This article is a summary of the first chapter of the forthcoming book “A new EU gas security of supply architecture”, written by J-M. Glachant, M. Hafner, J. De Jong, N. Ahner, S. Tagliapietra and published by Claeys & Casteels.
Suggested Citation: Hafner, Manfred and Tagliapietra, Simone, Rethinking the EU Gas Security of Supply Architecture (March 23, 2012), FEEM (Fondazione Eni Enrico Mattei), Review of Environment, Energy and Economics (Re3)
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Security of supply and security of demand: two sides of the same coin
The European gas industry has experienced over the last decades an extraordinary success. A strongly interconnected network of gas pipelines has been developed inside Europe and also between Europe and its gas suppliers, both by pipeline and LNG. Over the last few years the gas market has dramatically changed. The global financial crisis and the following economic recession have caused major confusion in energy and gas markets fundamentals around the world. While gas demand declined in the wake of the economic downturn, new supply surged mainly because of an increase in global LNG supply and the so-called shale gas revolution in the United States. This unprecedented shift in the supply/demand balance created new dynamics also in the European gas industry.
The European domestic gas production has inexorably fallen over the last decades, while the European natural gas demand has gradually increased. Demand grew on average by 4,2% during the 1990s, and by 2% from 2000 to 2008. For the first time the European gas demand strongly decreased in 2009, primarily because of the global financial turmoil. In 2010, the level of European gas demand bounced back, reaching a new all-time high level of 493 bcm, mainly because of a slight economic recovery and a cold winter. The first data available for 2011 estimate a new decrease in European gas demand, due to the worsening of the economic crisis and a mild winter.
Figure 1: Gas demand in the EU-27 member states (1965-2011)
Source: Hafner and Tagliapietra on “BP Statistical Review - June 2011”
In 2010 the EU imported natural gas mainly from Russia (110 bcm), Norway (99 bcm), Algeria (50 bcm), Qatar (34 bcm), Nigeria (15 bcm) and Libya (10 bcm). The EU dependency on external suppliers, represented by the imports/consumption ratio, stood at 67%.
The main concern regarding gas in Europe is currently related to the medium and long-term EU gas demand. This is due to the EU’s commitment to reduce GHG emissions by 80-95% below 1990 levels by 2050. In the recent “EU Energy Roadmap 2050” the European Commission has asserted that natural gas will be critical for the transformation of the energy system towards the decarbonisation objective, but the medium and long-term EU gas demand still remains a major question mark. The EU should always keep in mind that its gas security of supply architecture is strictly related (if not even dependent) to the EU security of gas demand. Today there is a great uncertainty about what role natural gas will play in the future mid-to-long term European energy mix. In a situation of general uncertainty, this lack of clarity on future European gas import requirements could postpone upstream and mid-stream investment decisions, thus potentially generating serious problems to the EU gas security of supply. Underinvestment may, indeed, threaten the adequate provision of new supplies by exporters or in the development of necessary new infrastructure due to contradictory estimates in gas demand.
The Role of Russia
Russia owns the largest gas reserves of the world, is the first gas supplier of the EU and it will remain so in the future. The interdependence between the two actors is indissoluble: the EU needs Russian gas supplies as Russia needs the highly solvable European gas market. For this reason the EU should strengthen the EU-Russia energy relations, in particular through the “EU-Russia Energy Dialogue”. This forum represents an important occasion to investigate the potential for a long-term energy cooperation strategy, that could deal with: the development of the upstream potential; the coordination of R&D in relation to the supply and transportation of gas; the discussion on new policy measures; the potential impact on the business environment. Moreover, would be primarily important to seek a bilateral agreement regarding all natural gas export pipelines from Russia to the EU, solving conflicts of laws and providing a framework for enhanced integration of the two gas markets. In this sense, the recently established “EU-Russia Gas Advisory Council” (which gathers high level experts from the EU and Russia with the aim to make recommendations for the long-term gas cooperation between the two actors) should deserve the encouragement of all the EU institutions.
The Role of Norway
Norway has always been a reliable gas supplier to Europe, but some concerns are emerging about its capability to deliver its gas supply in the long-term. In fact, the country has not made significant gas discoveries over the last decade. Different institutions estimate that the Norwegian gas production will peak around 2020. Also if the production level after 2020 will largely be determined by new discoveries made in the years to come, for the time being the EU should thus not expect to import considerable additional volumes of natural gas from Norway in the post-2020 period.
The Role of MENA Region
The MENA region as a whole holds half of the world’s proven gas reserves. Moreover, additional conventional and unconventional gas resources still remain to be discovered. Gas consumption is growing rapidly in the region -mainly driven by electricity demand- and some countries are facing gas shortages. If the EU is committed to improve the cooperation with the region, it is important not to be perceived only as a hydrocarbon buyer but as a full-fledged partner; in this sense the recent Arab uprisings could provide the EU with the opportunity to play a more meaningful role in the region. Considering that there is not a lack of infrastructure to import gas from the MENA region to the EU, efforts towards energy efficiency and renewable energy could represent the key elements of a EU foreign energy policy towards the region. In fact, an approach based on these two priorities would provide the double dividend of accompanying sustainable economic development in MENA countries and, at the same time, to free up gas for export; in this sense, the EU should strengthen its support to large-scale renewable energy projects in North Africa, such as the Mediterranean Solar Plan and Desertec. The EU should also try to accompany the creation of the broader economic and political framework that, after the recent Arab uprisings, new governments in the region will likely aim to develop. In particular the EU should be interested in developing cooperation schemes with North Africa. Contribute to the economic development of this area would have several positive spillovers, such as preventing migratory flows towards Europe, creating new markets and securing the existing gas supplies from political or social upheavals. Energy will be one of the key vectors on which trust between the parties should be built upon.
The Role of the Caspian Basin
The Caspian Basin is endowed with a considerable amount of proven gas reserves. The region has an important gas export potential towards Europe, currently untapped by its “landlocked” position. Created under the Soviet era, the gas system of Turkmenistan, Kazakhstan and Uzbekistan had been designed to supply Russia. As a result, these countries remain dependent on Russia for their gas exports. Gas imports from the Caspian Basin could help Europe in diversifying its portfolio of gas supplies. However, to directly export gas to Europe, Caspian countries would need either to have access to the Russian gas system under fair TPA conditions, or to develop alternative routes. In this sense, gas infrastructure is a major topic for the area. All Caspian countries are engaged in a number of competing pipeline projects, hoping that at least some of them would become a reality. The major potential gas suppliers for the “Southern corridor”, Turkmenistan and Azerbaijan, have expressed several times in the recent past their availability of supply Europe with substantial gas volumes. Over the last months, the EU has been engaged in a regular dialogue with the two countries. Given the political attitude of these states, the EU must “speak with one voice” in the region. In this sense, the EU should firmly implement the path already initiated with the mandate accorded on September 12, 2011 by all 27 Member States to the European Commission to negotiate a legally binding treaty between the EU, Azerbaijan and Turkmenistan to build a Trans Caspian Pipeline System.
Figure 2: Southern corridor gas pipeline projects
Although the high level of uncertainty on the demand side, natural gas could well continue to play an important -and even increasing- role for some decades to come. In fact, while gas used to be the “fuel of choice” over the last two decades, it could become the “fuel of consequence” during the next two decades. With other alternatives (i.e. the nuclear renaissance, a very strong penetration of intermittent renewables, coal with CCS) all facing problems of their own, it could well be that gas turns out to be the winner for some time to come, thus realizing the “Golden age of gas” recently predicted by the International Energy Agency. However, in the case of Europe the fulfillment of this prophecy will mainly depend on two points: (i) the availably of carbon capture and storage technologies at large scale: natural gas has no future in the long-term EU energy mix unless it is fitted with viable CCS technologies; (ii) the signals that the EU will provide on the future gas demand: any action in this direction would be essential in order to facilitate investments -both internally and externally- thus contributing to the reinforcement of the overall EU gas security of supply architecture.
A new EU gas security of supply architecture, Claeys & Casteels