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Study: Europe would need to pay twice as much to replace Russian gas

03.31.2014  | 

Europe’s natural gas prices would have to double to lure enough cargoes from the global market to replace Russian supplies, adding to the challenges of decreasing the region’s dependence on its neighbor.



Europe’s natural gas prices would have to double to lure enough cargoes from the global market to replace Russian supplies, adding to the challenges of decreasing the region’s dependence on its neighbor.

Benchmark UK prices would need to rise 128% to attract liquefied natural gas (LNG) if Europe had to replace all its Russian fuel for two summer months, according to Energy Aspects in London. LNG, shipped by tanker from as far away as Australia, would be the main alternative to the regional pipelines filled by Russia.

The European Union will announce a strategy by June for reducing its reliance on Russia, whose annexation of Crimea this month sparked the biggest regional crisis since the Cold War.

The 28-nation bloc gets a third of its gas from Russia, mostly via Ukraine, at an annual cost of about $53 billion. The EU would need to pay as much as 50% more to replace that with a combination of LNG, Norwegian gas and coal, according to Bruegel, a research group in Brussels.

“There will be high costs for a complete switch,” said Will Pearson, director for global energy and natural resources at Eurasia Group in London. “Russia will continue to be an important supplier to Europe, but I do think the emphasis will be on diversifying capabilities anyway so that they can import other sources when needed.”

Price Increase

Futures on London’s ICE Futures Europe exchange fell as much as 2% this week to 52.59 pence a therm, the lowest level since July 2012. Prices would need to rise as high as 120 pence a therm ($19.93/MMBtu) to attract LNG in the spot market, said Trevor Sikorski, the head of natural gas, coal and carbon at Energy Aspects, a research company.

Traders aren’t expecting disruptions any time soon. While the cost of UK gas rose 9.9% on March 3, the first trading day after Russia’s incursion into Crimea, the Ukrainian province annexed by President Vladimir Putin, all the gains were erased since then.

Futures fell 33% since September 2008 as the Euro zone’s longest-ever recession reduced demand to a 15-year low, Societe Generale estimates. The region has bigger-than-average stockpiles for this time of year after the mildest winter since 2007 diminished demand for heating.

Europe imported the least LNG in nine years in 2013 as demand weakened, according to BG Group. A drive to buy more cargoes in the spot market would pit the region against Asia, where prices were on average about 30% higher last year. Japan accelerated imports of the chilled fuel after closing its nuclear power plants following the Fukushima disaster in 2011.

Gas Supply

A halt to Russian gas supply this summer would double UK prices to more than $18/MMBtu, said Mike Fulwood, a London-based principal for global gas at Nexant Ltd., which advises utilities and governments. Increased competition for LNG supply would also mean about a 19% increase in costs for Asia, he said.

European terminals can import as much as 199 billion cubic meters (7 trillion cubic feet) of gas a year, according to Gas Infrastructure Europe, a lobby group in Brussels. Russia supplied 138 billion cubic meters to the EU last year at an average price of $387 per thousand cubic meters ($10.50/MMBtu), according to OAO Gazprom, the Moscow-based Russian pipeline gas export monopoly.

“It’s probably not impossible to eliminate Europe’s dependence on Russia for gas, but it’s not going to be a cheap or easy project,” Laszlo Varro, the head of the International Energy Agency’s gas, coal and power markets division, told a conference in Berlin on March 25. “It would take some very difficult and very expensive policies.”

Russian Fuel

Dependence on Russian gas ranges from 100% in Finland to 37% in Germany and 16% in France. Belgium and Spain are among those who get no Russian fuel. Some nations are already trying to diversify their supply.

Poland, with a 59% dependency, says it will complete an LNG terminal by May 2015. Neighboring Lithuania, which gets all its gas from Gazprom, will receive a floating LNG facility by the end of 2014. France will start an LNG terminal next year, while a canceled project in Germany may now find new investors. Croatia and Ukraine are also reviewing projects.

The 18-member euro area’s economy will expand 1.1% in 2014, after contracting for two consecutive years, according to the median of 53 economist estimates compiled by Bloomberg. Surging energy costs would threaten the recovery. A halt in supplies would hurt Russia more than the EU, said Georg Zachmann, a research fellow at Bruegel in Berlin.

Lost Revenue

Europe is Gazprom’s biggest market by sales and the region pays more than Russian customers or some other buyers in the former Soviet Union, according to the state-backed company’s latest financial report. Lost revenue from the EU would also deplete the state budget, 15% of which comes from gas sales, Zachmann said. Sergei Kupriyanov, a spokesman for Gazprom in Moscow, declined to comment.

Gas is flowing from Russia to the EU as normal and the bloc expects Russia to meet its supply commitments, Sabine Berger, an energy spokeswoman for the European Commission, said March 26. Exports to Europe expanded 2.9% this year through March 26, Russian Energy Ministry data show.

US President Barack Obama said March 26 in Brussels after meeting European leaders that the EU should consider gas imports from the US as well as developing domestic resources. The EU’s overall energy dependency rate will rise to 80% by 2035 from 60% now, according to the Paris-based International Energy Agency.

US Competition

Three congressional committees are holding hearings this week on whether the US should sell more of its growing oil and gas resources overseas, in part to lessen European dependence on Russian oil and gas.

“Natural gas exports will not only drive continued investment in domestic production and create jobs, they’re also a powerful geopolitical tool particularly in light of Russia’s illegal aggression in the Ukraine,” Mary Landrieu, chairman of the Energy and Natural Resources Committee, said March 25 at her first hearing as head of the panel. “The last thing Putin and his cronies want is competition from the United States of America in the energy race.”

Energy Studies

In addition to LNG, European nations could buy more gas from Norway and the Netherlands. They have the capacity to each boost pipeline exports by at least 20 billion cubic meters, or enough combined to supply France for a year, Bruegel estimates. Europe also could favor coal over gas in power plants, said Jonathan Stern, the founder of the Oxford Institute for Energy Studies.

Replicating the US success in tapping gas trapped in shale-rock formations will take years. Poland is developing Europe’s largest recoverable deposits, estimated at 4.2 trillion cubic meters by the US Energy Information Administration. While that’s enough to meet nine years of EU consumption, the country will likely be producing no more than 20 billion cubic meters annually by 2020, said Sikorski of Energy Aspects.

“Neither Polish shale gas, or shale gas anywhere else in Europe, nor anything else can be a game changer which will make any immediate and significant difference,” Stern said. “The only thing which can be done quickly would be to use massive amounts of additional coal rather than gas. This would massively add to environmental problems.”

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