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The European Gas Market: Diversification False Start?

Konstantin Simonov’s speech presentation at The United Nations Economic Commission for Europe Gas Work Group Session.

Moscow, March 30, 2010.

1.The European Gas Market : D iversification F alse S tart? Konstantin Simonov National Energy Security Fund Moscow March 30, 2010 2.Has 2009 been the year of the great gas revolution ? P ro argument s : The Shale Revolution in the US market Growth of liquefied gas supplies to Europe D iminution in the demand for gas in Europe Energy saving development Renewable energy industry Construction of interconnector gas pipelines 3.Ideal scheme for Europe 1. The USA reject s imports of gas . 2. They don’t need LNG in North America , and it rushes to the EC. 3. Europe implements ‘ 20-20-20 strategy’ and improves its energy efficiency . 4. Europe builds interconnectors , liberalizes gas transportation infrastructure , dramatically increases the number of LNG receiving terminals . 5. Gas surplus occurs in the EC market; the EC give s up the Groningen System and comes down to spot trading . Gas prices slump. 6. Shale gas production begins in the EC which finally buries Russia and other major conventional gas suppliers. 4.However, it's not all as easy as it sounds Reduction of gas consumption would be hard to achieve – it will require a complete technological revolution. E nergy efficiency may fail as a stake on alternative energy sources – as it has already happened with the biofuel, with which they've already tried to frighten the hydrocarbon producers some years ago. The crisis is not the best time for energy saving and investment in the alternative energy industry. I nterestingly, the country with most serious subsidies for solar energy generation such as Spain has been caught in the deep economic crisis . In the crisis period, there will be no money left for that. 5.Europe's heel of Achilles Gas equity production is steadily declining , and this tendency cannot be stopped because of the depletion of European conventional gas fields Source : Eurogas 6.Shale gas is a miracle but it’s a local miracle With respect to success in un conventional gas , Europe will have not so much to show as the USA . The technologies used in the United States cannot be automatically transferred to Europe. More rigorous ecological standards 7.Shale gas is a miracle but it is a local miracle Optimistic forecast: shale gas in the USA will be profitable provided that its price is not less that $ 6 per thousand cubic feet which corresponds to the price of $ 210 per thousand cubic meters approximately. Source : EIA 8.Weak development of gas transportation infrastructure The EC speaks much about gas market liberalization , but does very little about it in real terms . In the USA, they build much more gas pipelines than in the EC. Most plans of construction of Underground Gas Storage facilities and LNG receiving terminals remain as they are . 9.LNG is not a panacea Though Qatar increased LNG supplies to Europe at 114% in 2009, its share equal to 15 . 9 billion cubic meters is not decisive. LNG supply growth will require serious investments in new NLG Plants in Qatar - it would be hard to achieve. Upon conditions of European economic recovery, Qatar’s LNG will cover its own declining gas production ; however, displacement of pipeline gas won't be an easy job to do. The Asian countries will provide serious rivalry fighting for LNG. 10.Competition for gas will take place anyhow The USA will likely cease import of gas . However, that will be small relief for Europe. China and India will take away considerable gas volumes including LNG . They will be major drivers of gas demand growth. The recent example: Contract between China and Australia for $ 60 billion. 11.The Turkmenian Case : defeat by China The Europeans' expectations that a weakening of Russia's positions in CAR will lead to the growth of the European influence are melting away before their eyes. It is small wonder that the Nabucco Project that was greatly relied upon has been stuck and still cannot collect the required volume of gas to ensure pumping of at least 15 billion cubic meters per year. 12.The Polish Case : How to fall into the diversification trap ? Classic example of ‘ unwise diversification ’: Poland signed a contract with RUE maintaining that that was the way to the diversification . However, they did not take into account what was the origin of the gas intended for RU Å ; say nothing about that 50% of the company is Russian-owned . Eventually, Poland signed a gas supply contract with RU Å for 2 . 5 billion cubic meters per year . As a result, when RU Å began to have difficulties with the gas in 2009 , they had to go to Gazprom for those gas volumes . While consumption of the Russian gas was declining throughout entire Europe, it increased in Poland at 14% in one year; with respect to gas volume consumption, it made Poland the fifth largest consumer of the Russian gas in Europe. 13.The Polish Case : How to fall into the diversification trap ? The second stage of ‘diversification wars’ : Poland frightens us with LNG from Qatar . However, the terminal at Port of Świnoujście in the Baltic Se a will be built by 2014 under the most optimistic scenario , and its capacity will be only 2 . 5 billion m 3 at the first stage . In addition , it is a marvel how Poland , runs away from the problem that big LNG carriers from Qatar can touch at the port via the Strait of Baltiysk . Source : Energy Charter Secretariat Qatar’s Q-Max Vessels Qatar’s Q-Flex Vessels Average Size of LNG Carrier Vessels in 2007 Average Size of LNG Carrier Vessels (Excluding Qatar Vessels) in 2007 14.The Polish Case : How to fall into the diversification trap ? 15.The gas market has been changing very fast -11 . 68% 19 . 72% -38 . 93% Total 15 . 92% -8,50% 110% 6. Great Britain 14 . 02% 14,88% 19 . 30% 5. Poland -3 . 30% 18,70% -40,30% 4. France -14 . 70% -0 . 66% -51 . 47% 3. Italy -16 . 24% -13 . 37% -31 . 53% 2. Turkey -12,65% 64 . 25% -50 . 49% 1. Germany 2009 Quarter IV , 2009 Quarter I 2009 Source: Gazprom 16.There is nothing more difficult than forecasting the evolution of gas market Market development forecasts are rewritten in the mode of Wikipedia There has never been as many experts’ speculations relating to the future gas market as in 2008-09 Source: ExxonMobil 17.Possibility of strategic mistake The EC thinks that the year of 2009 became the beginning of a long-term trend. However, referring to the perspective of 2025-2030 , the situation may turn out to be not so favorable . Europe is in a hurry to reject Russian gas and considers it expensive and politically dangerous. However, it is far from clear that it will be able to find a long-term substitution for it . It must be borne in mind that the gas market situation is changing too fast.

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