Caspian Energy Journal Caspian European Club
Friday, 03 March 2017 19:00

How to avoid stepping on Gazprom’s rake Featured

The EU prioritises a competitive and diversified gas market, EU Energy Commissioner Miguel Arias has told this week in Brussels.

“In this context, we will develop various infrastructures, improve security of gas supply, and in the same context we do not need to rely on Nord Stream 2, Miguel Arias Cañete said at the press conference after the Council’s meeting on energy.



It would seem that for some reason the EC encourages some countries to build new gas pipelines on the one hand, but urges the others to refuse from the expansion of infrastructure. Ten years ago Radosław Sikorski, the then Minister of Foreign Affairs of Poland, stated the very exact opinion on that. He compared this project with the Molotov-Ribbentrop Pact, 1939 (German-Soviet Treaty of Nonaggression). That time he was accused of exaggerating, but after 10 years nothing changed dramatically in the relations between Gazprom and the EU. The European Commission fears that with the implementation of Nord Stream 1, 2 with the capacity of 110 billion cubic metres “Brotherhood” (Urengoy-Uzhgorod) and “Yamal-Europe” gas pipelines connecting Russia with Ukraine and Poland, which Gazprom inherited after the USSR’s collapse, may start to go bankrupt within a short period of time. Pipelines will begin to go to wreck without transit fees, and as a result Poland, Slovakia, Belarus and Ukraine, which are home to 100 million people, may be deprived of the important source of income. At that half of the capacity of the former operating Soviet infrastructure still remains non-demanded, and Gazprom itself recognizes it. According to the statements of Gazprom’s Chairman of the Management Committee Alexey Miller released by the company, it is the market that drives the Gazprom’s activity, so the company produces “as much gas as consumers need”. Gazprom can produce 150 billion cubic meters of gas per annum more than the actual production”. “This enables us to quickly increase the gas supply inside the country and abroad during the winter peak consumption”, Miller said. For its part, the EU would like to buy cheaper gas, Minister of Industry and Trade of the Czech Republic Jan Mládek said in his interview with Caspian Energy. “For example, we could buy cheaper gas from Kazakhstan. But we will not buy that gas because Gazprom does not allow alternatives through its export systems. We expect Kazakhstan, Iran to join the Southern Gas Corridor (TANAP, TAP gas pipelines – editorial note)”, the minister concluded.

That is, by sharing its spare capacity with its neighbors and partners in Kazakhstan and Turkmenistan the Russian monopolist could significantly reduce the degree of political tension around its image and at the same time to secure long-term prospects for diversification of its activities on the European market. However, nothing has changed since the USSR’s collapse. Therefore, the reaction of the European Commission “we will continue to support the transit of Russian gas through Ukraine” seems logical. “We have stated that Nord Stream 2 does not fully meet our goals because it does not allow access to new sources of supply, and even more so the European gas market is strong enough to do without it”, European Commissioner Cañete said. Greater coordination of energy policies is needed to withstand inappropriate pressure from the third countries, the First Vice-President of the European Commission for Energy Union, Maroš Šefčovič said.

For the full 2016 year Gazprom exported in total 179.3 billion cubic meters of gas (up 12.5% compared to 2015), the company said. This is a new historical record. The share of the Russian monopolist in the European market increased to reach 34% (up 3% compared to the last year). However, according to experts, in 2016 Gazprom started to lower export prices, IndexBox analysts said: in the first six months the cost of supplies to Europe halved compared to the same period of 2014 ($182 compared to $366 per one thousand cubic meters - the calculations by the Energy Policy Institute). As a result, exports increased by the one-fourth, while profits fell by the one third (from 640 to 413 billion rubles.). However, if preserved for a longer period, high prices would have resulted in a further decrease in the number of consumers, IndexBox experts suggest.



The European Commission has indeed strengthened its market this year. 18 projects concerning the gas sector, power industry and smart grids, and worth 44mln EUR were approved in February 2017.

Besides, there are only five projects associated with the concrete construction of new infrastructure facilities while 13 projects aim at conducting energy surveys. In addition, 10 projects associated with gas sector have been approved. The size of investments into these 10 projects makes 228 mln EUR.

Almost half of these funds (102 mln) will be spent on construction of the LNG terminal at the Croatian island Krk located in the Adriatic Sea. The capacity of the terminal will make from 4 up to 6 bcm of gas per year. The construction is planned to be completed by the end of 2019. The LNG terminal in Croatia is expected to diversify gas supply to the Balkan states and Hungary. EU is investing about 123mln EUR into gas pipelines between Slovakia and Bulgaria, Romania and Hungary (Eastring gas pipeline), Poland-Slovakia gas interconnector, Trans-Adriatic gas pipeline (TAP). TAP gas pipeline is a part of the Southern Gas Corridor pipeline system worth over $40bl and designed to supply gas from Azeri Shah Deniz field to Europe through Turkey. The construction of the TAP gas pipeline is estimated at 4.5bln EUR. 7 more projects are associated with power industry and their total cost makes 176mln EUR.

But the pricing policy is the main European trend. According to the World Gas Union, in 2014 almost 70% of consumed gas was sold in Europe with a linkage to the gas-to-gas competition. The volumes of these sales increased by 3.3 times compared to 2005. Spot gas trade is getting broader while trade platforms are getting more liquid. Thus, gas trade at such international exchanges as NBP and Holland TTF is carried out through forward and futures deals. There were already 18 trade platforms operating in Europe as of 2015. However, hubs of Spain, Czechia and Poland are at an early stage of operation now. In addition to gas hubs, there are 9 more exchanges holding gas trade - ICE Futures Europe (London), APX-Endex (Amsterdam), EEX (Leipzig) offer gas supplies beyond a single national market while others are operating only within their national market. Gas-to-gas competition has become the basis of the pricing in the North-West Europe while this system is at stage of birth in the South-East Europe and Mediterranean region.

Gas demand stagnation in EU in the medium and long term perspective (according to the data of the European Commission, 370-430bcm by 2030 while the current figure makes 440bcm), efficiency growth of alternative energy, including geothermal, opening of new gas fields in Egypt, Israel, Cyprus have long been saying that the window of export potential is getting narrower. Apart from this, construction of new gas hubs in Greece, Croatia, Bulgaria, as well as functioning  LNG terminals in Poland and Lithuania will certainly attract LNG supply from Qatar, USA and other sources.

In this way, if main volumes of pipeline gas are sold at spot market after 2020 and new LNG terminals host over 20bcm of gas per year, then the matter of competitiveness of gas supplies will become a main issue. Exporters such as Gazprom, which have a long-built infrastructure, as well as sources located very close to the European market, for instance Leviathan (Israel), Zohr (Egypt), will enjoy the most favorable situation. Besides, gas from the Israeli and Egypt fields are basically meant for the domestic market of these countries.

The advantage of the Southern Gas Corridor is its being the only underconstruction gas pipeline, apart from unstable North-African supplies, capable of indeed supplying big gas volumes from alternative sources in the Caspian – Shah Deniz, Absheron, Umid, Babek and many others in the Azeri sector of the Caspian Sea (a total of 2 trillion cubic meters of recoverable reserves). A branched network of domestic interconnectors will help to expand markets for new producers while underconstruction gas hubs with spot grounds and especially gas storages will help to set a market price for consumers similar to the oil exchanges. Therefore, spot, forward and futures contracts-based gas trade in EU, which equals to 100% of export volumes, looks inevitable and as an established trend. It is the reason why all new gas producers need to be ready because the image of the ‘monopolist’ will cost its owner higher with the lapse of time.


Natalya Aliyeva, Editor-in-Chief of Caspian Energy


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