Gas woes in Europe – part 3

Problems

Wider political and economic issues complicate development of new gas sources and pipelines to serve Europe. The war in the Ukraine, largely instigated by Putin and stoked by ethnic-heritage proxies could drag on for the foreseeable future. Although sanctions have bitten deeply into Russia’s economy, Putin has shown little inclination to back down, and continues to posture aggressively toward other EU border nations. Until a political deal is brokered, the situation has the potential to evolve in ways that have impact on the gas supply in Europe.

An important consequence may have already transpired

In early 2015, the EU’s Competition Commissioner, Margrethe Vestager, issued a ‘statement of objections’ to Gazprom. According to the EU, Gazprom is ‘pursuing an overall strategy to partition central and eastern European gas markets.’ The EU asserts that Gazprom curbs customers’ ability to resell gas, which allows it to charge ‘unfair prices’ in five countries: Bulgaria, Poland and the Baltic states of Estonia, Latvia and Lithuania.

In addition, the EU alleges that Gazprom used its market position to leverage control of the Yamal pipeline in Poland, and to arm-twist Bulgaria into supporting South Stream. Many of the charges stem from the launch of the EU’s Third Energy Package.

Gazprom, which has denied any wrongdoing, has several options, ranging from reaching a settlement to ignoring the EU’s authority. The latter would be an unwise move, as the EU competition commissioner possesses the authority to issue multibillion fines up to 10% of its US$40 billion annual turnover. Although the charges were compiled prior to the seizure of Crimea, Putin has vilified the move as a western plot aimed solely at Russia.

LNG

Over the last several years, LNG imports into Europe have been falling as Asian demand drove prices up. But the recent decline in oil prices and lower demand in China have seen prices drop by 50%, to the point where LNG imports are increasing. As long as these two market trends remain in place, LNG will have a dampening effect on proposed pipeline projects.

The future

While no one can imagine Europe free of geopolitical ruckus, economic considerations do occasionally reign. The Southern Corridor expansion and extension currently underway promises the imminent arrival of gas from Azerbaijan’s Shah Deniz field. Depending on various price and demand scenarios, it is not unreasonable to assume that some of the other proposals will reach fruition.

But even if all the proposed pipelines were built, their combined capacity would only dent the amount of gas that is currently imported from Russia. While it might be politically expedient to talk up pipeline alternatives, in reality, any comprehensive move to replace 15 billion ft³/d would require immense investments and decades of work.

However, other market forces may already be solving some of the problem. Since 2009, the EU has been working to mitigate supply disruptions through integration of its energy network. Better infrastructure connections and new LNG terminals mean fewer countries are vulnerable to point-source disruptions.

Gazprom can no longer offer preferential rates to one country and not others; even if they tried, EU members can pass their savings on. While new supply sources are always welcome, sometimes simply pulling together is the best way to avoid being pulled apart.

Written by World Pipelines' correspondent Gordon Cope, edited from published article by Stephanie Roker

To read the full version of this article, please download a copy of the August 2015 issue of World Pipelines.

Read the article online at: https://www.worldpipelines.com/project-news/29122015/gas-woes-in-europe-part-3/