European gas security: longer term supply and

infrastructure issues

Dr Katja Yafimava

Senior Research Fellow

Natural Gas Research Programme, OIES

6th UNECE Gas Centre Industry Forum,

Geneva, 16 December 2015

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e European gas security: what is it?

European gas security: acceptable level of threat of supply and

price disruptions, which may arise in any part of gas supply

chain (source, transport / transit) due to governmental,

contractual, legal/regulatory, and facility risks with the potential

to disrupt supply in the short and long term to individual

countries and Europe (EU+Energy Community Treaty members)

in general, from domestic (EU/EEA) & external suppliers

Parts of gas chain: sources (domestic & external);

transport/transit infrastructure (pipeline (domestic & external) &

LNG); facilities (accident and technical failure)

Risks: governmental (political relationships between suppliers,

buyers & transit countries); contractual (renegotiation

/arbitration/cancellation); legal/regulatory (e.g. EU/EnCT 3rd

Package); facility (e.g. underinvestment, sabotage)

2

Perceptions of threat as well as acceptable levels of threat

differ across Europe

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European gas security:

longer term supply and infrastructure

questions

Longer term supply: from where is Europe

likely to receive additional gas post-2020?

Infrastructure: which new pipelines and LNG

terminals are likely to be built and how will

they impact on European gas security?

3

Perceptions of longer term gas availability, and security

implications of new infrastructure, differ across Europe

and impact EU policy making

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e European (EU/EEA) gas production

4

Source: DECC, March 2015 (dotted line = March 2014)Sources: GTS + updates Honoré Source: Ministry of Petroleum and energy 2015

2014 2020 2030

Norway 109 104 (92-118) 78 (64-92)

UK 37 29 18

Netherlands 70 52 26

Other 40 40 25

Total 256 225 (213-239) 147 (133-161)

Norway/UK/Netherlands as % of total 84 82 83

Sources: National statistics and Honoré/OIES (updated)

Norwegian, Dutch and UK will continue to dominate European conventional

gas production, which will decline 95-123 Bcm (about 43%) by 2030. EU

unconventional gas production is projected by IEA to remain well below 20

Bcm by 2035, hence will have little impact on the decline in conventional

production (by 2030)

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e Gazprom’s Long Term Take or Pay contracts

with European customers to 2030

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Source: ERI RAS in Henderson and Pirani (OIES 2014)

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Even at 70% ToP, Gazprom’s average annual sales

exceed 100 Bcm/year until the mid-2020s

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European dependence on Russian gas

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Europe overall depends on Russian gas for some 25-28% of demand – a healthy share from a commercial point of view

NW & SW European countries, which account for more than ¾ of Russian gas exports to Europe, maintain relatively low levels of supply concentration and (mostly) meet the N1 standard

But CE, SE, Baltic countries, which account for less than ¼, remain highly dependent and vulnerable:

Europe overall is well diversified but the Baltic region, Central Europe, South

East Europe are highly dependent on gas from one source – Russia, this is

problematic, irrespectively of whether viewed from commercial or

geopolitical point of view, hence particular attention should be devoted to

these regions

based on 40 European countries, Source: OIES 2014

Countries which did not meet the N-1 standard in 2013: Bulgaria, Greece, Lithuania, Estonia, Slovenia, Sweden, Ireland, Luxembourg and Portugal

The Supplier Concentration Index (SCI) – countries with SCI>30 in 2012: Austria, Bulgaria, Czech Republic, Estonia, Finland, Greece, Hungary, Lithuania, Latvia, Poland, Portugal, Slovakia. Outside the EU, SCI > 30 in 2013: Serbia, Bosnia & Herzegovina, FYROM, Turkey

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Non-EU/non-EEA non-Russian pipeline

gas supplies: 2020-30

Southern Corridor: Azerbaijan: 24.4 Bcm maximum by 2020

(half Turkey/half EU); possible increase to 27 Bcm post-2023

but 2015 request for imports from Russia suggests questions

about export volumes; Middle East/Central Asia possible post

2030

North Africa: no increase in exports likely by 2020; outlook for

2030 is unpromising unless Egyptian discovery is even bigger

than advertised

East Mediterranean: 10 Bcm exports of Israeli gas as LNG via

Egypt questionable since the Zohr discovery, and pipeline gas

to Turkey now unlikely

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Russian volumes look secure for at least 10 years

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Pipeline gas via the Southern Corridor

8

Source: BP

“Southern Corridor” is the major element of the EU supply

diversification (route and source)/security policy since the late

1990s and enjoys favourable EU regulatory treatment & political

support. However, despite large reserves in potential exporting

countries, the only gas which has been contracted is 10 bcm

from Shah Deniz 2

Southern corridor (PCI status,

2015): TAP + TANAP + South

Caucasus pipeline

TANAP legal/regulatory framework

(non-EU/non-EnCT):

Turkish-Azeri IGA & MoU

Dispute resolution jurisdiction:

Turkish law

TAP legal/regulatory framework:

Exemption from the EU 3rd Package

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Global LNG supplies surge: Europe

becomes a ‘sink’ but until when?

9200

250

300

350

400

450

500

550

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Bcm

a

USA - Golden Pass

USA - Jordan Cove

USA - Lake Charles

USA - Corpus Christi T3

USA-Sabine Pass T5 - T6

USA - Corpus Christi T1& 2

USA - Cameron LNG

USA - Dominion Cove Point

USA - Freeport

USA-Sabine Pass T1 - T4

Russia-Yamal 1

Australia-CSG Curtis (Shell/Petrochina)

Australia-Icthys

Australia-Gorgon T2

Australia-Wheatstone

Australia-Gorgon T1

Australia-Asia Pacific LNG (CP)

Malaysia-Sarawak

Australia-Gladstone Santos

Australia-Queensland Curtis

Papua New Guinea-Hides

Existing

Awaiting FID

Source: Rogers, OIES

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e LNG Availability for Europe

There is a huge volume of new LNG supply – from US

and non-US projects - due to start exporting from

2015 onwards

The main variables which will determine how much is

available for Europe will be:

Asian (especially Chinese) gas demand and price

North American gas prices – and therefore viability

of LNG export projects

Willingness of European buyers to compete

internationally with Asia, Middle East and South

American buyers

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NW and Southern Europe have substantial LNG import

capacity; LNG availability up to 2020 (and beyond??) has

potential to displace large volumes of Russian gas

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e Infrastructure for bringing LNG to Europe

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NW & SW European countries: access to LNG via massive regasification capacity & high level of interconnection

CE, SE, Baltics European countries: ‘The Baltics region: with Lithuanian (4 bcm), Polish (5 bcm) & two more new

LNG facilities, the Baltics & Finland could diversify away from Russian gas (up to elimination) by 2020 if agree sharing facilities & expanding interconnections

SE Europe: with (to be expanded to 7.3 bcm ) Greek LNG terminal, (to be built) Croatia terminal (2 bcm), reinforcements & interconnections, and access to Italy’s LNG capacity, could diversify away from Russian gas (up to elimination) by 2020

CE Europe: given much higher demand, will depend on reverse flow of LNG from NW & SW Europe which could be limited due to infrastructure bottlenecks, could diversify away from Russian gas (reduction but not elimination) by 2020

Ability of most dependent/vulnerable ‘east’ European countries to

access non-Russian supplies has been limited by infrastructure

constraints but this can be solved by 2020 – but at a cost

(infrastructure & potential price differential)

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LNG supplies versus Russian pipeline gas

In a surplus global LNG market from 2015 until the early 2020s:

Europe could be the recipient of substantial LNG supplies (even if it is not actively seeking them)

Gazprom would need to compete against these supplies at prices which could go as low as Henry Hub + $2/mmbtu

Failure of Gazprom to compete could lead to significant additional LNG supplies arriving in Europe which would (at least for the duration of the surplus) – significantly reduce dependence on Russian gas

But this will be time-limited as global LNG supply/ demand may tighten by early/mid-2020s,

LNG will disappear when Asia needs it and..

dependence on Russian gas might increase

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The pipelines carrying Russian gas to Europe

Ukraine carries around half of Russian gas exports to Europe

Risks potentially impacting security of transit across Ukraine

Financial/commercial risk (payment issues); political risk

(willingness to continue transit post 2019); legal/regulatory risk

(post 2019 transit contract value); facility (technical state of the

network)

The EC has increased its leverage vis-à-vis Ukraine and can

mitigate these risks but is it capable of guaranteeing that transit

will remain secure before and after 2019?

Source: OIESSource: Naftogaz

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Downing of the Russian SU-24 military jet by Turkey on 24th

November 2015 led Russia to carry out a fundamental

reassessment of its political & security relationship with Turkey

Construction of TS1 (to Turkey) and TS2 (to Trans Balkan

‘reverse’ via Turkey) by 2020 might still be built but look

doubtful & might be cancelled altogether, also depend on

progress with Nord Stream 2; TS3 (TAP connection) & TS4 (CE &

SE Europe connection) will certainly not happen

If TS is cancelled (or limited to one line) would a return to South

Stream (to Bulgaria) be possible?

The Turkish (formerly South) Stream Pipelines

Source: OIES Source: OIES

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1515

The Nord Stream Pipelines

Nord Stream 1 (first string Nov 2011, second string Nov 2012) is

operational (total capacity 55 bcm but OPAL use is restricted).

In September 2015 Gazprom, EON, BASF, Shell, Engie & OMV

signed a shareholders agreement to build Nord Stream 2 (third

and fourth strings) (55 bcm) (Q4 2019)

Source: OIES

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Nord Stream 1 & 2: regulatory challenges

Gazprom cannot use more than 50% of OPAL capacity (NS 1

onshore extension):

The EC did not approve the negotiated compromise

solution, which would allow Gazprom to use more

capacity should no 3rd party want it

The fact that very little gas with delivery via OPAL was sold

at the Gazprom’s auction (Sep 2015) showed the lack of 3rd

parties’ interest in OPAL

thus making the EC refusal to lift the cap look

increasingly political rather than regulatory

The resolution of OPAL issue is crucial for Gazprom to

proceed with Nord Stream 2 (European buyers have

supported the case for Nord Stream 2 onshore extensions

exemption)

The EC could delay Nord Stream 2 start of operations until

the early 2020s & limit utilisation of onshore sections

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The EC attitude towards new Russian pipelines

The EC position appears to be that it expects Gazprom to

meet its contractual supply obligations vis-à-vis European

buyers while only using existing pipelines (e.g. Nord Stream

1 (capped), Ukraine & Belarus corridors, a link to Finland)

Given that capacity of existing export pipelines is not

sufficient for deliveries under existing contracts without

using the Ukrainian corridor, Gazprom’s ability to honour its

commitments depends on security of transit across Ukraine

The EC will have to play an increasingly important role by

brokering the Ukraine-Russia gas relationship and

underwriting security of Ukrainian transit both politically &

financially (e.g. Winter Package 2014/15, 2015/16 and

beyond)

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• Significant resistance on part of the EC towards all new

Russian gas export pipelines is to be expected on both

political & regulatory grounds

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e Whether/which new Russian pipelines will be built:

scenarios‘No new pipelines’:

Gazprom would be able to deliver under existing LTSC (at 70%

TOP) to Germany, France, Italy, Austria, Poland, Czech Republic &

Slovakia (OPAL cap assumed lifted) but would be unable to do so at

the 2014 export levels in respect of parts of Austrian, Hungarian

and (especially) Italian demand as well as parts of east and

(especially) south European demand and Turkey without using

Ukraine

‘Nord Stream 2’

Expansion of OPAL and the Czech network would need to be built

towards Baumgarten & additional interconnections for deliveries to

SE Europe & possibly some capacity expansion towards Italy

‘Turkish Stream 1’

Elimination of Ukrainian transit in respect of deliveries to Turkey

but no impact on security of supply in the rest of Europe

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Under ‘No new pipelines’ scenario, security of Ukrainian

transit remains crucial as a disruption would have a (varied)

impact on all European countries except NW Europe

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e European gas security (2015-2030): conclusions

Sources: global LNG and Russian pipeline gas will be the two main

sources competing for European market up to 2030. No significant

new non-Russian pipeline gas for Europe before 2025, projections

beyond 2025 highly speculative. Russian gas will be competitive

with all other gas supplies (LNG & pipeline) in a hub-priced

European market

Transport/transit infrastructure: abundant LNG regasification

capacity in NW/SW Europe, limited but expanding (with EU financial

support) LNG capacity in CE/SE/Baltics + interconnections enabling

the region’s access to LNG and non-Russian pipeline gas, but the

issue of transit across Ukraine post-2019 remains unresolved

Main risks are governmental (political), legal/regulatory, and

contractual, threatening to upset existing commercial relationships,

and must be mitigated

Threat of supply & price disruptions up to 2030 from any source

is acceptable for overall Europe but CE/SE/Baltics could reduce

their overdependence/vulnerability by 2020 through additional

infrastructure

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OIES Gas Programme research on this topic:

Pirani & Yafimava, Russian gas transit across Ukraine post-

2019: pipeline scenarios, gas flow consequences and

regulatory constraints, OIES 2016 forthcoming

Stern, Pirani & Yafimava, Does the cancellation of South

Stream signal a fundamental reorientation of Russian gas

export policy? OIES 2015

Stern (ed), Reducing European dependence on Russian gas:

distinguishing natural gas security from geopolitics, OIES

2014

Henderson & Pirani (eds) The Russian gas matrix: how

markets are driving change, OIES/OUP 2014

Yafimava, The transit dimension of EU energy security:

Russian gas transit across Ukraine, Belarus, and Moldova,

OIES/OUP 2011

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Thank You!

Katja.Yafimava@oxfordenergy.org