CONTERPRODUCTIVE FOR GAZPROM
Natural Gas Europe had the pleasure to discuss the current situation in the EU-Russia-China energy triangle with Dr Andrey Belyi. Dr Belyi is a senior researcher at the Centre for the EU-Russia Studies at the University of Tartu, Estonia, and honorary lecturer at the Centre for Energy, Petroleum, Mineral Law and Policy of the University of Dundee.
NGE: In your recent publication "Russia's gas export reorientation from West to East: economic and political considerations" you mentioned that Russia and the EU are passing through a mutual avoidance in energy interdependence. Is it possible to improve relations and what should be done for the thaw?
AB: Indeed, there is a process of an ever-increasing politicization which is sometimes also called a securitization. It occurs when an issue becomes a security matter. It means security stems from a non-linear reaction to a threat, which can be either exaggerated or misinterpreted. Now, the issue of security of supply becomes a matter of security because of the securitization process. In fact, there is no linear link between energy security and energy dependence.
For example, Cuba is entirely dependent on the supplies from Venezuela and it is not a security issue for them. Likewise, Lithuania would actually be happy to be 100% dependent on Norway rather than on Russia.
A process of an extreme politicization affected Euro-Russian gas trade. The EU-Russia relations are very diverse, they include a growing volumes of trade in oil and coal, a lasting cooperation in nuclear safety, and in energy efficiency, there is also quite a strong interdependence in investments etc. However, only the gas sector became a matter of an extreme politicization or securitization. For example, if we briefly compare a political attitude of Poland towards Russian oil and Russian gas, then we see that Poland would like to be dependent on Russian oil which is supplied directly via a pipeline to the Polish refinery in Gdansk on the Baltic Sea. Being on the harbor, they could easily import oil from anywhere. However, they are perfectly connected with the Druzhba pipeline coming from Siberia and are fine with that. Adding to that, Russian oil blend Urals is cheapter than other international sorts of oils, hence Gdansk refinery obtains an automatic price discount. In the gas sector we see the opposite situation. There is a certain commitment of many states to invest into non-profitable projects in order to decrease dependence on Russian gas. And there is a number of issues which caused this. First of all, a monopoly on gas exports of Gazprom constitutes one of the factors of politicization. Note, there is no export monopoly for Russian oil. In addition, gas disputes with with Ukraine contributed to the securitization already since 2006. Although, in 2006 on the Russian side many did not even noticed that the crisis had happened but it already spurred the views in Europe that Gazprom is not a reliable partner. Then there was a crisis of 2009 and the dispute of 2014-15, so things became only worse.
What is more, there is a politicization of pricing. Gazprom provides oil-indexed price twhich has been higher than prices proposed on gas hubs for some years. Obviously the European companies preferred to take into account developments in hubs, while oil indexation seemed to be rather outdated.Oil and gas do not compete anymore in the power sector so the oil-indexed price does not make economically sense. By contrast, Gazprom's long term contracts were based on oil indexation and that has been also a benchmark for Gazprom's credit commitments. Now, the oil price decreases and the politicization of the oil-indexation issue might also pass to the second plan. Indeed, for the consumers the oil indexation makes the price lower automatically and for producers (Gazprom in particular) the oil indexation is not that important anymore as it gives less profits. Finally, I would say that demonopolization would be a great advantage to Gazprom because it has market advantage anyway and it would be able to sell more gas than now. A good example is Norway, which demonopolized its exports, decoupled the price mechanism from oil, and finally Statoil's share of exports has increased.
NGE: Russian media actively discuss the Russia-Turkey deal which appeared to be just one of the memorandums of understanding. How do you foresee the future of the cancelled South Stream? Does Europe with its decreasing demand really need the project in this way or another?
AB: I see that as another political manoeuvre to create a certain tension between the Europeans, especially between South Eastern European countries like Bulgaria and Serbia on one hand and European Commission on another. We see that Brussels at the beginning was saying that South Stream should be cancelled and Bulgaria froze the project. And then once it was cancelled, Bulgaria started to argueit was supporting the project. This reversal is mirroring the politicization of the same issue.But I do not think that there is an economic rational in that. Gas demand in Europe is declining and there is also a general decline in oil price, which makes the issue of profitability of capital intensive infrastructure projects even more remote. Moreover, we should not forget the complex and incompleted transition of the EU to the new gas price model which also creates certain uncertainties for project developers. Altogether it makes the project of South Stream, its successors and competitors economically impractical. Obviously, the cheapest option remains to create a transit stability via Ukraine.
NGE: How would you comment the recent words of Alexei Miller about Europe that should hurry up to build infrastructure to buy Russian gas?
AB: Well, i think that such a discourse might generate another spiral of securitization in Europe. Hence, it is very counterproductive for Gazprom in the longer term. Especially in the context of continuous crisis in Ukraine and in the context of the fact that Europeans doubt more and more in the reliability of Gazprom. What does it mean when Mr Miller says to hurry up to build pipelines to Turkish hub? For Europeans, it means that Russia or Gazprom cannot ensure a transit through Ukraine. Then, a logic of securitization emerges and many in Europe will argue that Europeans have to find the ways to diversify from natural gas from Russia: either to build new LNG terminals or import natural gas from Middle East or Norway.
NGE: The conditions of Chinese-Russian projects stay looming. Oil indexation that was represented as a big Russia's advantage now causes doubt. Do you think that the Power of Siberia and the Altai route will be profitable for us with oil-indexation? Will we able to control the pricing in Asia?
AB: Yes, we do not know the financial terms of China-Russia projects because the countries involved preferred not to disclose the information. However, even it cannot be calculated, we can see that at the moment of concluding the agreements the price to China was lower compare to the oil indexation offer to the LNG to Japan. Now the situation changed, as the oil-indexed LNG import price in Japan decreased by almost 50% in four month because of the world oil price decline. At this context the price to China only reflects what is going in Asian gas market. Price is rather declining and China has been actually the first one to gain in market change. In turn, it makes life difficult for Russian gas exporters, including Gazprom's pipelines, and LNG projects in Sakhalin.
NGE: LNG terminal in Vladivostok is another big plan of Gazprom that was used in negotiations with China as an argument for the oil indexation. So what is it: a powerful tool or a burden?
AB: It seems to me that Vladivostok LNG project will not survive. The terminal has a problem of supplies of the commodity so they have to ship it and for that they need to build pipelines. So if you have to build pipelines in addition to the one from Eastern Siberia to China (Power of Siberia). So, it seems that Gazprom is not ready to commit itself into both projects at he same time. Interestingly, BP's chief economist in Russia Vladimir Drebentsov stated that according to the company's forecasts, China's incremental demand will be around 120 bcm per annum in 2020. so, 120 bcm of additional gas demand, where half of it is already contracted with Turkmenistan, who concluded a contract of 62 bcm per year. Therefore, Russia will rather play a minor role in China's gas supplies at least in the mid-term horizon.
NGE: Dr Belyi, you drew a parallel between the USSR- the EU energy projects and recent China-Russia deals. What is similar about these impressive projects?
AB: Well, the similarity lies in the political motivation in spite of economic cost. Very often a political context creates a positive ground for infrastructural development. It is much more often true than the other way round, though many believe that the infrastructure rarely creates the political approach. The political decision to build the pipeline can become economically viable in the longer term. The difference between the old pipelines to Europe and new projects to China is that the early European pipelines were built when the international natural gas markets were either embryonic or non existent. In China we see the opposite situation: international gas markets are getting more and more mature, with an increased number of suppliers, of consumers and increasing role of markets in the price setting. So, practically market became much more competitive in terms of a number of suppliers and buyers and also in terms of a number of price mechanisms.
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