Russia and Europe’s energy security – EAGC panel discussion

Gas pipelines, Russia, Ukraine
Source: DollarPhotoClub

Russia needs to push politics out of Russian-Europe gas relations if it wants to remain one of the biggest gas suppliers on this planet – according to Vladimir Drebentsov, Vice President, Economics and Corporate Social Responsibility, BP Russia.

Speaking at the EAGC conference in London, Mr Drebentsov, discussed the situation of Russia – and it’s biggest player Gazprom – in Europe’s supply strategies, especially in the wake of the Ukrainian crisis.

Whenever there is discussion about energy security in Europe, Russia is and will always remain an interested party, Mr Drebenstsov explained. This is because Russia depends on Europe for gas revenues which provide contributions to Russia’s budget and financial economy. Europe is Russia’s largest energy market – buying more than 160 billion cubic meters of Russian natural gas in 2013. This is why Russia will always be interested in selling to Europe, even while looking for other markets.

Gazprom

Much of the debate concentrated on Gazprom which, even though it is often perceived as an extension of Russian government, has become much more economically driven in recent years. Mr Drebentsov explained that it is partially caused by the situation in Russia’s domestic market where Gazprom is increasingly pushed out by independents. Mr Drebentsov quoted data which indicated that the Russian independent share of Russian domestic consumption, in the first half of this year, was already close to 50 per cent.

“We know that independents have plans to double that.” Mr Drebentsov said, “Last year, they produced 140 Bcm. So, they want to raise it up to 300 Bcm. Basically Gazprom, if nothing changes, will be squeezed out of the domestic market. So, if this company wants to remain a gas company, it will have to sell to some other markets.”

Responding to the domestic pressures, Gazprom has become much more economically orientated. “Basically I think what we need to keep in mind is that Gazprom, despite whatever they say from the podium, has become much more commercial” he explained.

“If one reconstructs Russian effective price in Germany, typically back in 2012, it was well about TTF, last year in 2013 it moved within a 5 per cent frame and Russian gas became competitive. Even on long term contracts – that’s after rebates, that’s after all those discounts.

“More than that: we usually don’t pay much attention to the fact that Gazprom increasingly approaches European gas hubs. Last year Gazprom already sold at least 12.5 Bcm on European gas hubs. And I looked at dynamics this year and for the first 6 months this volume crept up by another 12 per cent. Gazprom adjusted effective prices in long term contracts, sells more and more gas on European gas trade hubs. So, it wants to remain competitive. Why? I think it is explained by what is happening within Russia.”

Reverse flow supply

What is more, Gazprom’s increased commerciality might mean that – despite saying otherwise – it might decide not to take punitive action against countries attempting reverse flow supply.

Answering a question from the floor about supplying Ukraine through reverse flow from Slovakia, Mr Drebentsov ventured a guess that despite viewing reverse flow supplies as siphoning, Gazprom might not take a hard stance on the matter, explaining;

“My guess would be that Gazprom would stick to its current line which is; virtual reverse is something that they consider illegal. We know this contradicts their contracts. As we know, looking just at flows of Russian gas to Slovakia. So, we find a correlation between gas flows to Ukraine and declining flows to Slovakia. Yes, we see that Gazprom’s price, sort of, punished the virtual reverse. But basically I think Gazprom, from an economic standpoint, will not be very much interested in punishing, or reducing flows to Europe if they see virtual reverse. Why? Because this is a company with declining production.”

“Gazprom is totally in need to sell gas,” Mr Drebentsov continued, “so, if we see some decline in Russian flows to Europe, I think it will not come from Gazprom. It might be part of the political conflict between Europe and Russia or Ukraine and Russia. Again, there is no economic sense in trying to reduce flows whether it is used for virtual reverse or physical reverse.

“And actually coming to next year, there will be sufficient capacity for physical reverse. I guess all of these discussions about virtual reverse will just lose ground.”

Russia – China deal

A lot has been made of Russia’s historic deal with China, which saw Gazprom agreeing to deliver some 38 billion cubic meters of natural gas a year to China’s economy, starting around 2018. Professor Jonathan Stern, the panel moderator, noted that while the point’s been made that Gazprom’s got an awful lot of gas that it is unable to sell, the question is where all that is going in a world where there is apparently some reluctance to accept more Russian gas in Europe.

“There are some problems in terms of opening up the Asian market.” Professor Stern noted. “There is a strange dichotomy set up by a lot of Europeans that “aw the Asian markets are just the way that Russia is going to threaten to take our gas away and move to Asia”, which is bizarre but you hear it a lot.”

According to Vladimir Drebentsov, there is a lot of talk about Russia switching gas supply to Asia, but the actual numbers are a little bit less optimistic.

“We know that Gazprom’s CEO said that even in the short term Gazprom will be able to sell 60 to 100 Bcm to China. (The current agreement talks about 38 Bcm.) This is basically how much Russian gas China will need. Let us not forget that Central Asian exports to China and are likely to reach 80 Bcm.

“Again, we’ve heard today that the terms of the current agreement with China is competitive in comparison to what Russia has with Europe. That’s true, but if in China, Russia has to compete with Central Asian gas, the situation changes. Central Asian gas is locally sold at a lower price. Then, the whole value chain is different because it is completely controlled by the Chinese from the well to the pipeline.

“So again, if we are looking at potential competition between Central Asian gas and Russian gas, I think Central Asian gas has more advantage in Asia than Russian gas. So my point is; at the moment, Gazprom gets 58 per cent of its revenue from Europe. I don’t see how this changes very much in the future unless it will just decline.

“Coming back to the question of Europe. Russia’s capacity in terms of how much gas it can sell to Europe is immense. The total capacity of Russian pipelines from Finland to Turkey exceeds 300 Bcm. Already existing pipelines. It seems that the current infrastructure is sufficient to double Russian gas flows to Europe. Russia wants to build even more.

“So I think, it’s a matter of taking politics out of this.

“I think the best way to do that is to ensure that these markets are flexible, so Europe doesn’t feel threatened by the fact that it depends too much on Russian gas flows. Because Russia does have this gas.”

The 29th edition of European Autumn Gas Conference (EAGC), organised by DMG Events, took place in London, on 28-30 October 2014. EAGC is Europe’s longest-running gas industry event.

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