Issues and Challenges in the EU-Russia Energy Relationship: Interview Dr. Tatiana Mitrova
Natural Gas Europe was pleased to have the opportunity to interview Dr. Tatiana Mitrova, Head of World Energy, SKOLKOVO Business School Energy Centre. Dr. Mitrova sahred her thoughts wiith us on key issues and challenges in the EU-Russia Energy Relationship.
Unconventional resources will be flattening the role of energy superpowers with major geopolitical implications”(quotation from Fatih Birol, chief economist of the International Energy Association). Shale gas is not new in itself but this is now that we are witnessing a strong emphasis on its development, what does it/could it mean for Russia?
I respect Mr. Birol very much, but I would not agree with him that unconventional resources will be flattening the role of energy superpowers because to my understanding shale gas became one of the most influential tools in energy geopolitics during the last couple of years. It is used by many countries in geopolitical statements and in some intervention in the information space. Of course shale gas played an important role in the global supply-demand balance but I suppose that current emphasis is a sort of over-estimation. Shale gas was a game changer for the global LNG balance during the crisis, where it notably played a role in prices formation (LNG diverted from the US in a period of weak demand). I do not think that in the longer term, in other parts of the world such as Europe and China, shale gas will repeat the story of the US shale gas. Indeed, shale gas is much more about geopolitics than economics in Europe. Just looking at the European supply-demand balance, you can see that European indigenous production is going down, and shale gas can only slow down this decline. It cannot turn Europe from net gas importer to net gas exporter. I think that no expert can see such a picture. Volumes of shale gas output in Europe are estimated from 5bcm-6bcm to 20bcm while last year European indigenous production declined by 30bcm. For the European balance, theses shale gas figures are closer to statistical change than to the real game changer. Of course for several European states, theoretically it could be a game changer. For instance in Poland, where talks were based on preliminary cabinet estimation, but it turned out that when drilling started the estimates finally declined by ten times (this spring). Now we see that companies involved in the real drilling are removing from this process, they think that it is not commercially attractive for them. I think this is a very important sign for the whole European shale gas story. So I personally do not believe that shale gas will become such a game changer, even in Poland.
Competition from LNG projects will be a much bigger threat than competition from shale gas. Shale gas is too small to create a real threat for Russia. And as far as I can see, all these talks about shale gas do not affect the Russian energy export strategy at all.
While shale gas development prospects are still uncertain in Europe, the USA and Canada are expected to become shale gas exporter in 2016. This is not far from now but above all this date matches with the expected starting date of the South Stream project (expected to deliver first gas late 2015). Does it pose a serious threat on the completion of this project (making it unnecessary for instance)?
Shale gas prospects do not pose a threat on the completion of the South Stream gas pipeline project. This project is targeting south-eastern Europe while exports from the US and Canada are mainly for Asia or for the Northern/Western Europe. So here I do not see any competition at all between shale gas and South Stream.
The EU-Russia energy relation has been tensing up over the recent time. Indeed, the EU seems to be willing to assert its normative power and submit its Russian neighbor to its internal rules. The European Commission is looking toward increasing its institutional power (cf. the communication on external energy relation released last September that advocates for “a wider regulatory area” and for an exchange of information on negotiations with third countries, before and after these take place; the recent raids in Gazprom offices in Europe; and OPAL and NEL exemptions being ruled out by the European Commission). Moreover, the plea (for economic reason –energy traders-; and geopolitical reason –competition for power-) for more spot prices and more LNG supplies, if concretized, could mean, prices manipulation that would impact the Russian economic recovery and its political rise. How does Russia respond to these challenges posed by the alignment of interests of different actors (institutional, economic, and political)?
Gazprom efforts to control competition from abroad (for instance from East Mediterranean) gives flesh to the fear that even if Russia has the biggest world proven gas reserves, gas will be missing simply due to lack of timely upstream investment. Can Gazprom actually give guarantee that gas will be available to satisfy demand?
I agree that the whole situation in the European gas market is becoming less favorable for the development of EU-Russia energy relationship and there are many reasons for that, both political and commercial. As a matter of fact, European regulation evolves in the way that is not favorable at all for Russia. A recent example is the adoption this month (June 2012) by the European Parliament of a resolution on EU energy security, which announces that for Europe diversification of supplies means only non-Russian gas supplies. This is the first time that this is announced under the format of political statements, and not just rumors. The document also notes that gas prices should be based on hubs, which is also a political statement when it comes to the European Parliament. And it shows how the European political elites decided to solve this question, which is actually purely commercial. Of course it does not create a favorable environment. Actually, this is not only about regulation, this is about the whole view of the energy sector development inside Europe: support for renewables, current situation with CO2 prices, which actually plays in favor of coals. Thus, gas does not seem to be the winner in strategic document like the EU Roadmap until 2050 where it is mentioned only on a couple of pages.
To respond to this situation, Russia tries to convince the other party that gas is actually a good option, and that it might be the single option if the other options fail. This is an important argument because all the development of renewables and alternative energy sources is related with a huge uncertainty. If one day it turns out that renewables are too expensive and that European countries cannot subsidize them because of the economic situation, and that there is a need for much bigger back-up capacity for these alternative sources, if then supplies from the Middle-East and North Africa are not available for political reason, in this situation, Russian gas is a sort of insurance for the European Union stable and sustainable energy supply. In the framework of the EU-Russia energy dialogue, Gas Advisory Council is trying to explain this idea to European policy-makers.
Furthermore, Russia realizes that the European market is developing much slower than expected and therefore the country is moving its focus on the Asian market. It does not mean that Russia is diverting its supplies to Asia, but it means that additional investments inside the country will be targeting the fast-developing and promising Asian market where pricing conditions are better, where there are less regulatory barriers than in Europe, and where Russian gas is regarded as a source of secure supplies.
Negotiations between Russia and China are on track. Huge volumes are concerned, more than 70bcm. Building pipelines means that you make the deal for a long-term because you cannot change the destination or the supply source. Both sides are cautious and are trying to obtain the best price. At the same time, there is no pressing need to sign this contract tomorrow, neither for Russia nor for China.
So concerning the evolution of the EU-Russia relation, I do not see any breakthrough in this relation at the moment. Changes could happen in the European regulation. First of all Gas Target Model, and maybe some additional portion of Third package could be modified and make Europe less and less attractive for Russia. But frankly speaking I really doubt that such an evolution is a good idea.
On the disruption that occurred last winter, it is important to find out the reason. Only Italy was actually concerned. If you define disruption as a violation of the contract, as a failure by the supplier to supply contractual volumes, then last winter disruption was only Italy. For the other countries, it was about additional gas. They were nominating more than contractual volumes. Normally, problems with peak winter demand are solved by underground storage. This is a special instrument in the gas industry for this purpose. This is not the work of the supplier to increase the production by 50% just for five days. Just imagine technically: you have to make additional wells, to increase pressure... It is impossible to manage the daily fluctuation of demand on the production side; it has to be done with the underground storage. So to my understanding the reason for this winter conflict was because European buyers who have these long term contracts with Gazprom with « take or pay » clauses, they just wanted to use this cold weather to off-take as much Russian gas as possible in order not to pay the « take or pay » penalty by the end of the year. They were nominating as much as possible, but Gazprom did not had to fullfill these nominations. There was a lot of media speculation but European buyers wanted to save money. It is is a « normal consumer behavior », but Gazprom was not obliged to fulfill these additional nominations. Ukraine increased its off-take; Russian consumers increased theirs as well. As a result it was technically impossible to provide that much gas for all. There is no sign of Gazprom inability to supply more gas; it is more an issue of short-term gas supply management within Europe and in Russia. The situation would be easier if Russia had more underground storage. And if Russia and Ukraine had better relationship, if Russia could use Ukrainian underground storages, it would be easier. But this is not the case unfortunately.
As far as upstream investment is concerned, Russia is actually investing more than Europeans need, looking at their weak economic situation. Next month, Gazprom will start production of huge Bovanenkovo field at Yamal: this is an additional 130bcm. It cannot be called non-timely investments. Guarantee that future demand will be satisfied is actually given when Gazprom signs long-term contracts. Contract is the guarantee for the contracted volumes.
The EU should work side by side with its suppliers, including Russia. It is not possible to adopt political stance setting aside a producer and in the meantime telling this very producer that it has to invest more to satisfy potential higher demand. Reciprocity matters. If Europeans foresees additional demand, then they have to sign more contracts.
Turkmen resources are more and more “diverted away” to China but also to India (recently, the Indian government has approved a deal to buy natural gas from Turkmenistan via a $7.6 billion pipeline passing through Afghanistan and Pakistan). How does Russia see these “intrusions” in what It considers as being its near-abroad (or privileged zone of influence) and how will they impact the Russian strategy in the region?
Turkmen resources are indeed diverted. If you look at the Russian reaction on the Turkmen gas going to China, you will see that there was no opposition at all. If you look at the Russian reaction to any attempt to deliver Turkmen gas to Europe, this is the opposite. In Europe, it is just about changing the route for the same gas. Turkmen gas is already going to Europe through Russian borders. Having it crossing the Caspian Sea can hardly be called diversification of supply in so far as this is the same gas.
Russia does not oppose to Turkmen gas flowing to China as it actually develops the Chinese market. If consumers there start to consume gas, they will become « addicted ». So the more China consumes gas, the better it is for Russia in its negotiation with this country. This could lead to better regulatory landscape in China, and pricing system evolving as well. So Turkmen gas to China is paving the way for Russian gas to China. The Chinese market is huge and the main limitation for Chinese demand is regulation and the availability for gas itself. I do not think Russia is worried about China. And I do not think that Russia is anyhow worried about project crossing Afghanistan to reach India. The region is risky and it is unlikely to have a pipeline built there in the coming years.
On the Trans-Caspian pipeline, Russia opposes this project due to the unsettled status of the Caspian Sea. There have been military incidents between Iran and Azerbaijan. What Russia wants less is a small war in the southern region of the Caspian Sea: it could lead to military action and this is not in the interest of Russia. I am actually quite surprised why European politicians do not understand this very simple reason. All sanctions against Iran are less strong stimulus for military action than this division over the Caspian Sea. Russia is against a potential destabilization in a zone where de facto it guarantees security, simply because of historical reason. It is the political reason. The economic reason is simply that this is more interesting for Russia to have Turkmen gas crossing its boundaries for reaching Europe. This is a normal attitude to the Turkmen competitor.
The Southern Corridor aims at enhancing Europe’s security of supply. What is the Russian viewpoint on it?
So far, there are numerous definitions of security of supplies, and still there is no universal definition that everybody would adopt. Many factors have to be taken into account, such as reliability, price, environmental impact. Diversification of supplies is the right attitude, but you have to look also at which sources are available and how reliable these new diversified sources are. If you look at the sources for the Southern Corridor, and if you make a risk analysis country by country and compare it with the Russian supplies, I do not think that you will get such a favorable picture because Iran, Iraq are not politically stable and Turkmenistan has quite a peculiar track record on reliability of its supplies. So we are actually talking about gas supplies from one single country - Azerbaijan. This is what the Southern Corridor is all about. Building a fourth corridor (the other three are from Norway, North Africa and Russia) with a maximum capacity of 16-bcm does not seem to be the solution for European imports and for the European demand, which is exceeding 500bcm. To my understanding, this is extremely political and can only be explained by the desire of the European Union to improve its geopolitical position in this Caspian region. It is not so much about getting these 16bcm from Azerbaijan. It is about getting influence in the Caucasus, in the Middle East, in the Caspian region. Therefore it is a fight not about gas but about political influence in the post-soviet space. The role of Americans in this discussion is really important. This is a special focus for the US who wants to be sure that they have this influence in the Caspian region. Again, it is not about gas, it is not about economics, this is about geopolitics.
The “consolidated” Russian viewpoint is that the economic importance of the Southern Corridor for the EU is over-exaggerated. This Southern Corridor will probably not happen in the shape, which the EU is discussing. We do not see these announced 30bcm or more coming from this region, we do not see the supplies available for this. Probably there will be some supplies from Azerbaijan or some re-sells from Turkey. But this Southern Corridor will not become as important as supplies from Algeria or from Russia. It is simply impossible at least for the next 10 or 15 years, until the situation in Iraq and Iran changes.