Europe's gas security conundrum
Central Asian countries are eager to pick up the slack, if sanctions hit Russian pipeline supply to Europe
Beefed up US sanctions against Russia are hampering Gazprom's plans to send more gas to Europe, potentially paving the way for Russia's rivals in the Caspian region—and the US—to muscle in.
It's an area of uncertainty that European leaders need to resolve one way or another quickly.
The European Union is going to need to import a lot more gas in the short-to medium-term, even allowing for the greening of economies, given the gradual dwindling of North Sea supply. The EU's PRIMES model, published last year, predicts a steady climb in net gas imports, rising from around 310bn cubic metres (or 73% of gross inland gas consumption) in 2020 to 328bn cm (80%) in 2030 and 360bn cm (88%) in 2050.
While the figures may change somewhat, if renewables displace gas in the power and heat sectors faster than expected, the need for substantially more imported gas is clear. Brussels says it wants to make sure these imports come from as diverse a base of suppliers as possible.
In the energy security sphere, the EU divides the surrounding regions into five segments: the Northern Corridor, mainly supply from Norway at present; the Eastern Corridor, covering Russia; the Southern Corridor, (mainly Azerbaijan and Turkmenistan) and the Western Corridor, including Algeria and Libya. A fifth corridor is liquefied natural gas, including deliveries from Qatar the US, Africa and elsewhere.
Weaning Europe off cheap pipeline gas from Russia in order to diversify supply has proved easier said than done, but US president Donald Trump's hardline sanctions policy against Russian firms could make the switch inevitable, if not necessarily easier.
Pipeline projects such as the 55bn cm/y Nord Stream 2, intended to bring more Russian gas across the Baltic Sea into Germany and surrounding EU countries, have struggled to find western financing due to the impact of US sanctions on western banking institutions that do business with Russia. The Turkish Stream project, envisaged to bring 15bn cm of Russian gas into Europe-and a further 15bn cm into Turkey-via a southern route may also yet struggle with sanctions.
If new Russian supply into the EU is constrained by US sanctions, a resulting gas shortage would lead to higher prices, which would make readily available US LNG a viable option to fill the gap. It would also boost the influence of Ukraine in the European market, given Russia would then be keener to keep the gas flowing via the transit route through Ukraine, whatever its differences with the government in Kiev, following the Russian annexation of Crimea.
Reconciling those differences sufficiently to reach a long-term transit agreement between Russia and Ukraine may yet prove impossible. There are also question marks over the longevity of Ukraine's pipeline infrastructure, which is ancient and in need of an upgrade.
While US LNG has now started shipping into Europe and is well-placed to pick up the slack in the short-term, uncertainties over Russian supply may also open further doors for exporters in the gas-rich Caspian region—initially Azerbaijan, with Turkmenistan and Iran as potential participants in the longer-term.
Azerbaijan hopes to start supplying 10bn cm/y via pipelines through Georgia and Turkey to Greece and then into the rest of Europe, fed mainly by supply from BP's Shah Deniz gasfield in the Caspian initially. Greece, Romania, Italy, Albania, Hungary, Bulgaria, Montenegro, Croatia, Macedonia are among the countries likely to take Azeri gas.
Later, further supply is planned from a number of other fields including Total's Absheron field and so-called deep gas from the BP-led Azeri-Chirag-Guneshli oil project. These and other fields could add some 800bn cm of gas reserves, according to some estimates.
Across the Caspian Sea, Turkmenistan—which BP estimates has some 17.5 trillion cm of proved gas reserves (or 9.4% of the world total)—could potentially use the same Southern Gas Corridor to export its gas to Europe. That would be a boon for the government in Ashgabat, as European demand would enable it to improve its negotiating position with its only existing gas customer, China. But feeding Turkmen gas into Baku's European pipeline is dependent on the construction of a Trans-Caspian pipeline, which has thus far been stymied by a failure among the nations around the Caspian to agree on maritime borders.
All this will take substantial investment—as well as political willpower—both in Europe and around the Caspian. But Trump's sanctions, while an obstacle to securing fresh gas supply for Europe from Russia, may be just the spur that is needed to turn all that talk within the EU of energy supply diversification into a reality.