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    Europe's Gas Markets: How About Pro Market, Integrated, Interconnected?



Prof. Alan Riley says Europe should create a pro market policy for a much more integrated and interconnected natural gas market.

by: Drew S. Leifheit

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Europe's Gas Markets: How About Pro Market, Integrated, Interconnected?

At the Gas Dialogues event Development and Use of Natural Gas in the Danube Region: Prospects and Opportunities, Alan Riley, Professor of Law, City University Law School, spoke of his research regarding the way forward for the broader European natural gas market, as well as the impact in the Danube region.

Taking to the podium in Budapest, Prof. Riley noted that the states in Central & Southeast Europe region were struggling with a number of problems, like the legacy of the communist period with underinvestment in infrastructure, very low GDP per capita, the high cost of renewables, lack of interconnection. “My approach to this is to say, there is a potential solution and it involves a broader change in EU policy – a focus more on creating a pro market policy to take the existing EU single market on gas and reinforce it, bringing in the non EU states in the region into a much more integrated and interconnected single market in gas,” he explained.

That, he said, would provide more competition, new entrants and potentially lower prices.

The prospect of enlarging the gas market was another possibility, according to Professor Riley, via replacing Europe's overall climate change objective with less focus on renewables and more focus on cutting CO2 emissions. He offered, “Because if you focus on cutting CO2, then what you do is promote gas and drive out coal.”

By putting all of this together, he said, a new, different and much more attractive gas market would emerge. Underpinning all this was the prospect of a big gas deal with Russia.

At some point there had to be to be a political settlement and one way of underpinning that would be having a big natural gas deal.

Prof. Riley explained: “The EU would adopt pro gas policies and Russia would agree to provide a lot of gas to Europe, and that would essentially be changing Russia's business model from relatively low volumes and high prices to a high volume, low price business model.”

Could this really be done? he asked, in the face of substantial problems in the region in comparison with Western Europe.

“There are just fewer pipelines, fewer electrical network systems, far less plant capacity whether it's gas turbines, thermal power stations and any form of interconnector – this is to do in part with the legacy of 40 years of communism, but partly to do with low incomes. It's just much more difficult to afford any development when your income levels are below $13,000 per person, or below that, across the region.

The climate change issue was also a factor, he said.

Prof. Riley explained, “The EU's climate change policies were largely created before most of the Central & Eastern European states joined the European Union, and I think you can make a large case for saying that they are a Western European luxury choice in the sense that if you have very high levels of GDP, you may be able to afford them. But if you have far lower levels of GDP it becomes very expensive indeed.”

From the Russians' point of view, he said, they provided the gas to Europe, within a large market there were incentives to develop, while the country also sought Western investment into the market and was amenable to carrying out some liberalization to encourage such development.

“Russia at the end of the day has the world's largest gas resource base, next door to a huge single market in gas. If you create all the interconnectors up – currently it's seen as a way to protect against Russia – but in other conditions it would be in fact an opportunity for Russia to sell gas across the whole of the market much more easily than now.

“If you grow this market, and do a deal, first of all you can move down this route of high volumes and low prices – you make much more money because you're selling so much more gas into the market, and once you've done that, you can get to the next level: in the US, huge amounts of gas are opening up new marketing opportunities,” explained Prof. Riley, who offered the US administration's push for the creation of high-speed natural gas truck networks as an example of a new market for the gas industry.

The European gas market, he argued, could be viewed as a much much bigger market, one that's making greater use of gas, with far greater revenues generated.

“From the European perspective, you get lower gas prices and you're able to compete more effectively against the United States with advantages from the shale revolution – so everybody begins to benefit,” he said.

While he admitted such a scenario may sound crazy in the context of the sanctions, Prof. Riley contended that ultimately a political settlement would be necessary between Russia and Ukraine. “To underpin that segment, you need an economic deal. This is potentially an economic deal that could work,” he commented.

For the Central & Southeast Europe region, he said, it would provide a significant amount of economic stimulus, cut prices, provide a greater focus for economic development, and provide the connectivity needed to become an overall more competitive European energy market. “This is where I think we should look at trying to go,” he said.

Answering a query about Poland's dependence and relationship to the coal industry, not to mention further increasing dependence on Russian gas, Prof. Riley said that if a more integrated European gas market was created, where gas could move around, the supply security risks were not that great. With the shale gas revolution in full swing, there were substantial alternative sources of supply, not to mention increase supplies of LNG from places like Algeria.

“The market will simply be bigger – you get a much bigger 'win win',” he argued.

Meanwhile, he pointed to the possibility of the first commercial flows of shale gas in Poland by the end of the year – an alternative industry developing, which could provide part of the solution.

“This would be progressive,” he explained. “No one's going to suggest that if you adopt pro gas policies and a CO2 objective, overnight the entire coal industry is going to disappear, but the point is to provide a direction.”