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The objective is to understand the role of gas in important areas such as the EU Energy Union and the post-COP21 EU decarbonisation path, and to study the complementarity between gas and renewable energy. Another important stream of research focuses on energy and gas security of supply in Europe through the analysis of the new geopolitical and market dynamics of the EU gas supply architecture. Finally, considering the key role of infrastructures in the development of energy markets, it is essential to explore new avenues for European energy infrastructure financing and the potential role of institutional investors in this sector.

Italy’s energy future is increasingly related to the European energy system as a whole. This trend follows two parallel lines: the first concerns the gradual alignment of energy regulations and policies also in the framework of the emerging EU Energy Union, and the second relates to the progressive construction of intra-European gas and electricity interconnections. Taking into account the important role of gas in the European energy system, also considering the EU decarbonisation path, this research area will primarily focus on the future prospects of European gas markets. This analysis will integrate the various elements of the European energy system, including energy mix, infrastructure, regulation and policy.

These are highly interesting – and challenging – times for the European energy industry. In fact, different drivers of change are rapidly converging to reshape the traditional structure of the European energy market, opening up new challenges and opportunities for the future.
While most European research centers on energy focus primarily on the electricity sector and on energy regulation, very few of them deal with European gas matters in an international perspective. One of the priorities of the FEEM Research Programme on Energy is thus to make original contributions in this field.
In this framework, the research project will provide an in-depth comprehensive and integrated analysis of European gas markets on the basis of an approach combining three mutually-supportive analyses: the analysis of the European gas demand, the analysis of European gas supply and the analysis of European gas infrastructure financing.

1) The role of gas in the future EU energy mix in light of the EU decarbonisation path

Various factors are increasingly putting pressure on gas, particularly as far as its role in EU power generation sector is concerned. The increasing share of renewables in power generation, the increasing level of energy efficiency and the increasing competition of cheap coal made available to Europe in the aftermath of the US shale gas revolution are, all together, squeezing the role of gas in the EU energy system. Taking into account the important role that gas can play in the EU decarbonisation, the issue of carbon pricing should be reassessed at the EU level, in order to favour the less carbon intensive energy sources. In the post-2020 horizon, substantial baseload capacity in Europe will need to be replaced due to progressive nuclear phase-out in several countries and due to the progressive shutdown of old coal power plants. In addition to assessing the potential of gas in its traditional markets, new gas markets (e.g. transportation sector) will also be explored. The future role of gas in the energy mix needs thus to be better assessed, also in light of the fact that over the next decade most existing oil-indexed gas contracts will expire and will need to be renewed, probably based on gas-to-gas competition. This analysis will be carried out by using a scenario approach combining both quantitative and qualitative tools.

2) Towards a new EU security of supply architecture

The 2014 Ukraine crisis and the related political standoff between the EU and Russia have paved the way for the emergence of a new discussion at the EU level about security of gas supply. The project will provide a critical and realistic assessment of the future EU gas strategy and its implementation options in the aftermath of the Ukraine crisis. Furthermore, an in-depth assessment of the future evolution of the domestic EU conventional and unconventional supply potential as well as the supply potential and strategies of Russia, Norway, Algeria, the Caspian and Middle Eastern regions and different LNG supplies to Europe will be carried out. Russia, Europe’s largest gas supplier, is presently redefining its strategy towards Europe and will certainly continue to be also in the future a very important supplier, though possibly with a different strategy priorities. Depending on the evolution of the overall EU-Russia geopolitical relations, different cooperation scenarios in the field of energy, and more specifically gas, between Russia and Europe can be identified. In this framework the research project will formulate a set of various policy options to enhance the EU-Russia energy partnership in the various scenarios. Notwithstanding its primary role in the EU gas market, the future prospects of Norwegian gas production and exports are little explored in the existing literature. This is particularly surprising, as the future Norwegian exports to Europe are generally taken for granted even if Norway will need to make significant new discoveries in order to maintain its output at today’s level after 2020. A different analysis needs to be applied to Algeria, a country which presents a more comfortable reserve level but which faces potential production problems in some of its major existing fields. Moreover, Algeria is still relatively underexplored both as far as conventional and unconventional gas resources are concerned. The key problem in Algeria relates to governance constraints, which actually hinder the development of the gas resource potential. As far as Caspian and Middle Eastern regions are concerned, the project will develop a more realistic and accurate analysis of the future prospects of the Southern Gas Corridor. Finally, considering that LNG might represent the most important supply diversification option for Europe, the research project will analyse the future prospects of this market. This includes on the longer-term also a contribution from sub-Saharan Africa to Europe (see Annex III). In particular, the role of LNG in Europe will be assessed both under the external (i.e. global market dynamics) and internal (i.e. Europe’s gas interconnections) dimensions. Acquiring a better and more realistic understanding of Europe’s diversification options and potential is a precondition to develop Europe’s future energy and gas strategies.

3) New avenues for European gas infrastructure financing

Finally, the most important and cost efficient way to increase energy and gas security of supply in Europe is to have a well-functioning and integrated internal gas market allowing to easily ship gas from one part of Europe to the other. This reduces the impact of potential supply interruptions as well as the possibility to exercise commercial market power. For this, physical interconnections need to be in place. However, recent experiences have shown that strategic trans-European energy infrastructure projects defined by European authorities to increase overall EU energy security do not always match to commercial priorities of private investors. In this framework it is particularly important to explore new avenues for European energy, and notably gas, infrastructure financing. The research project will specifically focus on the role that institutional investors (i.e. pension funds, mutual funds, sovereign wealth funds) might potentially play in the field also with the support of new investment vehicles being settled by the European Commission (i.e. the so-called “Junker Fund”) and the European Investment Bank.

Among others, this project will thus address the following issues:

  • The role of gas in the future European energy mix in light of the EU decarbonisation path
  • The European conventional and unconventional domestic gas production outlook
  • The European gas strategy after the 2014 Ukraine crisis: The role of the EU Energy Union
  • The new Russian gas strategy towards Europe following the Ukraine crisis
  • The future of Norwegian gas in light of the country’s intergenerational dilemma
  • The future of Algerian gas between resource abundance and governance constraints
  • The outlook for Middle East, North Africa and Caspian gas export potential to Europe
  • The future prospects of the Southern Gas Corridor
  • The outlook for global LNG markets and their potential impact on the European market
  • Financing the future European gas infrastructure: What role for institutional investors?

This project is strongly related to the other project Gas Talks which consists of a series of successful annual close-door brainstorming workshops called FEEM Gas Talks. These initiatives will provide the opportunity to disseminate preliminary results of the research to high-level stakeholders and to enrich the final overall research.