New Gas Sources for Europe: the More the Merrier

New sources of natural gas making their way onto European markets are virtually always a good thing, says Ambassador Matthew Bryza, who recently offered an exclusive interview to Natural Gas Europe at the 25th Economic Forum in Krynica, Poland.

A 23-year veteran of the US Foreign Service who's served both in the White House and the US State Department (most notably as US Ambassador to Azerbaijan), today Ambassador Bryza is Senior Fellow at the Atlantic Council, and heads the Energy Program at the International Center for Defense and Security in Tallin, Estonia.

Having been responsible for US-Turkish relations for 8 years previously, Ambassador Bryza (now resigned from government) has been living in Turkey for over 3 years and sits on the boards of several companies like Turcas, through which he's trying to help develop a natural gas pipeline from Israel to Turkey (with possible buy-in from Cyprus); he also sits on the board of a small UK-based upstream company in the UK; does academic work; and has his own joint venture with a Finnish company that responds to oil spills.

Ambassador Bryza adds, “And I'm getting more and more involved in helping US investors scope out ways to make LNG exports, especially from the northeast US, economically attractive. We all understand the geopolitical attractiveness, meaning Eastern Europe and the US government, but the challenge is to make sure those projects are commercially attractive. And I think that's doable now, and I want to be part of that,” he explains.

Given that sentiment, how prepared do you think the European gas markets are for taking up that LNG? Not that long ago, many said that because of the liquefaction and shipping costs, things just did not add up to be economic.

The numbers are changing and part of it is that the cost of gas in the ground is so low, especially in the northeast of the US, away from Henry Hub, but in the Marcellus field of Pennsylvania. Part of it is that the price differential between Europe and Asia has gone down quite a bit and it's important for gas exporters and desirable to have a portfolio of buyers so the European market now looks more attractive than the Asian market in many ways.

Another reason why natural gas imports from the US are becoming attractive is because of the growing realization throughout the European space that it would strategically beneficial – given all the troubles with Russia – if it could be achieved. So the Europeans and the EU I think have done a terrific job in the last 9-10 years in waking up to the urgency of diversifying its natural gas supplies and putting in place the regulations to allow a genuine market to be established for natural gas.

The market works – we see how well it's worked in terms of the natural gas trading hubs in Northwestern Europe, where you have liquid markets that monopolists can't manipulate it and that has given European consumers, in fact, considerable leverage to the point that they've been able to negotiate price discounts and even rebates from Gazprom.

Now, the European Union has also put in incentives, subsidies – in the form of the Juncker fund, and others – to encourage development of additional physical infrastructure: pipeline interconnectors that will allow or help move toward a single integrated market for natural gas in Europe, where free market forces of supply and demand will of supply and demand will determine prices. And I think in that environment US LNG will feed in very well.

There will be times when US LNG – either on the spot market, or longer term prices – may be higher than what you may be able to get at a given time on a spot market in Europe, or from pipeline deliveries from Russia, but those lower prices from Russia are only available precisely because the Russian side knows LNG is increasingly available.

If you're an Eastern European consumer I think you will want to have a mixture: a portfolio of some LNG from the US for strategic reasons and long-term price reliability, some from the global market, and some piped gas from Russia. I think the European side is becoming increasingly well prepared to accept US LNG.

The one missing piece in my experience is that some of the biggest consumers are still afraid that if they move too quickly to procure US natural gas they'll anger Gazprom, who will somehow retaliate. I think that's a misplaced fear; I think market leverage works. But I think you could help some of the conservative large consumers of natural gas in Eastern Europe take the step they need to take if the Lithuanian or Polish governments were to come out and say “Purchasing LNG from the US is in our national interest.”

Overall, Europe's done a good job getting prepared. They just need to do a couple more things.

How do you see the addition of this new source of gas affecting gas relations and diplomacy between Russia and Europe?

I actually think this greater competitiveness that European consumers are displaying towards Russian suppliers is the best way in the long run to have a normal and constructive relationship with Russia. As long as the Russian side believes it has some monopoly leverage it's going to misuse it and generate tension in perpetuity with European consumers.

It's only when you close that door, when Gazprom knows it's got to behave like a normal market actor, that you will see much stronger relations between the two and you'll see Gazprom behaving as a normal company. That will be better for Russian consumers also, and it will be better for Gazprom.

There are great people at Gazprom – financiers, geologists, market experts, who just want to have a normal company, but they're constantly forced by the Kremlin to develop behemoths like South Stream that don't make any commercial sense, like Nord Stream in many ways. They want to be left alone by the politicians and just have a normal energy company. To me, that's the great quest that we're all after. When that happens, Russian-European relations will be much stronger and everyone will benefit.

With that in mind, how do you see the development of Nord Stream II? Is this just the latest move on the geopolitical chess board?

I think it's a huge mistake by European partners. It sends absolutely the wrong signal to Russia as many are concerned that President Vladimir Putin is thinking he's got no choice to get out of the box he's put himself in than to become more aggressive toward Ukraine.

By showing some daylight between the thrust of the EU sanctions policies and commercial partnerships, as Shell has just signed for Nord Stream, you're undermining the best leverage that the West has to convince President Putin that the costs of such aggressive adventurism outweigh the benefits.

I think it doesn't make sense at all for diversification in Europe, but I'm not afraid of it. Natural gas trading has become so robust at the natural gas trading hubs precisely in the Netherlands and Germany, UK, France and Belgium that there's really nothing Gazprom can do at this point to put that genie back in the bottle.

The Nord Stream expansion is a semi desperate effort by President Putin to get some oxygen from the West geopolitically, and to maintain some hold on European markets – it's going to have to be by lowering price, when there is this threat of LNG coming from many directions; not just the US, but eventually Qatari gas will be displaced from the Middle East as Australian gas comes onstream, there's going to be a lot of LNG from Mozambique, and even Eastern Mediterranean – Israel, Cyprus, and now Egypt could be exporting some natural gas soon.

So Russia's got to hang on to its market share, and I think that's what this is about.

Given your time as US Ambassador to Azerbaijan, are you able to provide us with any new insights on the Southern Gas Corridor project?

It's going to happen: the gas contracts have all been let and the commitments are there to buy all the gas, so that's not a problem.

Azerbaijan has gone through a difficult period with the drop in the oil price, and I understand SOCAR has sold a piece of its stake in the Trans Anatolian Pipeline to Goldman Sachs recently. One might wonder if that means that SOCAR is not strong financially. I don't think that's true at all. You could look at it the opposite way, that the investment has become so attractive that Goldman Sachs wants a piece of it, and SOCAR doesn't need to be the investor.

So, it's on track, the contracts are finalized, there are no major construction blockages. I think President Putin tried one last time last December to try to block the Southern Corridor by transforming South Stream, which the EU didn't want, into Turkish Stream, and I'm absolutely certain from all my years working on Turkey, living in Turkey that the Turks are too smart to allow themselves to undermine their own strategy, which is to become the central transit hub, trading hub over time of natural gas with good relations with Russia on natural gas, but not dependent on Russia - in fact, having diversified supplies so they can reduce the price of gas they pay from Gazprom, which is the highest in their portfolio.

What does your diplomatic “Spidey sense” tell you about the potential of natural gas volumes from Iran coming to Europe?

I think it's going to be a while before we see gas volumes. You'll see a really rapid uptick in oil volumes. They've got 40 million tons stored right now that could be released. They're going to increase production quite quickly once the sanctions are lifted over the course of a year or so.

Natural gas will be a bit more difficult because the infrastructure's not there. Iran has underperformed on its gas deliveries to Turkey for some time. There will probably be a flood of investment to help Iran develop those pipeline interconnections into Turkey and beyond, but I think it will take a little while.

Still, it's great – the more gas flowing into Europe, the better for everybody. We need, in the long run, the most liquid possible natural gas market that we can have in Europe, and once the sanctions regime is finished, Iran can help - not just Turkey, but the EU itself – manage its minuet with Gazprom and Russia that I think, in the long run, will lead Russia to be a more reliable partner, once Russia sees there's not going to be any monopoly leverage any longer.

Could you give me a sense of what you've heard here at the Economic Forum in Krynica, Poland, and what you'll be taking away from that?

One point is, people in the energy and natural gas sector in Poland are rightfully proud of the steps that the country has taken to emerge now as the key player in this part of Europe.

Poland has “joined the adults” at the holiday table. It is a major player in Europe and is about to be on natural gas thanks to the Świnoujście LNG terminal and the North-South Corridor, and is proud of that. It's done the right thing.

But I also hope Poland doesn't forget about the need to work with the Baltic States as well, and Finland – not just to be nice to them, but because it's in Poland's own interests to have as liquid as possible a gas trading hub network in the Baltic region just as already exists in the North Sea region. That's great for economic and strategic reasons and ultimately that's going to help Poland become really the major economic player in this part of the world.

So I hope Poland's evolution strategically will embrace even more the need to build a liquid market in the Baltic region. We're in an interesting moment, because the gas transmission system operators (TSOs) are becoming the market makers. TSOs are, in a way, public-private partnerships: state institutions that operate like companies and are the interface between the private energy companies, suppliers and consumers, and governments. In the Baltic region, whether it's Litgas or Ambergrid, etc., these TSOs understand that they are the ones who have a vision and commitment to building liquid gas trading hubs all throughout the Baltic region. Again, that will lead to a much healthier relationship with Russia and much stronger economic security for all of the EU.

As long as the EU's easternmost members are not connected physically to the natural gas or electricity markets of the EU, as is the case now in the Baltic States except for two electricity connections between Estonia and Finland, Europe is not whole and there can't be a unified energy market.

So there's a lot of unfinished business, but what we've heard in Krynica is, the vision is there, the EU knows what it needs to do, the Baltic States know what they need to do. Poland is willing, but sometimes its strategic attention is diverted westward or southward with a lot of unfinished business still eastward.

-Drew Leifheit