Energy Security in South-Eastern Europe: Ukraine as a catalyst?
There's an old saying in Azerbaijan, “Oil is about money; natural gas is about politics,” according to Mr. Vasile Iuga, Country Managing Partner, PwC Romania, who spoke at the Romania Oil & Gas conference in Bucharest, Romania.
He said that it should not be taken too literally, as these aren't exclusive categories.
“The saying reflects the fact that while for oil there is a global, competitive, well functioning market, for gas this is less the case – there is no such thing as a global gas market,” he explained, offering that the gas market is fragmented into three large markets: Europe, America, and Asia, with significant differences in price.
Oil, he said, is delivered primarily by ships using shipping lanes, whereas gas is delivered for the most part using land-based pipelines that are very expensive to build and with little flexibility. LNG's primary destination, meanwhile, are the East Asian markets.
“On the eve of World War I,” recalled Mr. Iuga, “the then first Lord of Admiralty, Winston Churchill, made a historical decision to shift the fuel of the Royal Navy from coal, which was mined from Wales, to oil, because oil had a higher calorific power, therefore making British ships faster than their German counterparts.”
This meant that the Brits went for oil in Persia, he said, and as a result energy security became an issue of national security at that time. Churchill's initial paradigm, said Mr. Iugu, was “variety and variety alone.” Later, he explained, this also embraced other factors like diversification of supply, or the need for integration in a stable market.
Energy security, he noted, is a key topic on the EU agenda, to avoid shortages and to foster the competitiveness of the European economy. Western Europe, he said, and to some extent Central and Eastern Europe enjoy the benefits of a large, stable and competitive market, but this was not the case for Southeast Europe.
“Countries in the region are dependent upon gas imports from one supplier only,” Mr. Iuga remarked. “As such, countries in southeast Europe are isolated and captive markets, which transforms gas into a highly strategic and political commodity.”
Additionally, gas imports, he said, are based on long-term contracts indexed to the price of oil, with take-or-pay clauses and prohibition of re exports.
He offered, “This means that countries in the region are vulnerable to shocks in supply. Recent stress tests conducted by the European Commission, taking into account various scenarios for gas supply disruption, either from Russia or transit disruptions through Ukraine, confirm the fact that the most vulnerable part of Europe is the area where we live.”
Mr. Iuga showed two scenarios on a slide: 1) the potential impact of transit through Ukraine, and 2) the potential impact of a complete stop of Russian supplies.
“Such disruptions in mid winter can have significant economic, political and social implications, therefore the issue of gas security is crucial for the countries in our region.”
This, he said, is not just about the Southern Corridor, as initially it will only deliver 10 BCM/a to consumers in Europe. “If my memory serves me well, total gas consumption in Europe is 400 BCM/annum. Yes, the Southern Corridor is part of the solution, but it's not the solution itself,” he commented.
How, asked Mr. Iuga, can supplies be diversified in southeast Europe, how can an interconnected market to Western Europe be built and what transport routes are available?
He offered his views on the Black Sea: “Despite the occasional setbacks which are political and technical, the Black Sea continues to attract interest from international oil companies and this includes the supermajors, the likes of ExxonMobil, Chevron, Shell and Repsol to name only a few.”
According to him, some experts compare the Black Sea's potential with that of the North Sea. While North Sea reserves are dwindling, the Black Sea may be one of the last frontiers for deep sea drilling for oil and gas – potentially great news for the countries in the region.
Potential deepwater reserves in the western part of the Black Sea could amount to up to 2.6 billion boe, he said, while off the coast of Crimea in the east it could be up to 5 billion boe.
“We are still in the early stages of exploration in the Black sea,” he explained, recalling that over 30 years ago the first 70 wells drilled in the North Sea had been dry. “In the end, the oil and gas produced in the North Sea at market prices equals $15,000 billion.”
He pointed out that fewer than 100 exploratory wells have been drilled in the Black Sea, but admitted that some time is necessary before reserves are confirmed and the gas is delivered to market. Mr. Iuga rattled off the bid rounds and agreements entered into with operators in Bulgaria, Romania, Turkey and Ukraine.
“The initial enthusiasm should be viewed with caution,” he explained, “as there are significant risks attached to the gas in the Black Sea, as there are potential disputes over the exclusive economic zones leading to international arbitration and delays in the production of gas.”
There are also significant uncertainties regarding the legal status of Crimea, he noted. Significant investments are also required as well as long lead times to production, 5-7 years.
“Which means that gas from the Black Sea will not reach the market before 2018-19,” he explained, because of the need to develop significant infrastructure in the region to transport gas to the market, as well as corrosion challenges and unknown topography of the seabed in the Black Sea.
Other countries which have the potential to become suppliers, according to Mr. Iuga, include Turkmenistan, Iraq, Iran, Cyprus and Israel.
He offered, “The Black Sea region could be the destination of LNG supplies using existing LNG terminals in Turkey or newly built terminals: the Greek one, Croatian one and the potential on in Constanza if the Agri project is to go ahead.”
How will it be possible to transport gas from the Caucasus region or from the Middle East regions into south-eastern Europe? It will be key, he said, to interconnect existing infrastructure with the Western European network.
“Turkey plays a critical role in this,” he remarked. “The geographic location gives the country a crucial role for transit in addition to Turkey being a very dynamic gas market.”
Turkey, he explained, is supplied by a number of pipelines, but he chose to comment on one, Blue Stream.
“This links Turkey with Russian exports, it's operated by Gazprom and ENI, annual capacity 16 BCM/annum. There are plans to extend or to increase the current transported quantities to the maximum limit and to build another pipeline, which would be Blue Stream II,” reported Mr. Iuga.
Of South Stream, he said, “Of what we know, it is a 'hot potato', but, if finalized, would bring 63 BCM of gas into Europe, and the financing is in place, but the political disputes need to be resolved.”
Regarding other potential projects that could be developed, he mentioned the Aegean-Baltic Corridor, connecting seven countries form Greece to Poland, including reverse-flow capabilities; AGRI, and White Stream.
The feasibility of these projects needs to be assessed, he admitted. Meanwhile, Mr. Iuga commented that such energy projects are not immune to risks. Turkey, he recalled, had offered up an alternative route to South Stream running through Bulgaria; meanwhile, he said there are questions about the profitability of TANAP, and the ability to build the pipeline over mountainous terrain in Greece and Albania.
He spelled out what was necessary in order to bring natural gas from Iran, Iraq, Cyprus and Israel to Europe: “A number of longstanding, bitter disputes and disagreements need to be resolved, and these are of a political nature.”
A crucial element for natural gas supplies in south-east Europe, according to him, is the interconnectors between the countries and between the region and the Western European network system. He noted that a number of interconnectors had been mentioned at the conference, such as Greece-Bulgaria, Turkey-Bulgaria, Romania-Bulgaria, Bulgaria-Serbia, Romania-Hungary and Romania-Moldova.
“What is interesting is that, in the light of increased interest of the European Union for gas and gas supply, EU funds are available and the EU is prepared to provide support in order to implement accelerated programs for the development of the projects – the so-called 'projects of common interest'.
“Countries in our region are in a race against time to improve the security of gas supplies, and in this respect cooperation is needed; the track record of cooperation in the past was poor, and even in the recent past.”
Just think back to the Nabucco saga, he said, the TAP/TANAP developments, or the current conversation around South Stream.
Mr. Iuga concluded: “Everyone in our part of Europe wants to be an energy hub: Turkey naturally, Bulgaria naturally, Romania naturally, so probably cooperation would be the lesson and the future of the gas supply security in the region – in this respect, this is a moment of change in the paradigm, which would focus on long-term cooperation and coordinated efforts in order to create a functioning regional market. In this respect, maybe the Ukraine crisis can be a catalyst and represent and opportunity for the countries in our region to learn the lesson of cooperation.”
-Drew Leifheit