The European-Russian Gas Disagreement
by Kent Moors Ph.D. | published April 18th, 2011
As you read this, my wife Marina and I are somewhere over the Atlantic Ocean, bound for Germany. We'll be there for 10 days, and some of my time there will be spent on the subject of this column.
Most of the trip, however, will be devoted to what has become an annual Easter project – spoiling the grandchildren.
My son lives near Frankfurt, having remained there after he left the Army, and now works for the U.S. government. He looks forward to our visits… even though he says it will take him months to undo the damage we inflict upon the kids.
He thinks we send the wrong message – that Opa will buy them everything.
Not true, I always answer. I don't buy them everything… only what they ask for.
Of course, there is always the danger that my "message" may be misunderstood. But these days, that seems to be a problem besetting Europe as a whole.
And a fair chunk of it involves energy.
The E.U. Wants to Diversify Its Gas Sourcing
My son's house outside Frankfurt is heated with natural gas. That gas comes from Russia.
Despite domestic sources of conventional freestanding gas – especially from the Netherlands and Norway – the European Union (E.U.) became progressively dependent upon piped gas from Russia's huge Gazprom (LSX:GAZP.UK; OTC:OGZPY), – the largest gas company on the face of the earth.
That energy has become a political hot potato.
The E.U. wants to diversify where it sources its gas to gain dependence. It has increased the heat by passing – and, on March 3, putting into effect – "The Third Energy Package." This plan requires the separation of gas sales and transportation businesses, while also requiring access of third parties to national gas pipeline systems.
Gazprom, of course, strongly opposes the package. The Kremlin will never allow other parties to have access to its pipeline network.
But the disagreement goes deeper than that… and may yet impact upon European energy security.
Already, the events in North Africa have required Italy and Spain to deal with reduced gas supply from Libya by replacing it with increased imports from Russia.
Other E.U. countries are beginning to have the same concerns over shortages if the civil unrest across the Mediterranean spreads. If it hits Algeria, there will be a general panic in the E.U. over adequate energy.
So Europe is increasingly turning to liquefied natural gas (LNG) from Qatar and elsewhere to offset Russian volume. It is also pushing several pipeline projects designed to bring in additional energy from central Asia and Iraq (bypassing Russia altogether).
And the LNG use has been creating a real problem for Gazprom…
Russia's Determined to Stay on Top
(in the Face of Accelerating Competition)
LNG has developed a local spot market that was selling gas for less than the 20-year contracts used by the Russians. This has obliged Gazprom to change some contracts terms with major Western European utilities… and it has cost Moscow billions.
Meanwhile, Gazprom has itself spent billions – and will spend billions more – on new pipelines to bring more gas produced in or transported across Russia to Europe, bypassing Ukraine and Belarus.
Disagreements with those two transit countries ended with gas being cut to Europe. That was embarrassing for Russia, but more serious for Europe – especially when delivery interruptions happened in the dead of winter.
Thus, Gazprom is advancing two of the most expensive projects ever conceived: the Nord Stream (moving under the Baltic Sea to Germany) and South Stream (designed to move under the Black Sea to Bulgaria and then on two branches into southeastern Europe).
Gazprom has developed a series of powerful European allies in some of the largest utilities, now with an active interest to support one or both of these projects.
And that support is not restricted to companies. Former German Chancellor Gerhard Schroeder is chairman of the consortium heading up the Nord Stream.
The E.U.-supported pipelines bypassing Russia – Nabucco and the ITGI (Italy-Turkey-Greece-Interconnector) – are competitors for Gazprom's new lines; although in about a decade Europe will need all of these pipelines and more.
Competition is accelerating, with still two more opponents emerging for Gazprom.
One is renewed LNG trade into the new Rotterdam Gate LNG terminal and the other terminals coming into operation elsewhere in Europe.
The second is the extension of shale gas production in Poland, France, Austria, Hungary… and Germany. For that matter, expanded LNG trade could even include volume coming from surplus shale gas produced in the U.S. (See " A Solution for North America's Natural Gas Surplus, " November 2, 2010.) Both provide significant opportunities for American business and technology.
And these are the matters that will be taking up my time over the next 10 days (when I am not ruining discipline in a particular German household).
There are considerable possibilities for energy transfers into Europe, but also major political mine fields.
A microcosm of the situation is found in my son's living room. When the four of us sit down to discuss current affairs, and the conversation moves to the "gas issue," other agendas are sometimes present.
My son and I are American, his wife is German, and Marina is Russian.
Sometimes, we find we can only speak about the weather… or how badly the grandparents are spoiling the kids.
On the bigger European-Russian disagreement, the affair is likely to get downright nasty. It recalls Carl von Clausewitz in the early 19th century, writing that war is the continuation of politics by other means.
Only these days, it seems the opposite is true.
Sincerely,
Kent
