Russia and Europe: Mutual Dependency

New sellers and new transit routes are key to Europe’s security of gas supply, the CEO of Austrian OMV, Rainer Seele, told a European gas conference in Vienna January 20.

But politics was impeding these goals, he said. “The European Commission is supporting the principle of supply diversification, but mainly to find a replacement for Russian gas. This attitude can only be called paradoxical, bearing in mind that Russian gas stands for just 25% of the European supply.”

He recalled that Nord Stream 1 brought the European Union into contact with Russian gas resources: a “milestone for security of supply, even in the mind of Brussels.”

“To the same extent, Nord Stream 2 will be a majority European project,” explained Seele. “Austria, Germany, France, the Netherlands will be part of it. That's as European as it can get.”

Nord Stream 2, he said, is the answer to declining indigenous gas production in Europe, saying the UK is set to lose up to 50% of its current production, while the Netherlands' Groningen field will lose 10bn m³/yr of production. He warned: “Europe is running out of options and therefore we are relying on Norwegian and Russian supply, or LNG, mainly.” Pipeline gas, he said, is and will remain the backbone of the European gas supply, as it will be the main source of gas imports for Europe.

Nord Stream: no time to waste

Nord Stream 2 will be built, according to Gazprom’s chairman of the board, Viktor Zubkov. “This means that customers will receive gas at favorable prices, but for this we need reliable sources of supply and uninterrupted means of transportation,” he said.

The boss of Gazprom Export, Elena Burmistrova, said that in order to meet Europe's growing appetite for gas, there is no time for delays in constructing transmission systems. “This is why we and our partners have decided to expand the Nord Stream project, which reliably delivers natural gas directly to the European Union.” She said some of the gas would also be delivered to Baumgarten. "There is no need to reinvent the wheel," she said. Baumgarten is the delivery point for gas flows to southeast Europe and Italy.

The planned expansion, she said, will raise the trans-Baltic pipeline's throughput capacity up to 110 bn m³/year, providing what she termed reliable supplies of resources for heating and electricity for tens of millions of European households.

Europe, she said, will need a great deal of natural gas in the coming decades, “and there will be room enough for all in the gas market. What should be ensured now is in equal terms for everyone, creating a fair and competitive environment.” She said Europe will need another 140bn m³/yr by 2025 rising to 165bn m³/yr by 2035.

As for the costs of natural gas infrastructure for European taxpayers, she said: “Actually, Nord Stream 2 won't cost them a cent. This project is not seeking any funding from the European Union, since we and our partners are prepared to finance it all by ourselves.” Its partners are Anglo-Dutch major Shell, OMV, French Engie and German BASF and E.ON, owning half between them.

Still, she said a stable gas price was needed to complete investments. “We still believe that the European markets establish a hybrid price formation model offers the best possible reflection to the balance of power and interests between suppliers and buyers.” Last autumn Gazprom auctioned off a small amount of its gas for hub delivery, and she says this percentage could reach 10%, but that oil indexation would also remain.

Producing gas for sale on the basis of long-term contracts, transporting it thousands of kilometers and delivering it at hubs leaves the producer with both the volume risk and the price risk.

Russia wants EU clarity

Zubkov said that Russia needs to know what role Europe plans on giving to natural gas in the mid and long term perspectives of its energy mix. Clear rules of the game, he said, are necessary to be able to make investments into infrastructure and exploration and production.

Citing the history of Gazprom's gas deliveries to Europe, now some 50 years old, he said Russia and Europe had broadened their cooperation along the entire value chain. “Therefore our relations with our European partners do not belong to the past; they are oriented towards the future. Large-scale projects are being implemented by Russia and Europe. Russia has always been and will be a reliable supplier of gas, oil and other resources to Europe.”

He called for a systematic dialogue between all market players in Europe whose topics would be, among others, guaranteeing security of demand and supply, reliability of transportation of gas and other sources of energy, joint investments, and scientific research. Without that, there could be serious problems in European gas markets in the coming few years, arising from reductions in investment, he said. "There are only a few countries who can continue their investments when prices are this low," he said. He said Russia delivered a third of EU gas consumption last year, but at falling prices, thanks to oil prices being lower. He expects the price this quarter to be just $180/'000m³. This really is a paradox: "Suppliers could refuse oil indexation but buyers cling on to them like a life-saving straw," he said.

He recognized what he termed “decades of successful and beneficial cooperation” between gas suppliers and consumers which had generated experience in overcoming mistrust and disagreements.

“I think this experience can be an example for organizing a systemic energy dialogue between Russia and the EU, which is now, unfortunately, limited by artificial barriers based on fears reminiscent of the Cold War. It's in our common interests to overcome these issues, because the challenges for energy security are very serious: contradictory energy politics of the European Union, transit risks and problems in developing new gas transportation infrastructure, the decline of EU production, the reduction of investment and exploitation of hydrocarbons and the necessity to do away with subsidies for alternative energy.” He said last year Germany spent some €10bn on subsidies.

Drew Leifheit reporting from Vienna; edited by William Powell