War of forecasts

RUSSIA - MOSCOW - The year 2012 became almost the most problem year in gas relations between the Russian Federation and the European Union. The fact that the ongoing debates concern not only conjuncture topics but also strategic issues adds special acuteness to this situation. In fact we are trying to determine the future format of work of the European gas market and Russia’s presence on it. At the same time, to achieve the result and reinforce positions the sides are using the forecast weapon more and more actively – they draw pictures of the gas market future that would reflect their own expectations, and they try to convince their opponents of credibility of respective forecasts. This is true both for the European Union and Russia. 

According to expectations of the European Union, there will be no gas deficit and gas suppliers will be fighting for buyers that will not want to have long-term obligations on gas imports. According to this picture, there will be the gas surplus on the spot market that will push prices down. This creates the illusion of a long period of comfortable prices for European buyers. The launch of shale gas production in the EU, development of renewables, LNG supplies from the USA, new deliveries of LNG from the Persian Gulf and the beginning of piped gas imports from Central Asia and the Caspian Sea region are major hopes for such developments. 

Gazprom, being offended by the EU’s desire to find new suppliers and by the investigation against it that is fraught with serious penalties, portrays a different picture of the future. According to it, the main demand for gas will drift towards Asia, first of all China. And this is why Russia more and more actively speaks about the necessity to expand deliveries to this region. Such speculations were flourishing in 2012. At the end of 2012 Gazprom presented an updated variant of the Eastern Gas Programme noting that the final decision had been made on substantiating investments in development of facilities at the Chayandinskoe deposit. Gazprom expects a gas pipeline from Chayandinskoe to Vladivostok to be laid by the end of 2017. After progressing with Chayandinskoe, Gazprom wants to begin developing the Kovykta deposit. By 2018 a liquefied natural gas producing plant of over 20-million tonne capacity is to be built in Vladivostok. This means projects aimed at Asian consumers, not Europe, will become the centre of investment activities.

At the end of the year Gazprom declared about a new proposal on pricing gas exports to China. It concerns deliveries through the western route – the Altai gas pipeline. Gazprom wants to use this pipeline to show Europe that gas from deposits in the Nadym-Pur-Tazovsky district in the Yamalo-Nenets Autonomous Area, which is the main resource base for our gas exports to the EU, may be pumped to the PRC. 

Being pressed by European consumers and EU authorities, the Russian gas giant tries to make it clear to the Europeans that it will move its main investment efforts onto its eastern projects. Delaying for an indefinite period the final investment decision on the Shtokman project that was initially aimed at western markets also fully fits this logic. 

The problem is that neither picture of the future can come true – neither Russian, nor European – as there is quite a big number of counterarguments. 

As far as Europe is concerned, it is necessary to understand that growth in competition on the European market in 2012 was attributed to decline in the demand for gas, not to some new supplies. Over the past four years natural gas consumption in the European Union has dropped by almost 50 billion cubic metres. Besides, a positive moment for exporters was the decrease in gas production in the North Sea. But in general we should acknowledge not decline in competitiveness of Gazprom and Russian gas but rather decrease in attractiveness of natural gas as fuel for the EU.

In particular, despite declarations of intent to strengthen control over environmental friendliness of energy sources, the European Union is raising imports of coal and its use in the electrical energy sector. However, natural gas is much better in terms of impact on the environment. This is why it is a big question how long such policy will last, given that the Europeans are seriously concerned about ecological problems. 

The EU’s main hope is LNG imports from the USA. But in reality the export potential of North America is significantly overestimated. Export licenses have been issued only to two consortiums that will be able to export only 50 billion cubic metres of gas after 2016. Besides, the USA has launched the policy of re-industrialisation bringing manufacturing capacities back to the country. This became possible only due to very low gas prices on the domestic market. Consequent reduction in electrical energy prices became a key factor of increase in competitiveness of the American economy. But exports will promote growth in gas prices in the USA, which will trigger resistance of the American industrial lobby and the public. It will be hard to explain to them why natural gas produced, for example, in Pennsylvania is delivered to the Chinese market reducing the supply in the USA and pushing its prices up. Such things will substantially limit the US export potential in the gas sphere.  Shale gas from the USA may remove the psychological fear of the Europeans of gas. As a result it may play an important role – waiting for the US gas Europe will begin raising its consumption. But its imports will not be as noticeable as the Europeans would like them to be.  

Production of shale gas in the EU is complicated due to environmental risks, the lack of a necessary amount of water, drill rigs and other restrictions. This is why there is more talking here than real actions. The alternative energy is still rather expensive. Qatar has completed its investment cycle, which means no additional LNG imports should be expected from this country; moreover, Qatar is more and more actively engaged in exports to Asia where prices are high and the demand is growing. Azerbaijani projects are postponed, the question of a trans-Caspian pipeline is not settled, while China is gaining its foothold in Central Asia becoming a real competitor of the EU. Finally, political risks in the Persian Gulf region and in Northern Africa are sharply rising.

The main problem of the Russian strategy is huge investment expenses on implementing the eastern programme. According to just preliminary estimates, a 3,200-kilometre long gas pipeline from Yakutia will cost over $25 billion alone. Meanwhile, it is necessary to develop deposits that have a complicated geological structure in Eastern Siberia. Moreover, they contain the so-called fat gas that requires construction of gas chemical plants. 

However, Gazprom leaves a possibility for Europe to change its opinion. In particular, Gazprom mentions a project of gas supplies from Kovykta to the West – the deposit can be connected to the existing system of gas pipelines running in the western direction. Moreover, Gazprom keeps building pipelines to Europe – the second line of Nord Stream was launched in 2012, at the end of the year the symbolic welding of first pipes of South Stream took place. Finally, a contract with China is not signed yet, although negotiations have been going on for many years. 

Thus, we see that both the EU and Russia are more and more actively thinking how to reduce mutual dependence on each other. However, this is a very complicated process, nothing to say, it will have political consequences. Probably it is high time to understand one simple thing – Europe overestimates the potential of diversification of suppliers and liberalisation of markets, while Russia counts too much on diversification of buyers. As a result, this policy is beginning not to increase but to decrease competitiveness of our economies, which is very dangerous on the eve of the second wave of the economic crisis.

By Konstantin Simonov, Executive Director, National Energy Security Fund, Russia

New Europe, January 20, 2013