EU & South Stream: Compromise Unlikely
Europe is indeed dependent on Russia for its energy supplies, but so is Russia on Europe as its main market, especially for natural gas. This co-dependence limits the room for maneuver for each. In the medium-term Russia may well regret threatening to use energy as a weapon in the struggle over Ukraine, as there are clear signs, that the European Union is increasingly determined to further diversify its gas supplies, complete its internal energy market and eliminate Gazprom’s monopoly positions.
Even before Russia's seizing of Crimea and Russian forces' territorial incursions into Ukraine, the realization of the South Stream pipeline seemed problematic, according to Dávid Korányi, Acting Director, Dinu Patriciu Eurasia Center at the Atlantic Council.
“It's difficult to foresee how South Stream will evolve,” he says. “It's a function of the Ukraine-crisis and a possible political showdown with Russia, but also how the EU investigation against Gazprom will turn out in the coming months.
“It depends on the EU-Russian energy relationship as a whole," he continues. "Gazprom's business model in Europe will have to fundamentally change in any case.”
Mr. Korányi says this should all be seen in the context of the broader deteriorating relationship between Russia and the EU, which is not likely to grant South Stream third party access (TPA) exemptions as offered to Nord Stream earlier or to the Southern Corridor.
“Given the political circumstances, I don't see much flexibility in the Commission or in most member states to negotiate a deal that Russia has created that would provide exemptions in those countries. Russia will have to consent to EU internal market rules applying to itself and Moscow does not seem to be ready to do that. In the context of what is happening in Ukraine, there is an increased political willingness within the European Union to deliberately create a situation where South Stream will eventually be impossible to be built,” he offers.
Nord Stream, Mr. Korányi says, was seen as both strategic and commercially profitable by key European investors. “South Stream is not; during the building of Nord Stream it was peacetime between the EU and Russia. Now it is anything but.”
Meanwhile, he says he sees a resurgence of the activity of Russian actors to retain market share to keep and further increase their positions in Eastern Europe. “The monopoly supplier problem, the dependence problem, the higher prices – though the situation has improved in most countries as the EU internal market is slowly being completed - these issues have not been solved.
“In case of another cut-off of supplies through Ukraine, the Balkans, but also Central & Eastern Europe, will suffer,” he says. “Hence, to speed up supply source diversification is a must, through LNG terminals and through new pipeline routes.”
LNG is certainly an option even in the short term, he says, though it entails higher prices. He points out there is idle capacity in Western Europe to import LNG from existing suppliers such as Qatar or Nigeria. “The US cannot directly help Europe with gas supplies in the short term. US LNG won’t come online until 2015-16. But in the medium-term the allowing of unrestricted US NG exports to Europe would be a great contribution to overall efforts to diversify away from Russian supplies, even if the EU should be conservative about how much actual US gas will end up in Europe. The price points in Asian markets are currently far more attractive and will likely remain the preferred destination for US gas exports. Yet, simply by increasing liquidity on the global LNG markets, the United States could further improve European energy positions by enhancing the negotiating power of the buyers, especially those in Central Europe and the Baltics."
How much could the Southern Corridor change dependence on Russian gas supplies in CEE? It all depends on the time frame, he says.
“Again, it is not a short-term solution,” he opines. “But it will help, potentially big time in the medium- and long-term. The 1 BCM that the Bulgarian state-owned company contracted, and the ongoing talks to build the interconnection between Greece and Bulgaria that will enable access to LNG as well, will mean that Bulgaria, one of the most vulnerable of the CEE states, will be in a much better position by 2019-20.”
Other countries in the region may also benefit from the Southern Gas Corridor beyond 2020.
“Down the road, if you look closely at what the Azeris are doing and what SOCAR is doing and how prospective the other offshore Caspian fields are, then by the middle of the next decade Azerbaijan may have significant quantities of natural gas coming online for export, which could total up to 30-35 BCM.”
Then, Mr. Korányi says, there's the Kurdistan region of Iraq. “Mindful of all the political difficulties that surround that region the Kurdistan Regional Government (KRG) could also add significant quantities of supply into the Southern Gas Corridor. Gas from the Eastern Mediterranean gas could also make it to the Corridor.”
However, he says one key issue of concern is the Trans Anatolian Pipeline (TANAP). “It is unclear whether in its current form and ownership structure, it will it be an enabler or preventer of additional quantities feeding into the Corridor in addition to Azeri gas.
“Since Turkey's not a member of the Energy Community, the EU acquis is not applicable. This means that 3rd party access rules are not applicable. SOCAR will be in a controlling position – they'll be calling the shots. It would certainly make sense from a commercial point of view to allow for transit of Kurdish and/or East Med gas through TANAP a hugely expensive undertaking that could certainly benefit from transit fees. But politics could always complicate things.
“Shah Deniz gas will not exactly be cheap either," he adds.
"The price for Shah Deniz gas will be around $400-410/TCM, which is not significantly cheaper than Russian gas – in fact it is more expensive than some existing contracts with Russia. So while the Corridor cannot replace all gas coming from Russia even in an expanded form - and it will be quite expensive - its importance is still massive. Its gas will inject competition into all European gas markets that will blunt Russia's energy weapon.”
And what about emerging resources for the Southern Corridor like those from Northern Iraq? He says it's a function of TANAP. “In any case, most of the gas from the KRG will end up in Turkey, which will be the main consumer of Iraqi gas. It is onshore gas and will likely be considerably cheaper on the cost side than natural gas from the Caspian, or from the Eastern Mediterranean for that matter.”
In addition, according to Mr. Korányi, there doesn't seem to be much European activity towards luring Iraqi gas, in contrast to efforts for Caspian gas. “Of course there are the security issues and the political disarray in Iraq, in addition to the huge additional domestic energy needs and the ongoing standoff between Baghdad and Erbil over hydrocarbon revenue sharing and export policy, that will complicate gas exports.” he opines.
Still, there are very significant quantities of gas, he says, to the tune of 10-20 BCM.
“Even if KRG gas itself doesn't make it to Europe, then it could actually offset gas from elsewhere that could make it to Europe,” he adds.
Iran could also someday export its gas to Europe given that it was included in the original concept as a source for the Southern Corridor project. “It's not going to happen tomorrow, but I wouldn't exclude a scenario that a year from now this is something that could be more seriously discussed pending a resolution on the nuclear dossier. Iran certainly has the reserves to become a massive supplier to Europe”
Eastern Mediterranean gas, he says, is another prospect for the Southern Gas Corridor, but with many caveats. “The quantities are not huge for a start. Another difficulty there is that those export infrastructure solutions that are commercially the most viable are the most difficult politically.
"Commercially, one ideal solution would be to build a pipeline from Israel's Leviathan field to Turkey (possibly through Cyprus) and export gas to Turkey and feeding it into TANAP. That is a fast and cheap solution, but that pipeline should either cross the exclusive economic zone of Lebanon and Syria, or that of Cyprus. And if there is no settlement to the Cyprus issue, that's just not going to happen. Whether gas could be used to entice the parties to come closer on a settlement on the decades-old Cyprus issue is a complex question, but it is an option definitely worth exploring.”
Floating LNG, he says, would be the least risky option for East Med gas from a geopolitical perspective, "but it is a largely unproven technology, hence commercially risky. “As of now, all the options are still on the table, including using the idle LNG export facilities in Egypt, another commercially very attractive option.”
Drew Leifheit is Natural Gas Europe's New Media Specialist.