Major investment in European gas storage, transmission and emergency planning make a repeat of the 2009 gas shock unlikely this winter, market observers say, even if Russia trims exports to retaliate against western sanctions. That should be comforting news to EU Energy Commissioner Günther Oettinger, who is meeting with energy ministers from Ukraine and Russia (Yuriy Prodan and Alexander Novak) on Friday in Berlin. But analysts do caution that the EU’s long-term energy security rests on further market integration and diversification. Timothy Spence reports from Vienna.
Jolted into action by one of Europe’s worst energy scares, infrastructure companies have invested billions of euros in storage and new or refitted transmission capacity to move gas back and forth across borders. Recent EU measures aimed at strengthening energy security also appear to being paying off, with the expansion in central and eastern states of bi-directional gas flows that were all but absent in 2009.
“A lot of progress has been made, particularly if you look at the 2009 crisis,” says Anita Orbán, Hungary’s ambassador-at-large for energy security, citing projects that have been completed or planned across the central and eastern countries that are heavily reliant on Russian gas.
Michael LaBelle, an energy specialist at the Central European University Business School, says gas security has “dramatically improved” and that the EU is far less vulnerable than in the past. “There was a lot of confusion” in 2009, he said, adding that energy officials in one country “didn’t know other people’s phone numbers, didn’t know the right contact people.”
In a bid to defuse tensions with the Kremlin heading into the winter heating season, Günther Oettinger, the European commissioner in charge of energy, is scheduled to meet with energy ministers from Russia and Ukraine on Friday. Commission officials say ensuring steady gas supplies throughout the winter will top the agenda of the Berlin meeting.
Although today’s energy jitters are compounded by the Ukraine-Russia territorial conflict, there are striking similarities to the past. In early 2009, Russia’s state-owned Gazprom accused Ukraine of failing to pay its bills and cut supplies that affected transhipments to the rest of Europe. Gazprom has again halted deliveries to Ukraine, though executives of the Russian energy concern say they are committed to fulfilling supply agreements with EU customers.
What remains to be seen is whether the Kremlin will order a reduction in gas shipments this winter to punish the EU for sanctions imposed over the Russia-Ukraine conflict. A new round of EU sanctions targets petroleum-related businesses in addition to the finance and weapons sectors.
“People are preparing for a potential crisis, so the market is functioning”
If the Kremlin turns gas into a weapon, LaBelle says, “supplies would still be tight, but essentially it [the EU] would be all right and much better than in 2009. And going forward, that will continue to improve.”
The 2009 disruptions exposed the shortcomings of a Cold War-era delivery network built to move gas one way – from east to west. Inside of a few days, 6 to 20 January, EU countries lost 20 per cent of their supply in what the European Commission called the “most serious gas supply crisis to hit the EU in its history.” East and central EU countries and European Energy Community members (mostly the Balkan states) were the hardest hit as reserves dwindled.
Blame for the crisis was cast widely, especially since it had happened before, in 2006, though the impact was less critical then. “There was no contingency plan at national or EU level as to how to react to an unforeseen major disruption, which industry representatives had thought ‘impossible’,” noted one European Commission report.
In the aftermath of the crisis, the EU adopted Regulation 994, a 2010 law that made implementation of bi-directional gas flows obligatory where it was practical, positioning suppliers in one country to move gas back and forth depending on demand. The net effect has been to accelerate trans-frontier energy lifelines and market integration.
The legislation also included provisions to create an EU-wide warning system about potential disruptions, and called for supply coordination between regional blocs, such as Poland, Lithuania, Latvia and Estonia; Spain, Portugal and France; Bulgaria, Greece, Romania; Denmark and Sweden; Slovenia, Italy, Austria, Hungary, and Romania; and Poland, Germany, Czech Republic, and Slovakia.
Countries have taken other steps to harden their resistance to shocks. Hungary’s storage capacity is estimated to be six times its domestic demand. A deal was also clinched to pump Caspian Sea gas from Azerbaijan to southern Europe through the EU-backed Trans Adriatic Pipeline, a corridor due to be operational within six years.
Europe’s overall storage capacity has also grown, rising 15 per cent between 2009 and 2012, from nearly 80 billion cubic metres to 94 bcm, while the number of storage facilities has grow from 133 to 146 in the 28 EU states plus Norway, according to Gas Infrastructure Europe (GIE), a Brussels industry association. Infrastructure companies spent a combined €22.6 billion on storage, transmission and LNG capacity between 2009 and 2011, more than half – or €13.4 billion – on transmission.
This summer, gas companies have been bulking up reserves due to uncertainty over EU-Russia relations. Supplies in the EU stand at 76 bcm or 91 per cent of capacity, above the seasonal norms, while in Ukraine the tanks are 51 per cent full at 16.4 bcm.
Storage facilities are “more filled with gas than in the last couple of years,” notes Predrag Grujičić, head of the gas unit at the European Energy Community in Vienna. “People are preparing for a potential crisis, so the market is functioning,” with companies buying and storing gas to take advantage of lower, pre-winter prices.
Investment in LNG has also added to supplies. Speaking at the European Gas Regulatory Forum in Madrid on 6 May, GIE President Jean-Claude Depail said six LNG terminals were under construction at the start of this year with 32 planned, many of them in southern and eastern EU countries. At the start of the year, there were 22 such terminals in operation.
Risks for Ukraine
That may be good news for EU countries. But Ukraine faces a potentially devastating winter, compounding its political and economic woes. In June, in the throes of the conflict over Russia’s annexation of Crimea and support of restive regions on Ukraine’s eastern flank, Gazprom shut off supplies to Ukraine, echoing the 2006 and 2009 claims that Kiev wasn’t paying its bills. For its part, Ukraine accuses Gazprom of overcharging for its gas.
Ukraine has taken steps to cut gas use, hiking residential rates, though politicians have been slower to use pricing to tackle waste in the country’s industries. Kiev has moved to shift electricity production from gas to nuclear, coal and hydro. “The share of gas in the primary energy consumption is a bit lower than in 2009 and has been continuously declining every year since 2009,” according to the Energy Community’s Grujičić.
In an emergency, Kiev could also impose temperature limits on home heating during the winter and restrict or suspend supplies to industry. Slower economic growth could further tame consumption, with the European Bank for Reconstruction and Development (EBRD) forecasting that the country’s economy contract by 9 per cent this year and a further 3 per cent in 2015.
Meantime, Ukraine is relying on help that didn’t exist in 2009 – the reverse-flow capacity that has allowed Poland, Slovakia and Hungary to step in and pump gas to eastward to help fill the void.
Fuel for reconciliation?
Though Moscow is accused of using its abundant energy supplies as a cudgel, the reality is that it needs export markets as much as its customers need the energy.
Gas accounts for about one-quarter of all energy consumed in the EU and the bloc imports one-third of that from Russia, down from 45 per cent in 2002. Much of the Russian gas – upwards of 350 million cubic metres per day, roughly equal to Ukraine’s domestic consumption – is piped through Ukraine, according to EU statistics.
“The crucial message is to overcome the east-west divide by north-south, south-north interconnectivity”
Central European University’s LaBelle believes gas could play a role in easing tensions between Russia and Ukraine, and Russia and the EU, further easing concerns about a winter energy crunch. Projects like Russia’s South Stream pipeline to the EU remain a priority to Moscow, he says, and more blows to Gazprom’s fortunes could further hurt Russia’s increasingly anaemic economy. The EBRD forecasts stagnant growth for the Russian economy this year and a slight dip next year.
“We are in really uncharted territory because the relationship is so bad, at a very low level,” LaBelle tells Energy Post in a telephone interview, “and if Russia wants to pull back from having a disastrous relationship with Ukraine and the EU, then this gas issue would actually be a good friendship-building bridge.”
LaBelle adds, “If Russia wants to play hardball and see a lot of Ukrainians living in the cold this winter, they have that ability, they have that right to say we just don’t want to export to Ukraine. But if this relationship with Ukraine and with Russia is actually on the mend with the cease-fire in place, then gas would be a good olive branch to reach out and say, okay, let’s come to some agreement on how to do this.”
Nevertheless, even if a crisis can be averted, the EU will inevitably me motivated to diversify and find new energy suppliers.
During its stint at the presidency of the European Council in the second half of 2011, Hungary pressed for a regional integrated energy network stretching from Poland to Croatia, and continues to call for transnational cooperation despite financing setbacks posed by the euro-zone crisis and weak economies.
Today, “we are still short of having a fully integrated infrastructure. We need still key interconnectors, we are very much lagging behind in several reverse flows,” Orbán, the Hungarian energy ambassador, tells Energy Post, citing as examples unfinished interconnectors involving Romania and Hungary, and Hungary and Croatia.
“The crucial message here is to overcome the east-west divide by north-south, south-north interconnectivity and corridors,” says Orbán. Reiterating that progress has been made in recent years, she says current east-west tensions make it ever more important “to create a spider web of infrastructure in central and eastern Europe so that gas can flow freely and can be traded across the borders freely. That could provide security, that could provide competition which at the end will result in lower prices for our customers.”
Orbán also says that the EU’s future energy security lies in diversifying sources. In an April visit to Washington, she urged the U.S. Congress to revamp its restrictive energy export rules to encourage sales of American LNG to Europe’s expanding – though underused – terminals.
“Our goal was to expedite this process and to [draw] attention to the fact that energy security is a primary concern of our region, and the United States has a tool at its disposal – it can assist the security considerations of these countries and at the same time promote a free market and find a lucrative market for its product, which is LNG.”
That, says Orbán, would not contribute to short-term needs, but would eventually help provide diversification away from Russian gas.