There are various ways for Europe to reduce its “dependence” on Russian gas, but they all have their drawbacks, concludes a new report from the Oxford Institute for Energy Studies (OIES). The report makes it clear that the Russian-EU gas relationship has many intricacies that policymakers should be aware of when they develop new gas policies.
Here’s a short gas quiz. Who is the second biggest European importer of Russian gas after Germany? The answer will come as a surprise to most people. It is Turkey.
And which European country has gone from zero imports ten years ago to become the fourth biggest European importer of Russian gas in 2013? Again, probably not many will guess. It’s the UK. The UK imports twice as much Russian gas as France and more than any country in Eastern or Central Europe.
These are some facts from a new report of the Oxford Institute for Energy Studies (OIES), “Reducing European Dependence on Russian Gas” (October 2014). It examines “the realistic options for reducing European dependence on Russian gas in three time frames – 2015,2020 and 2030”, and thereby provides a highly useful basis for all who are involved in the (over)heated discussion around Russian gas and the European gas market in general.
As the OIES paper suggests, the “Russian gas” debate is not always very fact-based. Thus, for example, when it comes to reducing European imports of Russian gas, the importance of current long-term contracts is often ignored. As the OIES report notes, of total Russian imports of 178.6 bcm in 2013 no less than 166 bcm was supplied under long-term contracts. (The sole exception were indeed UK imports which, as OIES points out, probably did not come from Russia at all, but were supplied by Gazprom from other sources.) These contracts will not go away any time soon. Up to the mid-2020s, “European companies are contractually obliged to import at least 115 bcm/year”, OIES points out. In 2020, European buyers will still have to purchase over 125 bcm of gas from Gazprom (or pay stiff penalties). Nor can sanctions intervene in these contracts. Indeed, as OIES points out, European market players expect the Russians to live up to those contracts as much as the Russian expect the Europeans to live up to them.
Here are some other interesting facts from the report (see also Table 1 below):
- All of the increase in volumes in Russian gas imports in recent years has been to Western Europe. Imports in Central and Eastern Europe went down, because of reduced demand, economic restructuring and higher prices.
- “Western” Europe (from Greece to Finland) imports more than three times as much Russian gas as “Eastern” Europe.
- Last year, imports of Russian gas rose considerably across most of Europe compared to the years 2009-2012. Russian gas represented 34% of European imports and 30% of total European demand.
- Looking at expected demand growth till 2030, OIES notes that gas demand will not grow very much in countries that are highly dependent on Russian gas, with the exception of Turkey, which is in a category of its own.
With domestic production of conventional gas declining, what alternatives do European countries have for Russian gas? OIES disucces a number of them.
- Shale gas may be of small help in some places, but it will take several decades to get to any kind of significant production level. OIES notes that to reach a shale gas production of 28 bcm/year, which is just over 10% of current Russian supplies, 800 to 1000 wells will have to be drilled in Europe each year for 10 years. This seems “unimaginable”.
- For biogas the picture is a bit more optimistic. Total poduction in 2012 was about 14 bcm, with Germany responsible for more than half. This could doulbe to about 28 bcm in 2020.
- Gas exports from North Africa (Algeria, Egypt, Lybia) to Europe were 43.9 bcm in 2013. They show a sharp decline since 2008. Prospects for the future are highly uncertain, but growth cannot be realistically expected.
- Israel and the Eastern Mediterranean may be able to export some 13-18 bcm/year of LNG by 2030, some of which could go to Europe.
- As to the famous Southern Gas Corridor, according to OIES this should be more appropriately called a “Caspian pipeline”, since the researchers expect no export of Central Asian gas to Turkey or Europe (any exports will go to China). Azerbaijan will be the only country that will substantially increase exports to Europe: some 30 bcm by 2030. But half of that will stay in Turkey.
- Iran and Iraq will not become big exporters to Europe in the foreseeable future for all sorts of obvious reasons.
- LNG is often regarded as the most promising source of non-Russian gas. Europe is certainly ready to welcome international LNG supplies. Europe’s regasification terminals have a combined capacity of 200 bcm/year – i.e. more than total Russian gas imports! But only 22% of this capacity was used in 2013. Whether LNG supplies to Europe can be increased depends to a large extent on international price movements (read: Chinese demand). OIES also notes that Russia can probably keep out LNG supplies by lowering its prices. The report adds that Russia “has the ability of delivering 250 bcm/year of pipeline gas to Europe”. More generally, OIES concludes that “Russian gas deliveries to Europe will be highly competitive with all other pipeline gas and LNG (including US LNG) supplies throughout the period to 2030, and Gazprom’s market power to impact European hub prices may be considerable”.
Europe could of course decide to use less gas. “Fuel substition” could make up for 14 bcm in 2020 and 20 bcm in 2030, the report notes, but most of this would be by coal, which would go against EU climate policy.
Unfortunately, the report makes no attempt to quantify the contribution that could be made by renewables, nuclear power and energy efficiency. That is “beyond the scope” of the paper. The researchers do “caution against the EU projection that energy efficiency policies could result in a reduction of 40 per cent of gas imports by 2030”, but they not provide any numbers to back up this warning.
Whereas discussions around European dependence on Russian gas usually focus exclusively on European options, the OIES paper contains an interesting chapter on what possible Russian responses could be to European policy. It notes that Russia has a difficult choice to make. It can choose to invest heavily in European pipelines to show its reliability as a supplier, with the risk that this money will be wasted. Or it can leave Europe to its own devices, with the risk that Europe will only be more determined to turn away from Russian gas.
Generally, although the authors don’t make this point explicitly, the major takeaway from the OIES report seems to be that whatever reasons Europe may have to reduce its dependence on Russian gas, the current relationship of mutual dependence has a lot of advantages that should not be lightly thrown away. Those in the EU who favour an “EU Energy Union” with “collective purchasing” of gas to counter Russian dominance, may perhaps regard this as an argument in favour of their position – but the OIES report does not discuss this idea. It confines itself to the facts.