As Jack Handey aptly pointed out “Before you criticize someone, you should walk a mile in their shoes. That way when you criticize them, you are a mile away from them and you have their shoes.” Often arguments are caused by entities talking past each other, as personal vantage points don’t allow them to see from the others perspective.
With European gas demand rising in 2015 for the first time in four years and internal gas production on the decline, and fewer new sources of gas being brought online in Europe, the search is on for new sources of the fuel. A more fuel-hungry west and an east increasingly weary of Russia’s monopoly on the gas markets is fueling a debate over what the solution should be to the gas supply question.
Gazprom CEO Alexei Miller seems little concerned after Polish antitrust authority UOKiK ruled last week that the Gazprom-led consortium looking to develop Nord Stream 2 would create too large of a monopoly and inhibit competition in the European gas network.
Miller noted that the ruling may prove not to be a stumbling block at all as he said a new solution should be found by October. Nord Stream 2, a project to twin the Nord Stream 1 line from Russian gas fields to Germany, is being developed as a consortium led by Gazprom (50%), with partnerships from European entities: E.ON (10%), OMV (10%), Shell (10%),Wintershall (10%) and ENGIE (10%).
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North-western Europe support for Nord Stream 2
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Although Estonia, Latvia, the Czech Republic, Poland, Hungary, Romania and Slovakia have signed a letter opposing the opening of Nord Stream 2, many of the pipeline’s investors and benefactors are Western European countries, making them more invested in the project’s success. Further, many NWE countries have traditionally had more than three gas suppliers, and on top of that there is now an additional new source of supply in the form of American LNG. As a result, the region does not normally see the difficulties of having a monopolistic player on its gas markets.
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With gas extraction falling from states like the Netherlands to 25bn m3/yr down from 42.5 bn m3/yr in 2014 due to earthquakes, Western Europe is looking to supplant this supply with new sources. With the long-term decline of gas production in the UK and with steady demand, NWE is looking hard for new stable sources of gas.
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As even Norway’s gas fields are approaching maturity, NWE will need to develop other options for a gas supply. The Nord Stream 2 pipeline proves to be a good solution. North-central Europe sees extra capacity in Yamal and Ukrainian Corridor gas lines, and sees Nord Stream 2 as a way to lower gas transit fees ultimately paid for by the region. If the Nord Stream 2 line were to be built, Germany would enjoy lower gas prices as less transit fees to Ukraine, Poland, Belarus, the Czech Republic and Slovakia would be paid. Related: Has The Gulf Of Mexico Fallen Out Of Favor With The Oil Majors?
Further to the point, although LNG is a viable option for NWE as well, the region is more conscious of GHG emissions, and LNG has more related emissions due to the energy required for liquefaction and gasification, and gasses released during the processes. Considering that LNG, which currently supplies about 10 percent of NWE’s gas, is expected to increase to 20 percent, a new economic and GHG friendlier pipeline looks like a compelling option.
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North-central states on course for gas market diversification
Weary of Russia’s multiple-decade long gas monopoly on its gas supply, north-central Europe is looking to diversify its gas system. To a large extent, this is happening with some success.
Poland has recently received its first commercial LNG shipment in June at its 5bn m3/yr Swinoujscie terminal, a third of Poland’s 16 bn m3/yr consumption. Having just been commissioned, the terminal is already expanding to 7.5bn m3/yr, and will increase competitiveness on its domestic market.
Although Poland’s plans to develop shale gas have largely ended in a whimper, there is a chance for coal bed methane development. With PGNiG currently developing the Gilowice-1 and-2 pilot boreholes into coal-seams using hydraulic fracturing technology, the jury is still out how these developments will affect Poland’s gas supply. The country is also looking to develop a pipeline from Norway with a capacity of 2-3bn m3/yr, with hopes of completion by 2022, the same year that long-term contracts with Gazprom are set to expire.
Right next to Poland, Lithuania’s Klaipeda LNG FSRU terminal, constructed in late 2014, has a capacity of 4bn m3/yr. The terminal posted a 1.9 percent increase in profits from the previous year, as pipeline and storage capacity bottlenecks inside the country and the three Baltic states were cleared and more gas was imported. This terminal is greater than Lithuania’s supply, and can offset part of Latvia’s gas demand.
Meanwhile, funding for the €187.5 million Balticconnector pipeline connecting Estonia to Finland was announced on August 12. With the connection of the Baltics to Finland, another LNG terminal could be a compelling investment for the combined 7.5bn m3/yr Lithuania-Latvia-Estonia-Finland gas market.
July 10th marked the arrival of the first LNG cargo to Finland’s newly completed LNG terminal in Pori with a storage capacity of 30 000 m3, with commercial deliveries starting in September. The combined storage capacity of the Pori terminal and two other LNG terminals set to complete construction in 2017 in Finland is 90 000 m3 – assuming the same downstream processing capacity as the Swinoujscie Terminal (320 000 storage capacity), this amounts to an annual processing capacity of 1.4bn m3/yr.
The company Vopak EOS which operates 1 million m3 of crude oil and related petroleum product storage capacity in Tallinn, Estonia is looking to build a 160 000 m³ expandable-to 320 000 m³ of LNG storage in Estonia by 2017 for half capacity and by 2019 for full capacity.
All these terminals, with the Balticconnector pipeline would be able to supply more than the four countries’ 7.5bn m³/yr of demand, and allow the nations to export a nominal amount of gas, for example to Poland. A €560 million euro, 2.5 bn m³/yr pipeline between Poland and Lithuania is set to open in 2019.
Russia looking to break through its besieged fortress mentality
With these developments to Gazprom’s LNG clients and a potential Baltic electricity link, from an economic markets perspective it is understandable that Russia has a besieged fortress mentality. The reduction in revenue from energy players in Russia has a direct effect on its state budget, and the limitations of Russia’s influence on energy markets moves it from a price maker to a price taker. When Lithuania was willing to pay a 10 percent premium on Lithuanian over Russian gas last year, Gazprom noted that a diversified approach was the best path, and that it was mostly unaffected by western sanctions.
To adapt to the changing market dynamics, Gazprom is hoping to build its own LNG export terminal. The company signed a memorandum of understanding with Shell to develop a 10 million tonne (about 13.7 bn m3) LNG terminal in Ust-Luga, 110km east of St. Petersburg near the Estonia-Russia border. The plant has an option to expand to 15 million tonnes, and the $10 billion dollar deal hopes to start operating in 2021.
Further, last week Russia opened an LNG export (liquefaction) terminal in Pskov, not too far from Estonia. At 31.7 million cm / year, the terminal is relatively small, however will be a step for Russia to develop its LNG capabilities on the Baltic. Estonia and the client company of Gazprom that runs the terminal signed a contract to supply gas to Estonia. To help develop its LNG capabilities, Gazprom has been in talks with Russia’s largest shipping company, Sovcomflot.
Gazprom is also looking to develop pipelines to Turkey via the Turkish stream, and is in close talks with Chinese partners to develop export capabilities to the country. Russia and China have two agreements for Russia to supply a total of 38 bn cm / yr of gas to China. The company looks to develop a diversified, multi-pronged approach to its natural gas export capabilities. In this way the company can guarantee its long-term viability while natural gas markets equalize across the globe.
As Gazprom’s market capitalization for the first time fell below that of Sberbank, Russia’s most respected bank, the company is looking to diversify its markets as more new sources of gas are brought online in the world.
Ukraine looking to solve its own energy challenges
With the ongoing conflict between Russia and Ukraine causing challenges for commercial gas contracts, Ukraine has been steadily decreasing its dependence on Russian gas. Last year for the first time Ukraine produced more than half its gas requirements at 20 bn m3, and imported 16.5 bn m3 from Russia. After Shell pulled out of the development of Ukraine’s largest gas field last year, citing falling gas prices and uncertainty due to the conflict, the country recently awarded a new company, Yuzgas B.V., set up by investment fund Emerstone Energy. The fund is headed by former European Bank for Reconstruction and Development (EBRD) Ukraine country head Jaroslav Kinach, and will look to develop the 7,800 square kilometer Yuzivska gas field, which could yield 8-10 bn m3 / yr.
The 5 bn m3 / yr UkrTransGaz pipeline between Poland and Ukraine is set to start construction next year and be complete by 2020. This pipeline will give Ukraine access to LNG gas supplies via the LNG terminal recently finished in Poland. If production numbers prove to be as expected from the prospective Ukrainian gas field, the Production Sharing Agreement (PSA) could bring money to Ukraine’s budget, offsetting potential loss of gas transit fees.
Increasing energy efficiency at a time
It is interesting to note that Ukraine’s total gas consumption in 2013 was 55 bn m3, while in 2015 it was 36.5 bn m3. Although some of this decrease is due to territorial disputes and conflict, some of the decrease was due to an increasingly efficient Ukrainian energy system. Indeed, with funding from the International Monetary Fund, the Ukraine hopes to move to install gas and heat metering to have universal consumption-based billing by the end of this year. According to the International Energy Agency, Ukraine’s National Energy Efficiency Plan which it has submitted to the European Commission outlines how energy efficiency measures by themselves that could decrease gas imports in 2020 by 40 percent from 2014 numbers. Related: Ignoring Fundamentals: Speculation Has Been Driving Oil Prices
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If Ukraine was able to coordinate development of solar energy in Odessa, Wind energy in the Carpathian Mountains near Lviv, gas developments around Lviv, the Polish-Ukrainian gas pipeline, and a national energy efficiency program, Ukraine’s gas import woes could largely be overcome by 2020. This type of development would be on the scale of a national Energiewende for Ukraine, and such coordination would be difficult for a conflict-torn nation. However, the country has already surpassed 1GW of installed renewable energy capacity this year, and is planning on entering the race for the world’s first 1GW solar plant in Chernobyl.
With north-central Europe’s traditional Russian monopoly on its gas markets, the region is looking to diversify its gas supply and increase competition. It worries that a second Nord Stream line would allow Gazprom to further monopolize the European gas market, and isolate Ukraine for political means. The region is developing LNG gasification terminals to help with its gas diversification.
Western Europe sees Nord Stream 2 as a strictly economic pipeline to limit transit fees, and also sees line as having the potential to lower GHG emissions. The region has not traditionally had a single sourced natural gas market, and does not see a monopolistic threat from Gazprom.
Both regions however, are weary of the situation in Ukraine. The West sees the best solution as increasing Ukraine’s renewable energy mix and increasing the country’s energy efficiency.
With the large potential to fully remove Ukraine’s gas dependency on Russia, north-central Europe’s successful gas diversification using LNG, and Western Europe’s decrease in production combined with steady demand, Nord Stream 2 is a viable economic option. However, with increased U.S. LNG exports, an increased ability for north-central Europe to accept LNG imports, the line is not completely necessary for long term energy security.
Disclosure: Although I am a Polish citizen and hence my views are influenced by this, I am also a Canadian citizen, spent most of my life in Canada, have spent the last year living in Moscow, and am studying at a University in the UK through distance learning. In short, I’m comfortable looking at Europe through a macro perspective.
By Matt Slowikowski for Oilprice.com
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