Russia’s Gas Exports to Europe: New Challenges and Opportunities

February 3, 2012

 

The main takeaway from the panel was that the seemingly obvious “truths” about the global gas market are often more ambiguous than they seem.

Take complaints about the high price of Russian gas to Europe. As Gazpromexport’s Sergei Komlev pointed out, Germany is spending EUR23 bln per year on subsidies for renewable forms of energy, such as solar and wind power – more than double the sum it spends on Russian gas. Clearly, energy security and the desire to diversify into cleaner forms of fuels – what Andrei Konoplyanik labeled “methanophobia” – are coming at a price. Komlev claimed that it would be cheaper for Europe to meet its emission goals by relying more on gas. But as Tatyana Mitrova pointed out, the environment may not be the foremost concern anyway. Germany, the most vocal clean energy champion (and the same country that spends EUR23 bln per year on subsidies for renewables) is building 10 “dirty” coal plants against just one that runs on gas, as the so_called dark_spark spread – the difference between coal_fired and gas_fired profitability – has approached recent highs.

Or consider the excitement over new and unconventional sources of gas. Fatih Birol expects that in 10 years, the newcomer Australia will overtake Qatar as the world’s biggest LNG producer. The US and Canada have seen shale production skyrocket, and China might be the next to take advantage of the new technology. But as NOVATEK’s Mark Gyetvay pointed out, Australian LNG is very expensive compared with conventional gas sources. Meanwhile, the Energy Information Administration in the US last week downgraded the country’s gas reserve estimates, while in Poland – which boasts the third_largest share potential in Europe (curiously, after Russia and Ukraine) – the quest for shale has so far resulted in dry holes. Nevertheless, as Tim Lambert demonstrated, the shift in supply and demand across geographies will nevertheless cause the world to move from conventional gas deliveries toward LNG. Sluggish demand in Europe, oversupply in the US and precisely the opposite dynamics in Asia will assure a pull for LNG deliveries to the Pacific region.

Gazpromexport’s Komlev believes this oversupply of shale from the US is driven by the fact that producers have hedged the price, while the financial institutions sitting on the wrong side of the hedges can continue to do so because they know they will ultimately be bailed out by the long-suffering US taxpayer. In the US, as in Germany, it is government interference that is directly or indirectly skewing the market, Komlev said. Whether this is true or not, it is curious that the current debate on gas involves the Russian state-owned behemoth pitted against its Western customers in advocating for the free market in their countries.