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    Reconciling “Crazy Russians” vs. “Crazy Europeans”

Summary

Europe is moving in the direction of a much more liberalized market, which is based on spot pricing, with a tremendous degree of openness to competition, and the Russian market isn't like that, according to Professor Alan Riley.

by: Drew S. Leifheit

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Natural Gas News, News By Country, Russia, Pipelines, South Stream Pipeline, Featured Articles

Reconciling “Crazy Russians” vs. “Crazy Europeans”

Sometimes one just has to call things as they see them. But that's not all that Professor Alan Riley, Director of the LLM Programme, City Law School, did.

In his speech at South Stream: the Evolution of a Pipeline, Professor Riley said he'd try to take a broader view, looking at the problems both Russia and the European Union had to confront in the former's pursuit of building and operating the South Stream natural gas pipeline.

And later, he came up with a brilliant solution to address the problems of both sides.

But first, he said it really did not help to hide the scale of the problem – hydrocarbon delivery disruptions, which went beyond the natural gas supply disruption of 2009, and which colored perceptions of dependence upon Russian sources.

He stated: “The Swedish Defense Research Agency carried out a very significant and detailed study in 2006 which identified 44 politically motivated Russian oil and gas cut-offs between 1991 and 2004, and if you look at the perceptions' analysis done, part of the difficulty with the Russian perceptions of a lot of people in the countries along the route of South Stream about the project comes from that felt and known experience – so that's one of the problems that we have upfront.”

The other issue, he explained, had to do with South Stream and its application of European Union rules.

“Fundamentally, the difficulty with this is that Europe is moving in the direction of a much more liberalized market, which is based on spot pricing, with a tremendous degree of openness to competition, and the Russian market isn't like that.

“There's a disconnection here and dissonance which we have to recognize, and we have to look at how we deal with that,” said Prof. Riley.

The options for Europe, he explained, were different to the way they were being projected in Brussels.

He offered, “Russia is no longer our principal supplier of gas; it's Norway. We have increasingly, the option an a liberalized market, of creating a structure which is a competition – even if we produce no gas ourselves – of bringing competition between pipeline gas from Russia and Norway and LNG.”

The number of American LNG liquefaction plants which had been submitted to the US Department of Energy, he said, would provide capacity of 200BCM of natural gas. “There's an issue of where all that gas will go. We know in fact there's a huge amount of new supply coming onstream in various parts of Asia with the likelihood that most of that would end up in European markets. In any event we know that there are more final investment decisions being made to provide even more LNG capacity worldwide after 2015,” he explained.

Because more supply would become available, according to him the options for Europe were far greater than merely the Russian options, which was one of the real issues.

“To some degree, what both the Europeans and the Russians have been doing is mad. I think the essential problem with that energy and climate change policies in Europe and the US is that we have effectively the operation of the 'crazy Europeans' and the operation of the 'crazy Russians'.”

Of the crazy European approach, he said, “We have created an energy and climate change policy which, because it focuses on production of CO2 emissions and not consumption, doesn't actually cut CO2 emissions. We've actually operated a carbon displacement strategy rather than a carbon reduction strategy.


“We say we're going to reduce our CO2 emissions, close down our factories, send them abroad and import the steel, glass and chemicals into the European Union – that approach doesn't work.”

He said that the other difficulty was that the EU's renewables strategy was incredibly expensive, although it did make sense in 2006 when oil prices were going sky high.

“But now we're faced with a shale revolution, with so much oil and gas coming onstream from elsewhere. The latest Harvard Belfer Center report on shale and shale oil suggests that by 2017 the US will be producing 5 million barrels/day of shale oil. It only imported in total 8 million barrels of crude in 2012, so all of this is changing the nature of the market.”

Then, there was the US pushing very strongly on with developing the use of natural gas for transportation, with the Department of Energy's Advanced Project Research group rolling out a series of research projects for the widespread use of natural gas across the entire transportation network.

Prof. Riley commented: “All of this is creating a very different sort of potential market, where Europe is not in the game. We're faced with significant de industrialization, a renewable strategy which is very difficult to run when there are expensive renewables and the rest of the world is going down a much cheaper route; the Americans are getting very powerful cuts in CO2 emissions by switching from coal to gas.”

Moreover, he called Europe's Emissions Trading Scheme a failure.

“None of what we've got seems to really work and our current energy policy is ending in a position where we seem to be actually bringing on more coal capacity. The Germans are looking at 8 gigawatts of new coal capacity being brought onstream. It seems the only great energy change in Germany is about using more coal than anything else.”

It was a craziness, he said, that Europe was promoting the fuel with the highest emissions and not actually taking steps to use more gas to cut out coal, creating a positive route to bring on more advanced renewables later on.

Then, there were the 'crazy Russians,' who were focused on the traditional domestic incumbent monopoly model with Gazprom on one side, long-term supply contracts, to a domestic incumbent in a single member state.

“And you have nice comfortable long-term supply contract for most of the supply with all the pricing linked to oil. The problem with that, is that's not survivable because of the liberalization of the European Energy Market, the Third Energy Package, EU anti-trust action, the physical interconnection, which is increasingly taking place, interconnecting up the European market, partly through the Energy Recovery Programme, which had allocated hundreds of millions of euros towards interconnectors, reverse flow, not to mention national programs for more interconnectors, storage and LNG,” explained Prof. Riley.

 “The danger for Gazprom and the Russian energy market, is that you're increasingly adopting what might be called a 'King Knut strategy' in which you're saying 'no, no, no' and the advancing oncoming of the liberalization changes in Europe are taking place. And you have to see how you can fit South Stream and Nord Stream into that – and they don't fit very well.”

According to Prof. Riley, these were two policies that were not working very well in relation to energy and climate change on one side and the tradition domestic monopoly model on the other. How was it possible to fit them together? he asked.

“The actual potential of an increasingly large amount of gas available worldwide provides Russia and the European Union with a potential solution,” he stated.

“At the end of the day, although there's a large amount of gas potential for the US from shale basins and so on, Russia has the largest amount of gas available anywhere – conventional and unconventional. One of the potentials for Russia is this: Rather than see the European gas market as a high price/low volume market, they can see it as a low-priced/high volume market, with the idea of selling tremendously larger amounts of gas to Europe. That potentially could help cut Europe's CO2 emissions.

“Also, work with a lot of the American projects to expand the scale of the gas market.”

Not just natural gas vehicles, he explained, but using gas in a whole new generation of graphene products, with the prospect of a graphene gas economy in the mid 21st century.

“The opportunities there are enormous.”

If the Russian side were to embrace a high volume/low price gas production, then they would need to liberalize the Russian gas market in order to offer such an opportunity, according to him.

“There's a potential identity of interest between Russian and EU parties,” he said.

According to a McKinsey study, he said, the average load factor for gas-fired turbines in Europe was 45%. “If you took it up to 75% and cut out the equivalent amount of coal-fired generation, you would cut 300 million tons/year out of the atmosphere in Europe – that's one-third of all CO2 emissions from coal, and you'd be doing that for zero CAPEX. But if you want to spend renewables CAPEX to deliver the same result, you'd have to spend EUR 80-120 billion,” he explained.

Prof. Riley concluded, “It shows you what you can do with gas, and shows you the potential identity of interest between the European market and the Russian market. The question is, is whether we can get to a position where we can identify a strong approach, which will allow us to work on that identity of interest and both benefit.”