Europe: Where Are You Running To?
Brussels is fairly concerned by European security of natural gas supply, but is it adopting the right strategy? Are its policies really paving the way to a more secure supply, or paradoxically are they actually endangering supplies?
The shale gas “revolution” in the United States and possibility of gas exports, the shale gas perspective within the European Union, the new offshore gas discoveries in eastern Mediterranean sea and very recently offshore Romania, imports prospects from Azerbaijan and Turkmenistan, and even the planned increase of renewables in the EU energy mix, are giving hope to Brussels that it can lower the reliance on Russian natural gas imports.
But in turning away from a long-standing partner with which it has a mutually benefitting relations, where is Europe running to?
As underlined by Dider Sire at a conference in Nice (1), “EU and Russia energy relation is a historical one based on long-term approach. Long-term contract allowed for establishing a climate of trust and a balanced share of risk between producers and buyers.”
Yet, this trust has been eroded over the recent time and the relevance of the traditional long-term approach has been questioned. In addition to the 2006 and 2009 so called gas crises, the shortage in natural gas supply that several European countries experienced last February is a new black spot on Gazprom's reputation (i.e. the Austrian company OMV AG reported that deliveries of Russian gas to the European hub at Baumgarten had been reduced by 30% due to harsh winter conditions in Russia).
Last February’s shortage emphasized the real question concerning Gazprom: is it able to satisfy both the European demand and the rising internal Russian demand? And if it has already trouble in doing so now as shown last February, will it be able to satisfy these European and Russian demands in the future? Or will there be again arbitrage between Russian customers and European customers, at the expenses of the latter?
It seems that this is where a major knot lies in the current EU-Russia energy relation. While Gazprom seeks to lock the potential competition from abroad, there is the question from the European side of whether the upstream investments necessary to secure supplies are being undertaken by its Russian partner.
An example of the Russian strategy to control competition in supplies is the agreement between Russia and Turkmenistan until 2028 on trade and purchase of gas. This concern from the European side is understandable. Money used to reinforce monopolistic positions and set aside foreign competition is money, which is not invested in development of new Russian gas fields; whereas this would be needed to secure supply in the coming future of both EU and internal Russian demand. Russia has indeed the world greatest proven natural gas reserves, but so what if upstream investments are lacking? By being pro-active in targeting foreign fields, the Russian company is not sending a re-assuring message to its European partner. And this is a major problem because it comforts the EU in its “runaway strategy”.
Despite the numerous dialogues, meetings, and declarations, the situation seems to be in a deadlock. The Russian side calls for security of demand, the European side calls for security of supply, but it seems that both sides are deaf to what the other claims.
Gazprom is right to be concerned by security of demand. The gas industry is a capital intensive business that requires massive capital investment and carries risk, hence the requirement for a stable legal framework favoring investments and of reliable forecasts on demand. Long-term contracts allow for a balanced share of risk between producers and suppliers. Without the necessary incentives and without the prospect of a fair return on investment (business as usual!), one would wonder why a company (be it Gazprom or another one) would make any investment without reasonable certainty of economic return.
So here is where another knot lies: the European Union policymakers seem to have plenty of ideas on how to complete the internal gas market on the paper, but their euro-centric approach may not be the right one.
As a matter of fact, does it make sense to create an internal market without taking real account of gas market players concerns and of external partners (including Russia)? How can gas companies be reasonably told that they have to invest in costly infrastructures that will just be bridges to other energies?
Brussels seems to be gaining good skills for setting shortsighted policies. After having dismantled European gas companies and consequently weakened them faced to non-European integrated companies, after having embarked on a blurred project called Nabucco (2), many in Europe began to focus the promise of shale gas.
However the “shale gas revolution” in Europe appears to be falling short (3). Shale gas faces various challenges in Europe: concerns over the environmental impact of the hydraulic fracturing process, significant water requirements and issues in respect to the management of wastewater.
Furthermore, the reality of the European estimates (one should never forget that figures and data are always political) and commercial viability, are questionable. For instance, not long ago ExxonMobil announced that its drilling efforts in Poland thus far had failed, and in 2010 its Hungarian efforts also proved to be unsuccessful (4). Most recently, the past week’s announcement of a significant revision of the Polish shale gas reserves, from 5.3 tcm to 346 bcm-768 bcm (5), is a good example of such lofty prospects are politicized and instrumental attempting to portray that the Russian partner is past history.
Shale gas development in Europe is perhaps more a function of geopolitics than anything else; a dream for Americans than for Europeans. In a geopolitical view, the former is interested in ousting Russians from the European gas market and sending it back in its boundaries; thereby hitting the Russian economic and political rise. Often overlooked in this dialogue is the fact Russia depends on Europe as much as Europe depends on Russia. With around 20% of its federal budget revenue coming from its gas exports to Europe, with around 70% of its gas being exported to its most profitable market (Europe), and with no other viable alternative (the regular threat of re-routing gas towards Asia is still non-existent), Russia simply cannot do without Europe (6).
While Europe is busily trying to untie self from it neighbour, it is irrational to think that Russia should wait idly. In this chess game, it is now interesting to see the Russian side reacting by looking for outdoing this “untying strategy” by seeking involvement in the development of the eastern Mediterranean Sea.
To sum up, as mentioned at the beginning of this article, Russia has the biggest world proven natural gas reserves. These reserves have the advantage of being geographically reachable. This is a situation that should lead to a win-win partnership between Russia and the EU. For Europe to wish to secure supplies by having several sources and diversified routes for imports is wise. But it would be paradoxical to look for new suppliers so as to have more choice and in the meantime to ban the way to a historical partner, especially if the ways to runaway are actually endangering supplies instead of securing it (7).
The European Union needs Russia and Russia needs the European Union. Thus, Europe should not try to do without Russia; at the same time Russia should address the European concern over the lack of necessary upstream investments.
Only a genuine cooperation will make it a win-win game. Maybe serious guarantees by Gazprom to its European partner that it will be able to satisfy both the European demand and the internal Russian demand, could be a good step to start unlocking the situation.
By Yasmina Sahraoui
1 Didier Sire, GDF-Suez, Club de Nice - 2008
2 With a touch of humor, this project should be renamed “Phoenix project” owing to its great ability to re-invent itself (or its ability to rise again from its ashes).
3 At least some in the EU, such as Poland, are strongly promoting this new piece of geopolitics.
4 Steve LeVine, http://oilandglory.foreignpolicy.com/posts/2012/02/01/the_shale_gas_reality_check_out_of_europe
5 Wall Street Journal, 21st of March 2012 http://online.wsj.com/article/SB10001424052702303812904577295790442844470.html
6 The heavy reliance of Russian economy on energy should be kept in mind when analyzing the work done by Gazprom to control competition from abroad. If its supplies to Europe start to be challenged, the impact on Russia would be catastrophic, both economically and socially (Gazprom indeed sell its gas at very low price inside Russia but for being able to so it needs its export monopoly. Without irony, Gazprom export monopoly fills social function).
7 As mentioned, shale gas perspective is not seriously leading anywhere, the internal market policies supposed to help securing supplies have weakened the European gas companies, the EU supported project Nabucco seems to be fighting to exist, renewables cannot constitute a viable alternative (way too costly and the reliance on rare earth materials is an issue), new discoveries could be indeed bringing new perspectives at a time when the indigenous resources are depleting and nuclear future is questioned. But these new imports perspective should be an additional egg in the basket; it should not be the pretext to remove another one.