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Colin Chilcoat

Colin Chilcoat

Colin Chilcoat is a specialist in Eurasian energy affairs and political institutions currently living and writing in the former oil capital of the world. Colin…

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Russian Gas: There Is No Alternative For Europe

Russian Gas: There Is No Alternative For Europe

 The sanctions are now in their second year; the ruble is still not quite itself; and national champions Gazprom and Rosneft are both bracing for what can generously be called a down year. Still, while Russia’s political relationship with the west continues to be redefined, the broader element of codependence remains relatively unchanged – though its worth is hotly disputed. Nowhere is that dispute more pronounced than in the energy sector.

To be sure, Gazprom is in trouble. Last year, the gas giant saw its profits fall 70 percent to $3.3 billion. Through the first three quarters of 2014, Gazprom deliveries fell 3 percent, 13 percent, and 8 percent to Europe, former Soviet republics, and domestic consumers respectively. Its debt burden is up and opportunities for long-term credit are few. Moreover, its legal woes are growing by the day. Recent antitrust filings from Poland and Ukraine join the European Commission’s (EC) April charges that could cost the company up to 10 percent of its global turnover.

For its part, Europe – more specifically, the European Union – is still attempting to define the terms of its own energy security. Plans for the 28-member bloc to unite in an energy union are still a go, though only marginally more clear than when they emerged. In a recent statement at the European Economic and Social Committee’s Plenary Session, Energy Union commissioner Maros Sefcovic described the goals of the union as follows: a fully integrated energy market; energy efficiency above all else; decarbonization; a commitment to R&D; and securing supply through solidarity and trust. Related: Here Is Why Predictions For Lower Oil Prices Are Wrong

Much has been done to achieve the first four objectives. Interconnectors are popping up throughout the continent and the EC, along with the European Investment Bank, have launched two new financial instruments to drive investment into energy efficiency and climate action projects. Solidarity however, has been difficult to achieve.

That is nothing new for the European Union. Hardliner positions against Russia and calls for greater transparency (EU oversight) have only served to highlight the unsurprising diversity of national interests in the economic bloc. To take a controversial example, Hungary and Greece, among others, are struggling to see the economic benefits of sanctions against Russia. Brussels has gone to great lengths to present a unified front when it comes to the Ukraine crisis, but some members are not convinced of the strategy.

Securing supply is an even greater headache. The shale gas revolution in Europe has turned out to be anything but. The majors have pulled out of Poland and Ukraine – two of the more promising countries – though marginal hopes still remain in Denmark and the UK. Related: Did Low Oil Prices Actually Hurt U.S. Economy?

US liquefied natural gas is still years away, and even then is unlikely to satisfy Europe’s thirst. Cheniere Energy’s Corpus Christi LNG is the only prospective terminal to have signed contracts with Europe. By 2018 at the earliest, the terminal will deliver about 7.3 billion cubic meters (bcm) of LNG annually – or approximately 1.7 percent of Europe’s demand.

Turkmen gas – via the southern corridor – is not expected until 2019. Turkmen officials believe deliveries could account for between 2 and 7 percent of Europe’s annual demand. Russia’s Turkish Stream pipeline is expected to be operational in 2016, though it is unclear whether or not infrastructure on the Greek side will be ready then. Related: EU Energy Union May Already Be Proving Its Worth

In the meantime, the EU and Sefcovic will broker an interim Russia-Ukraine gas deal to last until a Stockholm arbitration court rules on Gazprom and Naftogaz’s debt dispute. A positive result there would, for a time, reduce the risk of any supply stoppage. Nearly 20 bcm of gas has already transited through Ukraine this year.

Russian gas is here to stay. Not because the EU’s Energy Union is still far from the solidarity it seeks, but because the alternatives don’t make sense.

Fittingly, on May 13, Centrica, owner of British Gas, extended a gas supply contract with Gazprom’s UK-based subsidiary Gazprom Marketing & Trading. Gazprom will now deliver 4.16 bcm per year to the UK until at least 2021 – an increase of 70 percent from the previous deal.

By Colin Chilcoat of Oilprice.com

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  • valleyboy on May 20 2015 said:
    This is delusional.

    First, the Germans, the largest and most important European country, are marching ahead toward energy independence. It's program of renewables is expensive, yet enjoys widespread popular support, even among German business who sometimes have to move companies out of Germany. Germans lead the world in per-capita solar power generation (NOT the sunny US). They are reconfiguring their grid (at a cost of billions) to accept North Sea generated wind power. The list of major investments by the Germans goes on and on and on.

    It is not a secret that the German goal, of eliminating 30% oil usage before 2020, is exactly the percentage supplied by Russia. The longer term goal is complete energy independence.

    In the Baltic states, one of these tiny countries has just completed (Jan 2015) a remarkably large LNG port/depot. Why so huge ? Because that one single port can supply ALL THREE Baltic countries with 100% of their gas needs, eliminating the Russian choke hold on these countries.

    Why, you might ask, did the barely floating Russia navy suddenly decide to hold expensive maneuvers (which Russia cannot afford) in the Baltic ? So that they could interfere with the huge electric power cable being laid in the Baltic sea between Sweden and Poland.

    Likewise, the Norwegians have already said it is no problem to supply Europe with enough gas to replace Russian gas. The question is not even of price, but rather long-term commitment to justify the construction of the necessary pipelines from Norway to Europe under the Baltic. This pipeline would be shorter and less expensive that the Russian Turkmen pipeline through Turkey.

    In the background, the small American company called Tesla will be making electric cars, at a profit, and so are all the other wanna-be car manufacturers. It is an irrefutable physical fact that not only are electric cars cheaper to manufacturer than internal combustion engines (less than 50% moving parts), they are also easier and cheaper to maintain, and they are cheaper to operate as well. With current projected volumes, electric cars are slated to be cheaper to buy, at retail, without subsidies, in the 2017 time frame. Even the slightest pressure on gas prices (even $60 oil) and sales of those cars will go through the roof.

    In the US, the oil reserves are setting records in billions of barrels of unneeded oil stored, while fracking companies go out of business. The moment oil prices raise even the slightest amount, all those fracking wells have been drilled and the land paid for. Many of the early fracking wells can make money at $40/barrel, so the first sign of uptick in the price and 100,000 unemployed oil drillers will be pressuring the oil companies to re-start those wells.

    Finally, it is an explicit stated goal of the German energy policy to lead the world in solar technology and then make profits from exporting this technology. While this article points out the lack of political unity in the EC, the reality is that politics is not the only force working on the situation. If the Germans can make solar power a reality in Germany, what makes this author believe that somehow Spain, Italy and the other sunnier countries cannot use this technology ?

    The Russians have used the oil club to bully Europe for the last time.

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