Friday 2 January 2009

Gas & Ukraine: Stop Gibbering, Blame the Real Culprits

The security of our gas supply is a serious topic and we can do without ignorant nonsense like this, from the Mail:

"Britain's reliance [on Russian gas] has quadrupled, with Gazprom providing 16% of our gas in 2007"

This is so far off the mark - by an order of magnitude - as to be ludicrous; Gazprom can only dream of a 16% market share in the UK: but it well illustrates the standard of debate. So let's get a few things straight:

- Russian gas represents just 6.5% of EU primary energy
- Russia's share of EU gas imports has fallen from 80% in 1980 to just over 40% now (though in absolute terms it has increased): we have been diversifying successfully
- Russian
gas supply to EU countries has been very reliable: (more so than the Dutch, who interrupt exports to neighbouring countries at the first hint of technical trouble)
- most European gas still comes from Norway, the UK and the Netherlands

- Russia has had genuine difficulties from Ukraine which would test the patience of any supplier

It is certainly the case that, by dint of masterly divide-and-rule tactics, Russia makes its 6.5% talk much louder than it should. The Germans and Italians, in particular, have always hastened to do Gazprom's bidding (despite Italy having suffered particularly from the 2006 Ukranian cut-off). Cutting to the
chase, it is fair enough to seek to dilute disproportionate Russian clout in the European energy markets.

The answer is clear - and, incidentally, it is the offical EC answer, bless the Commission (for once):
create a fully-functioning, competitive, EU-wide wholesale gas market. This is how, for example, the world solved the Arab oil embargo of 1973, where countries that were individually embargoed were supplied from the overall pool of liquidity. OPEC has never wielded disproportionate power since (and OPEC oil represents more than 10% of non-OPEC countries' global primary energy).

It's not a trivial task, and may involve some modest investment to de-bottleneck infrastructure. But we know exactly what to do: it's official EU policy (recall
jaunty diagram ?
): and it will ensure proper economic allocation of whatever gas can be bought by EU countries - gas which, incidentally, is very far from being in short supply for as long into the future as any sensible planning can take us.

Further, it chimes exactly with the famous European ideal of solidarity ! So why is it not happening ? Step forward the Germans and Italians who, solidarity notwithstanding, much prefer to cut individual deals with Russia: and the French, who don't much like markets in any manifestation. All is not lost, however, because the recession is about to cause a big EU gas supply overhang. This, in turn, will give a major boost to spot-market liquidity, and a proper market shouldn't be far behind, given a fair wind and even half-hearted regulatory action.

It's the best chance we are going to get. Watch for furious Gazprom and German lobbying against the inevitable ...



Unsworth said...

Yes, yes - but they're Russians aren't they? So one must always expect them to be up to no good.

But the serious point you make - and one which is often forgotten - is that the Russians are sometimes very disciplined in their approach. The West is just not yet comfortable with having to rely on them for anything at all, perhaps because if things go wrong the Russians can still retreat to the Steppes (in every sense). And, anyway, someone has to be the scapegoat, eh?

Mark Wadsworth said...

Nick, it's sensible posts like this that will see you end up as Energy Minister, even if that's only in a parallel univserse.

Steven_L said...

You got a view on whether more long term storage facilities would be good for British consumers of gas Nick?

marksany said...

Excellent post, very educational. Now I need to go over to Dale's and delete the tosh I spouted earlier today.

banned said...

I understand that Ukraines considered viewpoint was " can't pay, won't pay nuhr nuhr ".
Though now they have paid.

Presumably the Russians do actually need the money that Europe pays for its gas, they don't produce much besides raw materials in their tiny economy.

Nick Drew said...

Unsworth, Mark W, other Mark - thanks (and I enjoyed the 1932 pamphlet, oM)

ieboc - yep, they very much need the €€€. Plus - see our 2009 Predictions - they'll be suffering a collapse in gas price in 2009 they can ill afford, so the politics of this will become acute

Letters From A Tory said...

"Russian gas represents just 6.5% of EU primary energy"

That's still 6.5% too much.

Nick Drew said...

Steven - my answer is the usual one: if such facilities are economic, go for it !

On the downside, finance is really hard to come by these days, even for quite good projects, so this is a most unfortunate spanner in the works (big topic)

On the upside, there are a couple of reasons why gas storage could be economic:

(a) short-cycle storage (which the tiny depleted onshore UK gasfields are often well-suited for) - because gas market price volatility is likely to remain high. It's volatility that makes this type of storage most valuable

(b) long-term storage (your question): the value of this is mostly a function of (i) seasonality in prices and (ii) any premium attached to security of supply

On seasonality, for various reasons I reckon this is likely to stay at fairly pronounced levels, but these have not proved high enough to make what would be very expensive investments in offshore fields (approx £ 1 billion a pop), which is what you need for serious long-term facilities, given UK geology. (The single existing such facility, 'Rough', was built by BG in their monopoly days and it's not clear whether it was really an economic project: they never really cared about such niceties)

As I said on Dale, there are in fact 'plans' for a couple more of these: let's see.

As to (ii), no individual customer will voluntarily pay a premium for security - why should they, we've never really suffered from insecurity ! (perhaps the govt would like to tell us why it expects to piss off the Russians in the coming years ?) So it would need to be a mandated regime of some type ...

There's a long discussion to be had on this: and you might like to look back at the piece I did on Tim Eggar & the Interconnector a few months back. But basically, I'm not much worried about strategic security of supply. My preference, as you know, is for a proper EU-wide market and my real worry is the actions of oligopolistic French & German companies.

Nick Drew said...

Letters - can't go with you there. My father, a WW2 veteran, always brough me up on the slogan: peace through trade !

hatfield girl said...
This comment has been removed by the author.
idle said...

Bang on the money, Nick.

"Step forward the Germans and Italians who, solidarity notwithstanding, much prefer to cut individual deals with Russia"

Gerhard Schroeder, corrupt narcissistic sauasage-nosher.

Sackerson said...

Good one, Nick. The power of united action. Doesn't require us to actually be part of a United States of Europe, I trust.

Steven_L said...

Cheers for the answer Nick, happy New Year!

rwendland said...

ND: What do you think of this chap's views (with nifty graphs) that Russia will have trouble maintaining supply as the three big west Siberian gas fields are now in decline, and the investment in new fields looks dodgy.

Also, probably showing my ignorance here, why is seasonal storage attractive while we still have good fields - isn't it better to hold back our production if summer LNG, or whatever, is cheaper and pump more during winter? Even drilling a fresh hole down to increase winter flow rate sounds cheaper than creating a large store.

James Higham said...

I was going to post on this but because I was too close to it, I didn't. Let's just say the stick between the Ukraine and Russia goes very deep.

All the rest is just collateral.

Nick Drew said...

James - ain't that the truth, I have my own anecdotes, pity you can't say more ...

Mr Endland - welcome back ! I rate Noël's work highly. Others have made similar points, notably Jonathan Stern (see also our 2009 Predictions here).

Yes, Gazprom will have real funding difficulties, and in due course real operational / supply difficulties, when the gas price falls (as it will)

G will, however, interrupt 'other customers' including (Russian) before shutting off hard-currency EU buyers

in the past the World Bank etc & the Germans have been steady underwriters of G projects: may be a bit tighter in the coming months

G knows that an open EU gas market will accelerate the fall in price when the oversupply takes hold, so they oppose it bitterly and will continue to press the Germans to do likewise

Seasonal storage: it turns out it's rarely economic only to produce in winter (big topic), though certainly production is reduced in summer because that's when offshore maintenance has to be done (have you ever been in the North Sea in winter ?), which sits nicely with lower demand in summer

it also turns out that US gas prices are higher in summer and lower in winter than in EU (because they have much greater storage capacity than anywhere in Europe, pro rata, so LNG goes there in summer and to us in winter

basic principle: it costs more to do anything offshore than to do the same thing onshore - it's as true for gas storage as it is for baking a loaf of bread

interestingly, for the first 5 years (1999-2004) of operation of the UK-Belgium Interconnector, the UK used it effectively as a seasonal storage mechanism: we exported through it in summer, and brought back very similar quantities through it in winter (after which we became a net importer once more, though part of our production is still exported that way in summer, to similar effect)

this is exactly the rational out-turn you'd hope for ! UK storage = offshore = expensive, so use continental storage = onshore = cheap: ain't markets wonderful !

rwendland said...

ND: What a superb reply!

With gas prices taking a dive, electricty demand flatish, and money difficult to borrow for risky propositions, it will be interesting seing how EDF will justify building nucs in the UK in the near term!

Nick Drew said...

RW - thanks ! EDF clearly have a mandate to make non-economic ('strategic') investments, up to a point ... but they have made no commitments whatsoever, despite Brown's suggesting they are going to build 4 nucs

Sackers - Doesn't require us to actually be part of a United States of Europe, I trust

no, any more than free trade ever does

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