Europe's Reliance on Russia to Increase
There are no significant alternatives to Russian gas, says Russell Gamadia, Natural Gas Consultant at KBC Process Technology. In an interview with Natural Gas Europe, the former trader explains why US LNG and Norwegian projects are not game changers - those projects are too expensive. "Europe’s gas deficit is clearly increasing... Russia will be there," comments Gamadia. According to him, technology is the only card in European hands. In this gloomy backdrop, we spoke about a change in the way markets assess oil and gas companies, we discussed long-term contracts and the role of small firms.
Experts and industry participants said that the focus is switching from pure output to a mix of production and financial performance. In other words, in a moment of decreasing output of mature fields, companies’ performance is more likely to be assessed through a mix of financial indicators rather than on output only. Do you agree with the idea that financial indicators will be more important for the market?
I agree to a certain extent, because I think that a lot of these upstream companies have been really challenged. They have been under huge pressure as it has been all about reserves. As soon as the market has seen a decline in reserves, it has not been great for share prices. You see that many companies have been shedding assets. At the same time, the focus has been changing. Things are changing. In a sense, I agree with what you said. There is going to be more focus on financial indicators.
In a moment of so-called financial stress, oil and gas companies remain among the top companies in the world. In terms of revenues, six of the top ten companies and ten out of the top twenty companies are oil and gas companies. Do you think things will change? Do you think that big companies could lose some clout, with small firms emerging and taking advantage of the opportunities left?
The crude price has been driven by the increase in the demand for energy. At the same time, the market remains tight, with significant geopolitical risk factored into the crude price. The world has been able to live with Brent crude prices around $110, even through the period of slow recovery after the global recession. Going forward, a lot of the new oil and gas will be technologically challenging to recover, and the majors/larger companies are best positioned for this. The IOCs have been growing in terms of their role, but I do see room for the smaller players. In the U.S. for example smaller companies have taken advantage of the shale boom.
In this context, what is your understanding of long-term contracts?
Long-term agreements and contracts will always be required to support the large investments required for new gas infrastructure. New LNG supply projects would not have a chance of gaining final investment decision (FID) without a long term contract indexed to oil. At the moment in Europe, everybody is trying increase the spot share of their long term contracts over oil product indexation, but long-term contracts remain the backbone of the market, and we may well find that the gap between spot and oil-index prices decreases going forward, as LNG is increasingly directed towards Asia.
Some experts say that the Baltic countries are the ones with the highest potential in Europe in terms of investments in infrastructures, do you agree? In other words, do you see a radical change over there?
No, I don’t think it is a game changer. It is not on the top of my list of priorities in terms of changes.
What are the areas you are more focused on in Europe?
The key development is the South Stream project. Ultimately, European demand will be peaking up in the medium to the longer term. How are we going to supply that? If we look at the LNG market, things are very tight there. While in Asia there is not a real alternative to LNG, European infrastructures are already there and Russia has the gas.
In a sense you don’t see any alternative to Russian gas, right?
A lot of people consider US LNG, but then again I would argue that demand in the US is going to increase. They have cheap gas and everything is heading that way. Demand there is going to rise rapidly.
Norway’s recently announced that it could soon open the South East Barents Sea to oil and gas companies. Do you think it is good news for European energy security? Would it change anything?
It depends on the time frame, but then again these projects are potentially quite expensive.
Some experts said that the UK government has been pushing and pushing for shale gas, but it is not properly supporting offshore activities. According to them, offshore production could increase in the next 10-15 years, rather than decrease as it happened in the last years. Are there mature fields that can be still used in the North Sea? What is your take on this?
We have had a change in the regime. I think there has been increased activity. In the mid decade, we are likely to see at least a temporary flattening of the supply of the North Sea. There is now production coming online in 2015 and 2016 from Total’s fields. But in general it all goes back to technology. The easy-to-get resources have been already exploited. There are reserves, but for now they are too costly.
What is your understanding of reserves in the Mediterranean Sea? Do you see any room for significant increase in production? I am referring to the Adriatic Sea. In other words, do you see any changes in offshore activities off the coasts of Croatia, Montenegro, and even Italy?
Some potential is there, but again I would not put it on the top of my list of game changing activities.
Remaining in the Mediterranean Sea, do you think that the pull-out of Woodside from the Leviathan development indicates problems with regulation and policies? Do you see any short-sighted approach to gas production?
We have seen these changes in direction before. Many people would say that these changes in regulatory regimes destabilise, as you can never get long term objectives. These changes destabilise for the following 3 to 5 years. But I clearly see a potential in that area.
So you are basically saying that European reliance on Russian gas is set to increase?
Yes, I think it is going to increase. Another key element that I did not mention yet is that in the Netherlands they have various issues. The government has now revised down the possible peak output. Getting forwards, this fact is going to put increasingly a strain on Europe.
Coherently with what you said, the Energy Information Administration foresees that the Netherlands will become a net importer of gas in the coming decade. This confirms your point of view right?
Yes. Ultimately, when you consider all these facts, Europe’s gas deficit is clearly increasing.
What’s the role of the European Union in this framework? Do you see any room for the EU to support particular projects? In case, in which area?
Yes. The top priority is always going to be to try to bring new gas into the market, which isn’t Russian. Last year, we had the Final Investment Decision on the TAP pipeline, for example. This will bring 10 bcm of Azeri gas to start up with. But again, in the very long term, with the growing gas deficit of Europe, Russia will be there. The point is that the infrastructures are already there. All these infrastructures are hugely expensive.
Do you think that there could be any game changer. I am particularly referring to technology. Will eventual adjustments or technological revolutions be enough to make the most of mature fields, for example in the offshore fields in the North Sea?
Yes, I have always been a big believer of technology. Technology will always surprise. Not so long ago, the US has spent a lot of money building the import infrastructure. Look at what happened now with the shale gas revolution. This gives you the classic example. You cannot discount these things. I believe in technology.
Sergio Matalucci