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    Interview: Stern on Gas Supplies, Markets in the Year ahead



Interview with energy expert Jonathan Stern on Russia, gas, diplomacy, demand, prices, and global markets

by: Drew S. Leifheit

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Top Stories, Pipelines, Nord Stream Pipeline, Nord Stream 2, News By Country, Russia, Ukraine, , United States

Interview: Stern on Gas Supplies, Markets in the Year ahead

The chairman of the gas research department of the Oxford Institute for Energy Studies, Jonathan Stern, spoke to NGE about the state of the gas market, at the European Gas Conference in Vienna on January 20.

Professor Stern, last year when I saw you at the European Gas Conference, we quoted you as saying that 2015 would be a very difficult year in terms of gas diplomacy. With another year passing, what's your take on where we stand at the beginning of 2016?

It's a much easier year for diplomacy; a much more difficult commercial year, given the fact that prices have dropped to levels that we haven't seen for I don't know how long; and levels that we probably thought we'd never see again. And here we are in the middle of winter with these low prices and we fear that when the spring and summer come, prices may go even lower.

So that is going to make investing in infrastructure, in new supply, in anything very difficult.

When we're talking about infrastructure investments, of course today's discussions of Nord Stream 2 come to mind. What do your instincts tell you about the ability of Gazprom to be able to complete its pipeline in these times?

The problems for it are regulatory and also how to keep the European investors on board at a time of these very low prices. Now of course it helps that Nord Stream 2 is not scheduled to start before 2019, and that's still three or so years away and things may have changed by then, but nevertheless it's always hard to make a big investment when current prices are low.

So my view is that Nord Stream 2 will be impacted by whether the regulatory requirements can be met, which is a very complex question; and whether the investors feel that the remuneration, given the anticipated price levels, will actually pay back their investment.

We've heard of the opposition to Nord Stream 2 from the Visegrad 4 countries, that if South Stream would not be compliant with the Third Energy Package, then how could this new project? Do you see any validity to that argument?

Not really. The reason that South Stream was abandoned was it was impossible to land the gas in Bulgaria, not immediately because of Third Package requirements, but because of the procurement problems to do with the onshore Bulgarian pipe. Now, I'm sure that the Nord Stream 2 partners will ensure that the procurement process is rigorously followed.

On the other hand, if the procurement problems could be resolved in Bulgaria – such as just have another procurement process that was compliant with EU rules – I don't rule out the fact that South Stream could be resuscitated, especially with the current problems over Turkish Stream.

Having said that, the problem as we understand it is that, because of the political relationship between Turkey and Russia post the shooting down of the Russian fighter jet in December, the Turks have withdrawn their permission to transit through the Turkish section of the Black Sea. If that's the case, that leaves a big problem for the Russians doing anything in the Black Sea – either of the streams: Turkish Stream or South Stream. Because undoubtedly they will not get permission to transit through the Ukrainian section of the sea.

What's the most constructive approach for Gazprom to use in pursuing the Nord Stream project?

The most constructive approach is to agree that, if the EU wants it, then a significant proportion of Russian gas will flow through Ukraine, say 30bn m³/yr – it could be more – if that makes Nord Stream 2 completely compliant with Third Package rules. But the EU has to be really clear what those rules are to start with, so that we don't suddenly get strange things happening where people come up with new rules that we didn't know about to start with.

Russia understands that the EU is uncomfortable with more than about a 25-30% share for Russian gas, and the Russians would respect that, and also probably they can find some way of diversifying pipelines to southeast Europe so that those countries can, in an emergency, receive gas from other sources.

I think that is the diplomacy that would need to be put in place. Then I think people would feel a lot more comfortable at the diplomatic level with Nord Stream 2.

And how feasible do you think that approach actually is?

I think it's entirely feasible, but it requires a better working relationship between the European Commission and the Russian Federation than we've seen post the Crimean crisis and, essentially, the Ukraine crisis in 2014.

How do you see the prospects for natural gas consumption in Europe in the wake of COP21?

I'm not sure that COP21 makes a big difference. At OIES we do take notice of what people say, but we take a lot more notice of what they do. So what we were thinking we'd see post COP21 were major announcements about the limitations of coal in Europe, major announcements about spending very much more money on renewables, and on carbon capture and storage (CCS) – in other words, throwing money at the problem, because if we don't do that you don't see everything changing very quickly.

It will change of course, but the problem with COP is that it's fine for politicians to make declarations when they get together. Once they get back to their countries, normal life resumes and these things fall back into the place on the agenda they were once in.

We haven't seen a big change of agendas from anybody – in Europe, in Asia, in the US. Essentially, we see countries carrying on doing what they were doing. There's been a bit of pulling back of the subsidies for renewables; not much seen on investment in low carbon technologies that wasn't happening before. Maybe we'll have a huge breakthrough in electricity storage, or in CCS, or something like that which would make a big difference. But if we are going to get a big breakthrough, it's going to be on the same level of funding we've been having. We don't see a big change.

What will be on your radar screen for the first half of this year?

I think what's very important is what's happening to oil prices globally, but gas prices in Europe as the big surge of LNG, principally from Australia, but also the first US project gets underway. I think that will be incredibly important, because if prices go down – they're already at €13-14/MWh – if we see prices down at €10/MWh, that really makes companies hurt, and I think at that point we might see more demand, but we will see a lot of projects cut back. I can't think of a project that makes money at €10/MWh, so that's a big issue for us.

There are many things happening in Asia that will also be big for us: what will happen with Chinese LNG, what will happen with Japanese nuclear power stations. Unlike previous decades, these things really matter in Europe now, because if Asia doesn't need the LNG it will end up in Europe.

Drew Leifheit reporting from Vienna; edited by William Powell