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    Challenges Abound for EU Gas Strategy


The strategic outlook of the EU's natural gas policy is unclear and fragmented.

by: Ioannis Michaletos

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, Shale Gas , Liquified Natural Gas (LNG), Top Stories, Pipelines, Security of Supply, East Med, Ionian Adriatic Pipeline (IAP), Trans-Adriatic Pipeline (TAP) , Trans-Anatolian Gas Pipeline (TANAP) , Turk/Turkish Stream, Balkans/SEE Focus, East Med Focus, Energy Union

Challenges Abound for EU Gas Strategy

The EU both as a supranational institution and its individual member states have been struggling for years to overcome a series of strategic challenges concerning their natural gas strategy in the mid and long-term. Catch-phrases such as diversification, Interconnections, Energy Union, Market liberalization and Gas hubs have failed to address the lack of indigenous resources and the shifting of global balances.

More specifically the Southeastern part of Europe, mostly in the Balkan Peninsula is in the midst of strategic competition between proposed pipeline projects such as Turkish Stream led by Gazprom, assisted by Turkey and agreed upon in principle by Greece. In addition the Southern Corridor project including TANAP-TAP and perhaps IAP pipelines is another addition, still in progress. Still both of the above do not address the major focus which has been magnified by the Ukrainian crisis that of diversification from Gazprom’s seemingly dominance in the local market.

The Southern Corridor cannot achieve this aim by itself if it is not coupled with the wider opening of the Caspian gas producers, namely Turkmenistan and Uzbekistan as it has been noted by all shareholders in all leading fora and conferences in the past few months. Hence the objections of Russia, primarily, and Kazakhstan and Iran secondarily to not permit the aforementioned central Asian state to establish a pipeline in transit of the Caspian Sea nullifies such plans. Moreover China is steadily absorbing more and more of the natural riches of Central Asia and constructs its own version of modern day Silk Road of gas pipelines.

Iran, another possible candidate country for the future supply of the Southern Corridor has first to be accepted into the international community and overcome the objections of all of its neighboring Sunni states plus Israel who are all adamant about not recognizing a role of importance of Teheran in European energy affairs. Furthermore, Iranian gas would have to pass through Turkey and it is unlikely that the European member states would be glad to exchange Russia for Iran. That, in addition to unresolved territorial issues from where an Iran-sourced pipeline would pass, such as the Kurdish rebel areas and the all-encompassing Jihadist-controlled territories nearby.

Thus, LNG is becoming more and more as a referred strategic vision by Brussels. In that sense, shale gas from the US coupled with a thorough agreement based on the Trans-Atlantic trade partnership agreement could potentially flood EU markets with American LNG. In order for that to be practically available, significant infrastructure in terms of pipelines from inland USA to the Atlantic shores should be established along with LNG terminals, and a boosting of similar resources in the other side of the Atlantic. Concurrently the US suppliers should be persuaded to forgo a more lucrative pricing in Asian markets and direct en mass shipments to the much lower in pricing terms EU markets. In addition one has to take into account that the Russian Gazprom could depress markets even further by increasing discounts, since it has favorable earnings to turnover ratio and can afford it.

It should also be noted that North Sea gas resources, especially from the UK, are steadily decreasing while those of Norway are reaching a plateau. Further, US supplies are not unlimited, on the contrary, the US has to supply its own large market and it has far less reserves both of conventional and from shale than does Russia, Iran or Qatar. According to the US Energy Information Administration, in early 2014, proven reserves were around 10 TCM, which places the country in 5th place worldwide below Turkmenistan (17.5 TCM), Qatar (24 TCM), Iran (33 TCM) and Russia (49 TCM). The US consumes around 750 BCM per annum, the largest in the world, followed by Russia and the EU (around 450 BCM).

Another parameter of great importance is "consumer strategic competition" which is the new emerging market that will fight over increased supplies vi-a-vis the EU. At a recent international energy conference in Istanbul, interesting details were presented. Sohbet Karbuz, director of the hydrocarbon sector of the Mediterranean Energy Observatory, estimated that by 2040 the energy consumption in the Mediterranean will increase by 50%. That would be the result of the rise of population and economic activity. With the exception of Israel and its newly found offshore reserves of around 650 BCM gas, the rest of the counties have to battle challenges of political and social instability, most notably Egypt, while trying to increase their energy capacity. The Southern Mediterranean counties will need much more energy than now, including gas via imports.

Israeli gas capacity will mostly go to secure the indigenous energy security needs of the country, while the Εco Energy Financial & Strategic Consulting, and its CEO Amit Mor, estimate that Egypt would be a preferred export market and not the EU. Speaking recently at a conference in Nicosia, Cyprus, he relayed to local press that Turkey continues to be a non-preferred option as a transit route for the gas to reach Europe, due to political reasons. Moreover, the East Med Pipeline to shift gas to Greece and then Italy is not a viable project due to its cost and technical challenges and depressing pricing environment, whilst quantities found do not justify such a project. While Greece and Cyprus continue to lobby Brussels for that pipeline, it can be safely estimated that if more and significant offshore reserves are not found in the region, then it has extremely limited chances of being materialized.

The EU may find itself soon back to square one when designing its long-term natural gas strategy. The facts and parameters at hand point out that it needs to have stable relations with existing suppliers, far more attention into sector energy efficiency and diversification of energy production, such as use of nuclear and coal energy and further strengthening of research for potential indigenous reserves.

In any case the political implications of the Ukrainian crisis for instance cannot change the facts on the ground which clearly calls for the EU markets to find a modus vivendi with the Russian producers, who are slowly but steadily diverting their own supplies to Europe's industrial rival, namely China.