Editorial: Follow the money [NGW Magazine]
The year ended with the unexpected: Russia paid Ukraine’s arbitration award with interest, and the long-awaited five-year transit deal was signed with a good 24 hours to spare. Only a few days before, the winter gas price at European hubs had spiked on Ukraine’s announcement that the chances of a deal were vanishingly small. There was even an exchange of prisoners of war, hinting at a much-welcomed improvement in other relations between the two countries as well.
But failure to sign an agreement then did not necessarily mean no gas would flow: the consequence of not agreeing the terms – Ukraine said it fought over every comma during the five days of talks – and of Gazprom or Ukraine stopping flows on January 1, however satisfying that might have been, would have been mutually assured destruction. Lower flows would have meant lower sales for Gazprom and therefore lower transit fees for Ukraine. It would also have dealt a serious blow to the reputation of gas as a reliable and cheap energy source – and any reduction in gas demand in Europe is by extension bad news for LNG exporters too.
This includes the US, whose government is doing what it can to introduce risk into Europe’s gas markets by politicising the issue. Imposing sanctions on economic actors, such as the pipeline-laying barge operator Allseas, does not solve anything. Gazprom now will have to source another lay-barge, and the line will be commissioned even later. But Ukraine at some point will develop its economy without the crutch of transit fees and the US needs to keep gas demand alive in the Europe. It is the world’s biggest liquid market where LNG can be readily stored or sold.
And other economies in Europe might benefit if their governments addressed competition concerns in their own gas markets, rather than making life difficult for Russia and paying more for their gas than they need.
But emotions often carry more weight than economic arguments. This can be seen in the south of Europe as well. Political support for the EastMed pipeline – so far the one non-binding off-take agreement signed is with a Greek entity, the state-owned Depa – is as much a provocation for Turkey as a threat to Gazprom’s sales. It is one thing to own a lot of gas reserves; another to be able to exploit them commercially. Countries like the US, Russia and Qatar will sell out first, while those at the higher end of the production cost curve, or without deep pockets to subsidise production, might never be able to bring their gas to market.
If it were shorter and carried more gas and came at a time of scarcity, then EastMed would make more sense. But the Southern Gas Corridor (SGC), which is expected to expand, and Gazprom’s TurkStreams 1 & 2, present it with stiff competition.
Israel is still keen to see EastMed realised, but Cyprus, also expected to provide some of its gas, appears to have grown cold on the idea. Cypriot authorities recently issued the island nation’s first ever production licence to a Shell-led consortium for the offshore Aphrodite field. But instead of Europe, Aphrodite’s gas is to be transported via a new pipeline to Egypt. Other major finds off Cyprus could be piped to Egypt as well and thence exported globally in the form of LNG.
EastMed will also face competition from the region’s LNG import terminals, existing and planned: Depa has already bought a stake in GasTrade, which is planning a floating regasification terminal at Alexandroupolis.
Generally, in this carbon-conscious age, energy-intensive projects that risk becoming stranded assets do gas no favours. While it is so cheap, LNG will continue to undermine these ideas, whose financing is anyway becoming harder to sort out as opposition to fossil fuels grows. For example, the rebranded European Investment Bank, whose loans facilitated the SGC, is not expected to enable ideas like EastMed after 2021.
And reflecting the changing times, the European Commission trimmed the number of gas-related projects of common interest – key infrastructure developments eligible for EU grants – to 32 in November, down from 53 two years ago.
Another unexpected, if overdue, event was the final investment decision for Nigeria’s LNG expansion project. With LNG, the sellers are now becoming their own buyers as well, making FID easier.
The LNG glut presents difficulties for pipeline projects in Asia. In December Gazprom launched its first pipeline to China, Power of Siberia. But China would rather meet its demand growth with cheaper LNG and local supply for the time being, with the pipeline unlikely to flow at its full 38bn m3/yr capacity for five to 10 years.
Russia is already drafting plans to build a pipeline to China via Mongolia instead of directly across their short length of shared border between Mongolia and Kazakhstan. Given the time it took for Power of Siberia to get off the ground, the omens would be inauspicious but for the newfound friendship between the buyer and seller. Indeed, three of Washington’s betes noires – China, Russia and Iran – closed the year with naval exercises in the Indian Ocean and the Gulf of Oman, their admirals thumbing their noses, one imagines, at the former regional peace-keeper. For China, immoveable pipelines are going to play a bigger role than had been foreseen, as LNG becomes riskier or pricier.
And the gas industry’s infamous white elephant, the Turkmenistan-Afghanistan-Pakistan-India (Tapi) pipeline project, looks ever further away from being a reality, with both Pakistan and India looking towards LNG as a more feasible way of meeting their gas needs.