Europe’s natural gas supply mix likely won’t change much without drastic policy interventions despite recent renewed concern over instability in Ukraine, a new Brookings Institution policy brief concluded. This effectively will ensure a continuing significant market share for Russia, it said.
“Over 2 decades of market reforms in Europe, overdependence on Russian gas as a problem has been overstated,” said Tim Boersma, an Energy Security Initiative fellow in Brookings’s Foreign Policy program and one of the four authors. “But a lot more needs to be done, particularly attracting more infrastructure investment.”
The lack of market development and integration in central and eastern Europe appears likely to remain a problem in the near and medium term, according to the policy brief, “Business as Usual: European Gas Market Functioning in Times of Turmoil and Increasing Import Dependence.”
During an Oct. 14 discussion of the policy brief, Boersma said, “We’ve known for a decade now that much more work needs to be done in countries like Hungary.”
This is demonstrated by its scenario where Ukraine no longer functions as a transit state for gas headed to Europe, the study said. While this would not have a meaningful impact on seven of the eight trading hubs the study examines, it potentially could lead to price spikes during 2015 in the eighth, Austrian Baumgarten, the report said.
By constructing additional interconnectors, reverse flow options, and storage facilities, countries like Poland and the Czech Republic are better situated now to resist market abuse than they were 10 years ago, it indicated.
LNG, other alternatives
Another of the study’s authors—Tatania Mitrova, who heads the oil and gas department in the Russian Academy of Sciences’ Energy Research Institute—said the policy brief started with comprehensive gas production, LNG, and pipeline data bases with a moderate global gas demand assumption.
She said it predicted that the Southern Corridor Pipeline from Azerbaijan will be expanded only after 2030, and that only already planned LNG terminals would actually be built in Europe, including one in Croatia that has been long delayed.
The study’s baseline scenario used a $100/bbl Brent crude price, extensions of Russian contracts for 10 years with 35% spot pricing, Russia’s building its South Stream Pipeline, and transit through Ukraine remaining accessible, Mitrova said. “We expect North American LNG to be used primarily in Asia, but affecting prices globally,” she said.
LNG shipping costs to Europe likely will keep Russian gas competitive, she added. “The Russian gas presence still will be considerable, with more diverse supplies,” Mitrova said. With Europe’s gas prices tied to those of crude, Russia’s gas becomes even more competitive as crude prices drop, she said.
The US agrees that Russian energy will remain important in Europe, but would like to see countries there diversify more, said a third speaker, Robin Dunnigan, deputy acting assistant secretary for energy diplomacy in the US Department of State’s Bureau of Energy Resources.
“We don’t think US LNG exports are a panacea for Europe’s energy problems, although they are affecting pricing,” Dunnigan said. “The fact we are importing less and exporting more gas has given a lot of European utilities more leverage with [Russia’s state gas supplier] Gazprom.”
More immediate problems loom in Ukraine, which does not have enough gas to get through a normal winter after barely making it through the previous year’s heating season, Mitrova said. She expressed hope that Russian President Vladimir V. Putin and his Ukrainian counterpart, Petro Poroshenko, reach an interim 6-month contract at their scheduled Oct. 16 meeting.
“We’ve been working closely with the [European Union] on a proposal, and hope to reach an agreement in the next few weeks,” Dunnigan said. “We’re also looking at ways Ukraine can increase domestic production and improve its efficiency to a point that it ultimately can choose, rather than need, to buy Russian gas.”
The US government also is working with Ukraine on regulatory reforms so it can attract the necessary outside investments, she continued.
The Brookings policy brief said that European regasification capacity is expected to increase substantially in coming years, and LNG from North America will become competitive in Western Europe, particularly the UK, the Netherlands, and Belgium. LNG imports could help offset Europe’s declining domestic gas production, but won’t be a substitute for Russian gas, it emphasized.
The report also examined other alternative gas supply sources for Europe such as the Southern Corridor and South Steam pipelines and increased domestic shale gas production, but saw no evidence that supply alternatives will be transformative in the European gas supply mix in the near future.
Russia’s South Stream project doesn’t make sense to the US government, Dunnigan said. “It’s the same gas that’s already moving on other routes at a higher cost,” she explained. “We’re asking our European allies to look more closely at the numbers on it.”
Contact Nick Snow at email@example.com.