Natural Gas Diplomacy in 2015: "Very difficult, indeed"

When Professor Jonathan Stern, Chairman and Senior Research Fellow at the Oxford Institute for Energy Studies, speaks about the geopolitical issues surrounding natural gas in Europe, people listen.

In an exclusive interview with Natural Gas Europe at the European Gas Conference 2015 in Vienna, Austria, Prof. Stern offered how he sees the state of natural gas diplomacy at the beginning of 2015, describing it as, “very difficult, indeed.”

He explains, “We have a very difficult political situation with the Russian because of Ukraine, possible imposition of additional sanctions, which means that it's very difficult for the two sides to even talk to each other about gas, let alone agree anything with each other.”

We've repeatedly heard the call to de politicize natural gas, that it should be a business transaction and not a political one – how viable is that?

It's not possible. People who say that are right, it should be like that, but it's not like that, because the way it is perceived in Europe buying gas and indeed talking to the Russians about buying more gas in a political context signifies that somehow what Russia did in Crimea and is alleged to be doing in Ukraine is okay. The diplomatic view is, the only way to indicate to the Russians it's not okay is to refuse to talk to them on these subjects.

A couple of years back we had spoken to you, Prof. Stern, and you had expressed your opinion that South Stream would definitely be built. Given the recent announcement of the project's demise, how do you see this in hindsight?

In hindsight, it was looking difficult from a regulatory perspective before the Ukraine crisis. What the Ukraine crisis did was to make it impossible, because again, from a diplomatic point of view, to have allowed South Stream to go through, to have made a special regulatory case for South Stream – which was entirely possible, incidentally – that would have seemed like Europe was saying “okay, we can conduct normal business with the Ukraine crisis going on,” and that became completely impossible, so what the Russians finally accepted was, “okay, we can build this line, but we may never be able to put gas through it.” And, of course, given the cost of doing that, it was completely unacceptable.

The ironic thing that we've discussed in our recent paper is that we think for the Russians this has actually been a very good thing for them, and they've now arrived at a gas export policy which we think is far more logical for them than the one they had before.

Gazprom has announced that it would like to shut off the gas supplies running through Ukraine in two years. How realistic is that?

At the end of 2019, the long-term contract for transport through Ukraine runs out, so from 2020 onwards there is no contractual relationship which would require them to put gas through Ukraine. Our work suggests that even with the Turkish pipelines, they would still need to get 30-50 BCM – in other words between a quarter and a third of the gas they send to Europe – would still need to go through Ukraine.

So we don't think it's realistic for them to say, “we're not going to put gas through Ukraine anymore,” just as we think it's unrealistic for the Ukrainians to say, “we're not going to buy gas from Russia anymore.”

Given the tense situation between those two countries, how much of a surprise is it to you that we have not experienced a shut-down this winter of gas supplies to Central and South-eastern Europe?

I think the EU and former Commissioner Oettinger did a marvelous job in getting the winter package in place, and that was a very good way of preventing a crisis. And, of course, we've had no significant cold weather this winter, so that was very helpful as well.

But it is really good that we've avoided a crisis; we've got so many other crises going on around Ukraine.

Going forward, what do you think will be key to ensuring the secure supply of gas to those regions dependent upon a sole source of gas?

The direct pipelines to Turkey would be very helpful in creating another corridor for Russian gas to reach those countries.

It really depends on how you see the Ukrainian situation evolving, and the Russia-Ukraine political situation. At the moment, things are absolutely terrible – people are dying, being forced from their homes, obviously all considerations of gas are rather minor when you think about those kind of issues.

But if we think about this in the longer term, I still hold to the view that, despite what Russians say and what Ukrainians say, the infrastructure is there, we will see gas flowing through it for a long time – not nearly as much gas as we have in the past, but we will see significant volumes of gas, both flowing to Ukraine and through Ukraine to Europe.

If there is gas arriving at the Turkish-Greek border, how will the EU need to react to capitalize upon it?

I don't think that Europeans will respond to the idea that they need to go and get gas from the Greek border. If you look at South-eastern Europe, there are no countries in that region that use more than a few BCMs of gas a year, so it's the last place that you want to be delivering tens of BCMs.

Where we need Russian gas to be arriving is in the center of Europe, because that's where the big demand is. Arguably, Italy needs to get gas, but the Greek border is not the best place for it to get gas either.

What will happen is a mix of contractual issues: in other words, Gazprom's long-term contractual obligations to deliver to certain countries and the real economique of where we need the gas. Therefore, what I think will happen is we will see two lines to Turkey – that will take care of Turkish demand and South-east European demand; other demand will depend on a number of other issues, in particular how the buyers see their need for Russian gas and the route through which they want to take it.

-Drew Leifheit