For those in Brussels who want the US to ride to Europe’s rescue and provide an alternative to Russian gas, Charif Souki’s words will have come as something of a disappointment.
Mr Souki, chief executive of Houston-based Cheniere Energy, which is due to become an exporter of natural gas next year, was asked if his company could reduce Europe’s dependence on Gazprom, the Russian gas group.
Natural gas import dependency on Russia
Natural gas import dependency on Russia
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“It’s flattering to be talked about like this, but it’s nonsense,” he said. “It’s so much nonsense that I can’t believe anybody really believes it.”
His words came at a sensitive time. After Russia annexed Crimea in March and the west began imposing sanctions on Moscow, Europe was suddenly forced to face up to the extent of its dependence on Russian energy exports.
Concerns about its exposure increased in April, when Vladimir Putin, Russian president, warned that Russia might halt gas supplies to Ukraine unless action was taken over Kiev’s unpaid bills. The warning came after Gazprom almost doubled its price for gas to Ukraine.
Ukraine, the key transit route for Russian gas flowing into Europe, looms large in the continent’s energy equation. Russia sent some 155bn cubic metres (bcm) of gas into Europe last year, some 30 per cent of overall demand, and more than half of that – 82bcm – passed through Ukraine.
Brussels has made it a priority to diversify its gas supplies, but Europe’s options are limited. In the short term, it is prepared for a gas cut-off. As of mid-April, the 28 EU member states’ stores were 48 per cent full, with 38 bcm of gas – more than usual for the time of year following a mild winter.
Also, new interconnectors between European countries have made them more resilient. Connecting pipelines have been built between Romania and Hungary, Hungary and Croatia, Slovenia and Austria, and Poland and the Czech Republic. In late March, the leaders of Hungary and Slovakia inaugurated their own connector.
“Reverse flow” pumps have also been installed that allow gas to be pumped west to east. Germany’s RWE and Polish state company PGNiG supplied small volumes of gas to Ukraine in this way last year, and talks are under way to provide Ukraine with gas from Slovakia as well.
Such infrastructure is of little help to countries almost totally reliant on Russia, such as the Baltic states. They, too, have attempted to diversify. Lithuania has built a $330m floating liquefied natural gas (LNG) import terminal that will start working by the end of the year. Poland is also due to complete a large LNG terminal this year.
Such ventures reflect the hope that Europe might be able to replace some Russian gas with LNG imports. But this would mean a big change in current trends. Europe was badly hurt by the 2011 Fukushima nuclear disaster, which led Japan to swap to gas-fired power generation and signalled a move of LNG cargoes from Europe to Asia. Last year, Europe’s net imports of LNG were about 48 bcm, the lowest since 2004, and well below the 90 bcm peak in 2011, according to BG Group.
If Europe wants more LNG, it will have to pay for it. The continent spends about $11 per million British thermal units for gas, while in Asia, LNG fetches about $15 per mBTU.
“LNG is not a particularly cheap insurance policy,” says Howard Rogers, director of gas research at the Oxford Institute for Energy Studies.
Upward pressure on price could be mitigated by an improving supply picture, however. Wood Mackenzie, the consultancy, says 150 bcm of LNG production capacity is being built globally, and not all will go to Asia.
In particular, substantial LNG exports from the US would make European consumers drool. Cheniere, which is building an LNG export terminal in Louisiana, has committed some cargoes to Asia but also struck deals with European companies such as BG and Centrica of the UK.
The US could emerge as a big exporter of LNG. About 28 export projects have been proposed there, with more than 350 bcm of capacity, but most estimates suggest a fraction of those will be built. BG says roughly 90 bcm of export capacity will be in place in the US by 2025. The expectation is most of that will go to Asia.
Europe could try to replicate the success of the US shale boom and develop its unconventional gas reserves. But progress has been slow: some countries, such as France and Bulgaria, have banned hydraulic fracturing processes, and while countries such as the UK are eager to exploit shale reserves, public opposition is strong. In Poland, thought to have enormous reserves, drilling results been discouraging, and some companies have given up.
Meanwhile, reducing demand would cut Europe’s gas imports. Building more renewable generating capacity would have a similar effect. However, the eurozone crisis and concerns about rising energy costs have triggered a rethink of the cost of renewable subsidies, and several EU countries are paring back their support. That will slow the construction of wind farms and solar parks.
For analysts at Bernstein Research, all this leads to one clear conclusion. ”We continue to believe Gazprom’s most profitable market is safe,” they wrote in a recent report. “Like it or not, Europe is stuck with Russian gas.”
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Oil: Important policy questions hang over North American self-sufficiency
North America’s reliance on oil imports to supplement its historic deficit in domestic output is diminishing, writes Michael Kavanagh.
As US President Barack Obama said in this year’s State of the Nation address: “America is closer to energy independence than we’ve been in decades.”
This, combined with the prospect of the continent emerging as a key supplier of gas and coal for export, is creating radically different scenarios for the role the US might play in world energy markets in coming decades.
It is also creating an alternative ranking of leading economies that are most vulnerable to supply shocks and price rises for imported fuels.
A report by consultancy Wood Mackenzie predicts the continent will be energy-independent by 2020, before moving into a net exporting position; and BP, the oil major, has said that North America could switch from a net importer to net exporter of energy by 2018.
Both political doves and hawks have suggested that a possible result may be that the US will be less interventionist abroad.
But Skip York, an analyst at Wood Mackenzie, says if the continent does move more towards export, the US will still be left playing a key role in world energy markets as other economies become more prone to energy shocks.
But the path towards overall self-sufficiency and export may not be smooth. For example, although the glut of shale gas available to US power generators has prompted a diversion of coal for export to Europe, it will be some years before liquefied natural gas can be exported in scale from the US.
A revival in conventional oil output from the Gulf of Mexico, with growth in shale and tight oil production and oil sand projects, is narrowing demand for oil imports.
However, Mr York notes, the US is likely to remain a net importer of crude oil – albeit at significantly reduced levels – for the foreseeable future.
This picture of increased home production destined for domestic – and increasingly foreign – consumption, will reshape, but not redefine, geopolitics, says Wood Mackenzie.
It may even align the strategic objectives of the US and energy-hungry states such as China in areas such as the Middle East.
Companies in the sector are also predicting that global markets for energy will continue be marked by escalating demand for fossil fuels, as well as regional imbalances between production and consumption.
BP’s latest energy outlook, predicting global trends until 2035, suggests Europe’s existing energy dependence will increase. However, it also paints a picture of stable energy consumption in OECD countries, in part because of increasing energy efficiency, in addition to moderating consumption in developed economies.
Risk, it appears, is shifting east.
China and India lead the list of economies driving a worldwide increase in demand, as Asia emerges as the world’s dominant energy importing region.
A pattern of strong growth in energy consumption in emerging economies is expected to lead to an overall increase in energy demand of more than 40 per cent between 2012 and 2035, BP says.
And, in spite of attempts by some industrialised countries to curb greenhouse gas emissions, oil, gas and coal are still expected to provide the bulk of the world’s energy source 20 years from now.
As the BP projections show dioxide emissions will rise by 29 per cent over the same period, it would seem sustainability – rather than the reliability – of supplies is likely to be a big part of assessing future risks.
However, the US’s role as a potential supplier, rather than importer, of energy raises more questions for policy makers than how much surplus energy supplies should be reserved to boost homegrown industry or directed for sale abroad.
As Mr York says: “Do you want to supply to economically competing economies?
“If they are importing their energy, do you want them to be dependent on our energy? Are you better off making them dependent on us? They are going to be dependent on someone, is it better for them to be dependent on us?”