideration about the possible construction of the Trans Saharan Gas pipeline is unlikely to come into being, given both the long term market conditions and the likely the political problems faced by such a project. FACTORS BEHIND MARKET SURPLUS This year’s drop in demand has been primarily caused by the recession suggests Oxford University’s Jonathan Stern. Already, Europe is now experiencing a growing surplus in gas supplies, and Graham Freedman at ‘Wood Mackenzie’ anticipates gas prices will continue to fall. In addition, as new renewable energy schemes come on stream, this will further reduce gas demand. A further factor that is influencing Europe’s gas markets is increasing imports of Liquefied Natural Gas (LNG), which is the result of the completion of new LNG import terminals throughout Europe. This has increased Europe’s ability to import gas by sea, from 11% in 2006 to an expected 25% of total EU gas supplies reports Eurogas, thus increasingly threatening Gazprom market share in a shrinking market? In addition, certain UK gas fields have suspended production in favour of cheaper LNG imports and as a consequence Britain has switched from the European oil linked prices index to the lower prices available in the US Benchmark Henry Hub index, thus radically breaking the historic market convention for pricing natural gas within Europe. In the short term, the anticipated growing surplus in gas supply from LNG and gas pipeline deliveries, means Europe should easily cope with another round of disruptions to supplies caused by any disputes between Russia and the Ukraine? In the longer term, the need to achieve the EU’s environmental and energy targets require that 20% of its energy must come from renewables is reducing the attractiveness of gas to major electricity generators. In addition, further technological developments will affect the demand for gas. Such as carbon capture technology for clean coal power stations, together with Europe’s next generation of planned nuclear power stations, are all likely to further reduce Europe’s dependency on imported gas, especially from Russia. In terms of longer term internal energy security, Europe must speed up completion of its plans for a transeuropean gas pipeline network and new gas storage facilities. On the foreign front, given Gazprom’s weakened position, it would be advisable for Moscow to come to a deal with Brussels over the Ukrainian problem, rather than waste billions of roubles on political pipedreams? ConclusionIn terms of energy security, Europe is likely to face a more secure negotiating position with its current and future gas supplier, and thus its energy industry is likely to be better able to withstand vagaries in prices. Due to a slow down in the growth of demand for gas, the urgency claimed by backers of such projects as Nordstream and Sudstream are considerably reduced. In fact, given the current desperate financial situation in Russia, it would be more cost effective for Moscow to come to a deal with Brussels to upgrade the existing Ukrainian pipeline network than waste billions of roubles on new pipeline projects, when existing pipelines are already underutilised, and it would be more cost effective and politically advantageous for the EU and Gazprom to combine to build one super Nabucco project that integrates the best of Sudstream and Nabucco to meet long term growth in demand! Really does appear that Europe’s gas crisis might be over? Further Information 2. For market trends in gas |
