Ukraine, Turkey Only Two Potential New Energy Hubs, Says Expert
Developments in Europe require strong countries with such credibility that they can firmly set predictable and nearly authoritative legislations, which can allow the economic recovery maximisation required to promote new productions and, simultaneously, the construction of infrastructures such as pipelines and underground gas storage. This was the take-away message emerging from Energy Talks organised in Brussels by the Greek Energy Forum and Natural Gas Europe.
“The key issue here is the bankability of projects” commented one panelist, speaking under Chatham House rules (participants are free to use the information received, but cannot reveal the identity of the speakers) adding that commentators and journalists should put European gas markets in the broader regional and global context. Against this backdrop, many local governments claiming they will promote energy hubs are fallacious and groundless. Theoretically, only Ukraine and Turkey could succeed in such endeavours.
WITHOUT BANKABILITY OF GAS PROJECTS, EUROPE WOULD MAKE THE SAME MISTAKE IT MADE WITH RENEWABLES
During the conference, experts said that new projects are called upon to overcome three sets of difficulties: i. prices, ii. global competition, iii. bankability. The three concepts, which are clearly connected, can be simplified as follow: the projects on the Old Continent will compete with global projects given European proximity to other regions’ gas riches. Its ability to set up a clear long-lasting regulatory framework could allow the development of projects slightly (but only slightly) more expensive than elsewhere. In this sense, it all boils down to feasibly. Indeed, according to the experts speaking at the “Transatlantic Energy Security at a Crossroads. What to expect ahead of 2020?” conference, the economic dimension of the projects is the one that really matters.
“Only the most convenient projects will go ahead” one panelist said, while a second reminded how the current oil prices made things more and more difficult.
The discussion made the case for more fact-based decisions. Political manoeuvering would hardly bring about positive results. If countries pushed for producing gas from not commercially viable fields, the consequences could be dangerous.
“Subsidising local unfeasible domestic gas production would create a new disaster, like the one caused by overly enthusiastic subsidies to renewables. We should always look at price signals” one panelist said.
In this sense, European governments should refrain from politicised statements and overly inflated expectations. Projects have to be bankable.
POLITICS (1): DON’T PROMISE THE EARTH, WHEN YOU CAN ONLY DELIVER FLIMSY DREAMS
When European governments say they expect their countries to become energy hubs, their statements are dangerous and counterproductive. According to a panelist, the only two countries that could achieve the status of gas heavyweight are Ukraine and Turkey.
Countries can succeed in this intention just if they manage to foster indigenous production, to build pipelines and storage facilities, while keeping a stable political environment. At the same time, the process requires time, as new projects imply a pay-off period which could range between 20 and 30 years. During this time span, only a portion of the gas transiting through the country is available for the spot market, as the rest would be absorbed by the long-term contracts required by companies to provide the certainty required for their investments.
“Twenty years after the completion of new project, it becomes easier to switch from long-term contracts to short-term contracts. This is the case in North Western Europe” commented a panelist.
As a consequence of this argument, Turkey will need decades to capitalise on its new projects and become an energy hub, while Ukraine, which already has the needed storage facilities and pipelines, needs to promote certainties.
“We should not underestimate the difficulty of creating gas hubs” one panelist said, clearly referring to many countries in South Eastern Europe.
POLITICS (2): STABILITY FOR DEVELOPMENTS
Rather than stating political dreams, national governments should focus on giving the right signals to make long-term projects “bankable”.
One panelist mentioned the new laws being passed and implemented by the British government. The new law, stemming from the revision carried out by Sir Ian Wood in 2013-2014, will enable the Offshore Authority to force companies to coordinate and share infrastructures in order to maximise economic recovery.
‘The Government intends that licensees, operators and owners will be required, where appropriate, to co-operate with the new Authority and with other licence holders, operators and owners in the wider adjacent area on all aspects of field and cluster and area development, from exploration through to decommissioning, with the overarching aim of maximising economic recovery’ the previous British Government explained in a note last summer.
Following in UK’s footsteps, countries could trigger domestic production through a mix of incentives and heavy-handed decisions of public authorities, the expert contended.
In this sense, gas is a flexible fuel that could support the development of renewables. To do so, though, it requires a firm and inflexible political commitment to a stable regulatory framework.
“Europe has turned into an high-risk legislative environment” another expert said, underlining once more that Europe’s decisions might impact not only on domestic fields but also on developments of gas resources in other regions.
At the end of the day, gas markets are becoming more and more global, and Brussels has to remember that its decision will have an impact also on its neighbours, starting from Africa to the Caspian Countries, passing through the East Med and Middle East.
Sergio Matalucci
Sergio Matalucci is an Associate Partner at Natural Gas Europe. Follow him on Twitter: @SergioMatalucci