LNG Prospects and Gas Supply
Security in Europe
Can LNG reduce Energy Security Risks such
as Supply Interruptions and Gas Producer
Cooperation?
Presentation at the
Political Economy of Energy in Europe
and Russia (PEEER) Workshop
Higher School of Economics
Moscow State University
Moscow, 15 September 2009
Marcel Dietsch, MPP (Harvard)
DPhil Student
International Relations
University of Oxford
Marcel Dietsch | University of Oxford | September 2009
‘Energy Security’ and Core Questions
• Energy Security: the absence of physical
delivery interruptions of reasonably-priced
energy supplies.
• Does LNG contribute to Europe’s energy security
overall?
1. Can LNG reduce short-term risks such as physical
supply interruptions?
2. Does LNG contribute to more competitive (usually
means lower) gas prices in the short- and long-run?
Marcel Dietsch | University of Oxford | September 2009
European Concerns about Security and
Affordability of Gas Supplies (I)
• Long-standing dependence
on gas imports from
(super-)giant fields
• European indigenous gas
reserves and production
in decline – holding only
2% of world gas reserves
• growing demand and
hence even higher import
dependence on Russia,
the Middle East and Africa
Natural Gas Import Forecasts until 2030
net Imports as % share of Total Consumption
by Market, 2006 - 2030
South Korea
100
90
Japan
80
70
60
Europe
50
40
30
20
North America
10
0
2006
2010
2015
2020
2025
Chart: Marcel Dietsch
Data & Projections: US Energy Information Administration, June 2009
2030
Marcel Dietsch | University of Oxford | September 2009
European Concerns about Security and
Affordability of Gas Supplies (II)
• growing gap between consumption and production in
Europe covered by imports from very few countries
• Most imports via inflexible pipelines - problematic
since Russo-Ukrainian gas disputes in 2006, 07 and 09
Net EU imports in by country of origin
Chart: European Commission Report, July 2009
Marcel Dietsch | University of Oxford | September 2009
1. Mitigating the Risk of Supply Disruptions?
• LNG considered a valuable tool to diversify European
gas imports in addition to winning new suppliers (e.g. Iran,
Turkmenistan, …) and establishing alternative pipeline routes (Nabucco)
• Geopolitical distribution of LNG suppliers different from
pipeline supplies, which is both good and bad news
• LNG share of gas imports is still low at about 47 bcm or
15% in EU - hence LNG adds to, but does not dominate,
the supplier base
Marcel Dietsch | University of Oxford | September 2009
Western Europe: LNG beneficial...
• Largest LNG consumers in EU are France (about 25% of
imports) and Spain (approx. 50%) - both countries least
affected by recent gas cut offs, not just because of their
location
• Hence: in some countries LNG contributes to diversification
of energy supply; acts as backup supply and improves security
of supply
• Increased use of LNG buys Europe time to finish Nabucco
pipeline to access Middle Eastern and Central Asian resources
Marcel Dietsch | University of Oxford | September 2009
... but only up to a point (I)
• Regasification capacity expansion until 2015 mostly predicted to be
at existing terminals mostly in the UK, France, Spain, Italy and
Germany
Projected LNG
Regasification
Capacity
Atlantic Basin, bcm
Jensen Associates
Marcel Dietsch | University of Oxford | September 2009
... but only up to a point (II)
• Most of the LNG quantities come to Europe locked up in longterm contracts; less than 20% is non-committed LNG
• These flexible, tradable quantities (3% of Europe’s gas needs)
could increase security of supply to the extent that buyers in
Europe could outbid others, especially the US, Japan and
South Korea
 depends on the competitive situation
• Construction of regasification capacity worldwide far ahead of
liquefaction capacity  existence of regasification terminals
does not always mean availability of actual supplies
Marcel Dietsch | University of Oxford | September 2009
Eastern Europe – LNG nonexistent
• Eastern European states are highly or fully dependent on one
gas source (Russia) and one transportation method (pipeline)
• Considered highly undesirable especially after repeated gas
cut offs in 2006, 2006 and 2009 - regardless of whether
Gazprom, Ukraine or both are to blame
• Yet, no existing LNG regasification terminal, partly because
countries are landlocked or there is no easy access to the
Atlantic or the Mediterranean
• Need for diversification to reduce impact of supply
disruptions – LNG not a suitable solution?
Marcel Dietsch | University of Oxford | September 2009
Share of Russian Gas for Importing
Countries’ Consumption Needs
all via pipeline, for 2008, in bcm
Country
Import
Share
Consumption
Share
Bulgaria
100%
95%
Finland
100%
100%
Lithuania
100%
95%
Slovakia
100%
98%
Greece
68%
67%
Romania
78%
24%
Hungary
77%
74%
Czech Republic
77%
76%
Poland
73%
52%
Turkey
63%
65%
Austria
72%
61%
Germany
50%
44%
Italy
32%
32%
France
18%
20%
Switzerland
11%
11%
Table: Marcel Dietsch; data: BP Statistical Review of
World Energy, 2009.
LNG receiving
terminals in Europe
Marcel Dietsch | University of Oxford | September 2009
Eastern Europe: increasing security of
supply without LNG
• Diversification through use of LNG or different pipeline
suppliers not possible/optimal
• Instead: integration into European gas grid, investment in
interconnectors (with reverse flow technology)
• Eastern European countries and the Baltic region remain at
the periphery of the European transmission system
• July 2009: European Commission initiates Baltic Energy
Market Interconnection Plan and includes €310 million in EU
Infrastructure Spending plan for regional gas interconnection
projects linking Slovakia-Hungary; Slovenia-Austria;
Bulgaria-Greece; Slovakia-Poland; Hungary-Croatia;
Bulgaria-Romania and Romania-Hungary.
Marcel Dietsch | University of Oxford | September 2009
Initial question: Can LNG reduce risk of
physical supply interruptions?
• Yes, to an extent, mainly in Western European countries
• Especially in countries with existing receiving facilities since
capacity expansions are expected to be realised at existing
terminals rather than through the construction of new
terminals
• Not in eastern Europe since there is practically no LNG
infrastructure for various reasons
• Integration into European grid by building interconnectors
between countries more important
• Overall: LNG useful, but no a panacea for European energy
security in general
Marcel Dietsch | University of Oxford | September 2009
2. Gas Pricing and the Geopolitics of Supply
• Algeria, Norway and Russia derive some market power—i.e. being
able to sell gas above their (marginal) production cost—due to two
factors
• 1. high market concentration in their export markets (Russia as quasimonopolist in Eastern Europe, oligopoly structure elsewhere except UK
and Netherlands)
• 2. inelastic demand for natural gas as a result of widespread household
use (cooking, heating)
 gas prices above competitive level
• Does LNG contribute to more competitive gas prices in short-run?
• In the absence of a fully integrated European gas grid: differences
between those EU members states with LNG access and those
without
Marcel Dietsch | University of Oxford | September 2009
... in the short-run
• LNG creates competition to Russian pipeline gas in Western Europe for two
reasons
 Countries in western part of EU are relatively far from Russian fields
(cost advantage of LNG only over very long-distance pipelines)
 UK, Netherlands, Spain and France already have infrastructure in place
• increased use of
LNG could well
strengthen
bargaining power
of some EU gas
importers vis-à-vis
pipeline suppliers
by reducing dependence on pipeline gas
$/MMBTU
$4.00
Transportation costs and the effects of scale
36" LP Offshore
Gas Line (1,000)
Single Train LNG
36" LP Onshore56" LP Onshore
Gas Line (3,085)
Gas Line
$3.00
$2.00
$1.00
Onshore
Crude Line
Crude Oil Tanker
$0.00
0
2,000
4,000
MILES
6,000
8,000
Jensen Associates
Marcel Dietsch | University of Oxford | September 2009
Gas Pricing in the Long-Run – LNG cartel?
• LNG contributes to the globalisation of regional gas markets –
increasingly susceptible to cartelisation?
• Important to look at global distribution of gas reserves and
production – and to examine the potential for cooperation among
LNG producers and exporters
• Russia, Iran and Qatar control about 55% of global gas reserves
• EU Commission notes: “Iran holds the second largest reserves of
both oil and gas worldwide, with 11% and 16% respectively. Russia,
Iran and Qatar might be the only large providers of gas worldwide
by 2030. So far, the geopolitical implications of such a scenario do
not seem to have been subjected to a thorough study.”
Marcel Dietsch | University of Oxford | September 2009
Cooperation among Gas Producers
• “An association of some kind among LNG exporters is likely.”
(Daniel Yergin, CERA)
• Unclear if and when such an association can be effective since
gas trade is different from most commodity markets (storage,
transportation costs)
• Current gas price collapse might be catalyst (Jonathan Stern,
OIES)
• Motivation for closer cooperation perfectly understandable
from producer point of view: raise or maintain high prices to
extract value from their resource
• Loose cooperation beginning to take shape in the GECF (next
page)
Marcel Dietsch | University of Oxford | September 2009
The GECF
• Gas Exporting Countries Forum (GECF) created in 2001
• Gathers the world’s leading gas producers to promote mutual interests
▫ Includes measures aimed at maximising the value GECF member countries can
derive from their gas reserves
▫ GECF members exchange views and information on project development, supply
and demand balances, exploration, production and transportation costs, etc
• GECF’s share in global pipeline gas trade at about 38%
• More impressive share in LNG production and exports: around 85% (2007)
GECF members
GECF observers
Marcel Dietsch | University of Oxford | September 2009
GECF and LNG in Europe
• All of the EU’s LNG suppliers are part of the GECF
• European Commission report argues that the “likelihood of GECF
being able to exercise control over all gas movements worldwide
seems unrealistic [...] but the Forum might take quite a firm grip on
LNG.” (July 2009)
• GECF does not engage in OPEC-type quota setting at the moment,
but measures to achieve greater control and “preferred” price levels,
the GECF may use “softer tools:”
▫
▫
▫
▫
Managing capacity expansion (Saudi-style spare capacity too expensive)
(re)-introducing destination clauses
Pursuing vertical integration
Using delivery swaps to use price arbitrage opportunities
•  Medium- and long-term risk (especially for highly importdependent EU consumers) of cartelisation of LNG market
Marcel Dietsch | University of Oxford | September 2009
The known Unknown: Unconventional Gas
Resources in the US
• Significant changes in the gas resource base in the US: discovery of new
shale gas formations and arrival of new technology to exploit shales
(hydraulic fracturing)
• US reserve-to-production ratio previously at about 10 years, between 30
or 40 years (EIA, June 2009)
• Consequence: growth of US production reduces LNG import needs
• Indication of unconventional impact: operator of a LNG regasification
terminal in US earlier this year tried to change the licence to a
liquefaction facility
• If US can exploit new unconventionals as planned1, this may render
GECF completely ineffective
• Why? For long time, it looked like US was going to depend on LNG
imports, but now may become exporter again after new discoveries
• Safe to assume that the US would counteract any cartelisation efforts by
other LNG exporters
1 depends on US Federal and State regulations since hydro-cracking affects groundwater supply
Marcel Dietsch | University of Oxford | September 2009
Gas Pricing - Summary
• LNG is a competitor for pipeline gas in Europe and (may) contribute to
the erosion of market power that Algeria, Norway and Russia enjoy in
parts of Europe
• Global distribution of gas reserves highly concentrated
• Cooperation among gas producers and exports, especially those using
LNG for transportation, likely and taking shape in form of GECF
• GECF countries control 85% of LNG exports worldwide and all
shipments to Europe
• Risk of cartelisation of globalising gas market in medium- and long-run
(and hence higher prices – above the competitive level)
• Possible mitigating factor: US re-emerges as an LNG exporter as a
result of unconventional gas reserves that are now exploitable
Marcel Dietsch | University of Oxford | September 2009
European Energy Security: Natural Gas
Geographic Sources
Diversification
1. Reliability
Gas
Supply
Security
(low impact of
physical interruptions)
LNG contributes to geographic
diversification by making available
sources previously not accessible by
pipeline (e.g. Qatar, Nigeria, ...)
Liberalisation
2. Affordability
Infrastructure
and Storage
Transport Routes
and Modes
As a new form of transportation
for natural gas, LNG provides
a flexible alternative to pipeline
Discussion / Q&A
Marcel Dietsch MPP (Harvard)
DPhil student, International Relations
University of Oxford
University College, Oxford | OX1 4BH | UK
www.marceldietsch.com
marcel.dietsch (at) politics.ox.ac.uk