LNG Prospects and Gas Supply Security in Europe Can LNG reduce Energy Security Risks such as Supply Interruptions and Gas Producer Cooperation? Presentation

LNG Prospects and Gas Supply Security in Europe

Can LNG reduce Energy Security Risks such as Supply Interruptions and Gas Producer Cooperation?

Presentation at the

Political Economy of Energy in Europe and Russia (PEEER) Workshop

Higher School of EconomicsMoscow State University

Moscow, 15 September 2009

Marcel Dietsch, MPP (Harvard)DPhil StudentInternational RelationsUniversity of Oxford

Marcel Dietsch | University of Oxford | September 2009

‘Energy Security’ and Core Questions

•Energy Security: the absence of physical delivery interruptions of reasonably-priced energy supplies.

•Does LNG contribute to Europe’s energy security overall?

1. Can LNG reduce short-term risks such as physical supply interruptions?

2. Does LNG contribute to more competitive (usually means lower) gas prices in the short- and long-run?


European Concerns about Security and Affordability of Gas Supplies (I)

• Long-standing dependenceon gas imports from(super-)giant fields

• European indigenous gasreserves and productionin decline – holding only 2% of world gas reserves

• growing demand andhence even higher importdependence on Russia,the Middle East and Africa

2006 2010 2015 2020 2025 20300

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20

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50

60

70

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Natural Gas Import Forecasts until 2030net Imports as % share of Total Consump-

tionby Market, 2006 - 2030

Chart: Marcel DietschData & Projections: US Energy Information Administration, June 2009

Europe

South Korea

Japan

North America


European Concerns about Security and Affordability of Gas Supplies (II)• growing gap between consumption and

production in Europe covered by imports from very few countries

• Most imports via inflexible pipelines - problematicsince Russo-Ukrainian gas disputes in 2006, 07 and 09

Chart: European Commission Report, July 2009

Net EU imports in by country of origin


1. Mitigating the Risk of Supply Disruptions?

• LNG considered a valuable tool to diversify European gas imports in addition to winning new suppliers (e.g. Iran, Turkmenistan, …) and establishing alternative pipeline routes (Nabucco)

• Geopolitical distribution of LNG suppliers different from pipeline supplies, which is both good and bad news

• LNG share of gas imports is still low at about 47 bcm or 15% in EU - hence LNG adds to, but does not dominate, the supplier base


Western Europe: LNG beneficial...• Largest LNG consumers in EU are France (about 25%

of imports) and Spain (approx. 50%) - both countries least affected by recent gas cut offs, not just because of their location

• Hence: in some countries LNG contributes to diversification of energy supply; acts as backup supply and improves security of supply

• Increased use of LNG buys Europe time to finish Nabucco pipeline to access Middle Eastern and Central Asian resources


... but only up to a point (I)

• Regasification capacity expansion until 2015 mostly predicted to be at existing terminals mostly in the UK, France, Spain, Italy and Germany

Projected LNGRegasification

CapacityAtlantic Basin, bcm

Jensen Associates


... but only up to a point (II)

• Most of the LNG quantities come to Europe locked up in long-term contracts; less than 20% is non-committed LNG

• These flexible, tradable quantities (3% of Europe’s gas needs) could increase security of supply to the extent that buyers in Europe could outbid others, especially the US, Japan and South Korea depends on the competitive situation

• Construction of regasification capacity worldwide far ahead of liquefaction capacity existence of regasification terminals does not always mean availability of actual supplies


Eastern Europe – LNG nonexistent• Eastern European states are highly or fully

dependent on one gas source (Russia) and one transportation method (pipeline)

• Considered highly undesirable especially after repeated gas cut offs in 2006, 2006 and 2009 - regardless of whether Gazprom, Ukraine or both are to blame

• Yet, no existing LNG regasification terminal, partly because countries are landlocked or there is no easy access to the Atlantic or the Mediterranean

• Need for diversification to reduce impact of supply disruptions – LNG not a suitable solution?


Share of Russian Gas for ImportingCountries’ Consumption Needs LNG receiving all via pipeline, for 2008, in bcm terminals in Europe

Country ImportShare

ConsumptionShare

Bulgaria 100% 95%

Finland 100% 100%

Lithuania 100% 95%

Slovakia 100% 98%

Greece 68% 67%

Romania 78% 24%

Hungary 77% 74%

Czech Republic 77% 76%

Poland 73% 52%

Turkey 63% 65%

Austria 72% 61%

Germany 50% 44%

Italy 32% 32%

France 18% 20%

Switzerland 11% 11%

Table: Marcel Dietsch; data: BP Statistical Review of World Energy, 2009.


Eastern Europe: increasing security of supply without LNG

• Diversification through use of LNG or different pipeline suppliers not possible/optimal

• Instead: integration into European gas grid, investment in interconnectors (with reverse flow technology)

• Eastern European countries and the Baltic region remain at the periphery of the European transmission system

• July 2009: European Commission initiates Baltic Energy Market Interconnection Plan and includes €310 million in EU Infrastructure Spending plan for regional gas interconnection projects linking Slovakia-Hungary; Slovenia-Austria; Bulgaria-Greece; Slovakia-Poland; Hungary-Croatia; Bulgaria-Romania and Romania-Hungary.


Initial question: Can LNG reduce risk of physical supply interruptions?

• Yes, to an extent, mainly in Western European countries

• Especially in countries with existing receiving facilities since capacity expansions are expected to be realised at existing terminals rather than through the construction of new terminals

• Not in eastern Europe since there is practically no LNG infrastructure for various reasons

• Integration into European grid by building interconnectors between countries more important

• Overall: LNG useful, but no a panacea for European energy security in general


2. Gas Pricing and the Geopolitics of Supply

• Algeria, Norway and Russia derive some market power—i.e. being able to sell gas above their (marginal) production cost—due to two factors• 1. high market concentration in their export markets (Russia as

quasi-monopolist in Eastern Europe, oligopoly structure elsewhere except UK and Netherlands)

• 2. inelastic demand for natural gas as a result of widespread household use (cooking, heating)

gas prices above competitive level

• Does LNG contribute to more competitive gas prices in short-run?

• In the absence of a fully integrated European gas grid: differences between those EU members states with LNG access and those without


• LNG creates competition to Russian pipeline gas in Western Europe for two reasons Countries in western part of EU are relatively far from

Russian fields (cost advantage of LNG only over very long-distance pipelines)

UK, Netherlands, Spain and France already have infrastructure in place

• increased use ofLNG could wellstrengthenbargaining powerof some EU gasimporters vis-à-vispipeline suppliersby reducing de-pendence on pipe-line gas

... in the short-run

0 2,000 4,000 6,000 8,000MILES

$0.00

$1.00

$2.00

$3.00

$4.00$/MMBTU

Crude Oil TankerOnshore Crude Line

Single Train LNG

36" LP Offshore Gas Line (1,000)

56" LP Onshore Gas Line (3,085)36" LP Onshore

Gas Line

Jensen Associates

Transportation costs and the effects of scale


Gas Pricing in the Long-Run – LNG cartel?

• LNG contributes to the globalisation of regional gas markets – increasingly susceptible to cartelisation?

• Important to look at global distribution of gas reserves and production – and to examine the potential for cooperation among LNG producers and exporters

• Russia, Iran and Qatar control about 55% of global gas reserves

• EU Commission notes: “Iran holds the second largest reserves of both oil and gas worldwide, with 11% and 16% respectively. Russia, Iran and Qatar might be the only large providers of gas worldwide by 2030. So far, the geopolitical implications of such a scenario do not seem to have been subjected to a thorough study.”


Cooperation among Gas Producers

• “An association of some kind among LNG exporters is likely.” (Daniel Yergin, CERA)

• Unclear if and when such an association can be effective since gas trade is different from most commodity markets (storage, transportation costs)

• Current gas price collapse might be catalyst (Jonathan Stern, OIES)

• Motivation for closer cooperation perfectly understandable from producer point of view: raise or maintain high prices to extract value from their resource

• Loose cooperation beginning to take shape in the GECF (next page)


The GECF• Gas Exporting Countries Forum (GECF) created in 2001• Gathers the world’s leading gas producers to promote mutual

interests▫ Includes measures aimed at maximising the value GECF member

countries can derive from their gas reserves▫ GECF members exchange views and information on project

development, supply and demand balances, exploration, production and transportation costs, etc

• GECF’s share in global pipeline gas trade at about 38% • More impressive share in LNG production and exports: around

85% (2007)

GECF members GECF observers


GECF and LNG in Europe

• All of the EU’s LNG suppliers are part of the GECF• European Commission report argues that the “likelihood of

GECF being able to exercise control over all gas movements worldwide seems unrealistic [...] but the Forum might take quite a firm grip on LNG.” (July 2009)

• GECF does not engage in OPEC-type quota setting at the moment, but measures to achieve greater control and “preferred” price levels, the GECF may use “softer tools:”▫ Managing capacity expansion (Saudi-style spare capacity too

expensive)▫ (re)-introducing destination clauses▫ Pursuing vertical integration▫ Using delivery swaps to use price arbitrage opportunities

• Medium- and long-term risk (especially for highly import-dependent EU consumers) of cartelisation of LNG market


The known Unknown: Unconventional Gas Resources in the US

• Significant changes in the gas resource base in the US: discovery of new shale gas formations and arrival of new technology to exploit shales (hydraulic fracturing)

• US reserve-to-production ratio previously at about 10 years, between 30 or 40 years (EIA, June 2009)

• Consequence: growth of US production reduces LNG import needs

• Indication of unconventional impact: operator of a LNG regasification terminal in US earlier this year tried to change the licence to a liquefaction facility

• If US can exploit new unconventionals as planned1, this may render GECF completely ineffective

• Why? For long time, it looked like US was going to depend on LNG imports, but now may become exporter again after new discoveries

• Safe to assume that the US would counteract any cartelisation efforts by other LNG exporters1 depends on US Federal and State regulations since hydro-cracking affects groundwater supply


Gas Pricing - Summary

• LNG is a competitor for pipeline gas in Europe and (may) contribute to the erosion of market power that Algeria, Norway and Russia enjoy in parts of Europe

• Global distribution of gas reserves highly concentrated• Cooperation among gas producers and exports, especially

those using LNG for transportation, likely and taking shape in form of GECF

• GECF countries control 85% of LNG exports worldwide and all shipments to Europe

• Risk of cartelisation of globalising gas market in medium- and long-run (and hence higher prices – above the competitive level)

• Possible mitigating factor: US re-emerges as an LNG exporter as a result of unconventional gas reserves that are now exploitable


European Energy Security: Natural Gas

Diversification

Liberalisation

Infrastructureand Storage

Geographic Sources

Transport Routesand Modes

LNG contributes to geographicdiversification by making available sources previously not accessible bypipeline (e.g. Qatar, Nigeria, ...)

As a new form of transportationfor natural gas, LNG providesa flexible alternative to pipeline

Gas SupplySecurit

y

1. Reliability (low impact of physical interruptions)

2. Affordability

Discussion / Q&A

Marcel Dietsch MPP (Harvard)DPhil student, International RelationsUniversity of Oxford

University College, Oxford | OX1 4BH | UK

www.marceldietsch.commarcel.dietsch (at) politics.ox.ac.uk

Documents

LNG Prospects and Gas Supply Security in Europe Can LNG reduce Energy Security Risks such as Supply Interruptions and Gas Producer Cooperation? Presentation