Is Europe too dependent on Russian energy supplies?

Interview with Igor Yusufov, former Russian Energy Minister


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In spite of the international sanctions, in March 2018, the Russian energy giant Gazprom increased its gas exports to far-off countries by 29.4% – compared to the same period of 2017 – thus bringing it to 9.7 billion cubic meters in only two weeks’ time (from 1 to 15 of March). New Europe has asked Igor Yusufov, former Energy Minister of the Russian Federation (in 2001-2004) and the special representative of the President of the Russian Federation for international energy cooperation (in 2004-2011), how he sees the position of Gazprom now on the European markets.

Igor Yusufov: In 2017, the far-off European countries (that we traditionally state to be the EU countries and Turkey, with the exception of the Baltics) consumed the maximum volume of natural gas for the last five years – 560.5 billion cubic meters. And Gazprom not only retains the position of the leading player in this market, one of the largest markets in the world), but the Russian supplier has significantly increased its share over the last five years: by bringing it from 26% in 2012 to 34.7% in 2017. According to Gazprom, in 2017, the volume of exports to far-off countries amounted to 194.4 billion cubic meters of gas, which is by 8.4% more than the 2016 exports (178.3 billion cubic meters).

New Europe: Is this due to some increase in output, or to the changes in the geopolitical situation?

Igor Yusufov: The growth of last-year gas supplies from Russia to Europe occurred not so much under the influence of climatic factor (for the January frosts got compensated for by the unusually warm autumn), but due to its being in serious dependence on the index of industrial production in the euro-area countries that grew by 2.3% in January-November of 2017, thus reflecting a significant rise in the economies of the European countries. The industries of Germany, Italy and the UK continue to grow and therefore need a large amount of cheap energy. In January-October 2017, the EU produced 2.3% more electricity than the year before.

New Europe: So you mean Europe is generating more and more gas of its own.

Igor Yusufov: Well… An important role in the growth of gas consumption in 2017 was played by the gas generation of Europe, which increased the purchase of gas by 6.2% by way of reducing the electricity generation at nuclear power plants in Germany and France, as well as a significant reduction in the production at hydro power plants in several southern European countries (Spain, Italy, Portugal) during the summer period. As a result, the electricity production share in the structure of gas consumption in far-off European countries rose from 30% in 2016 to 31% in 2017.

New Europe: Does that mean that we can get rid of coal from now on?

Igor Yusufov: You know, amid the growth of world coal prices in 2016-2017, the market conditions for gas-based electricity generation have also improved considerably. In Germany, the range of calculated switchover prices is now close to the current gas prices of NCG hub. In the UK, where RES play a much less prominent role, and where there is an additional levy on greenhouse gas emissions (which makes coal generation more costly), gas continues to supplant coal. The additional charge for greenhouse gas emissions provides the British gas power plants with a higher margin (compared to the coal plants) that reaches its maximum levels during the summer season with a seasonal reduction in gas prices at NBP hub.

New Europe: What would be the break up, the scheme  of production at the European level?

Igor Yusufov: In 2017, own production of gas by the far-off European countries remained at the level of 2016, making up for 260.4 billion cubic meters. Despite the fact that the production of gas in the northern seas is stable and even demonstrates growth in certain periods, we are witnessing a decrease in investments, as well as the decrease in the volumes of geological exploration that went down to match the last-century 70ies. This poses a midterm threat to the stability of supplies within the European Union. The Norwegian authorities are planning to ban the drilling of wells and exploration of oil and gas in the most vulnerable areas of the Arctic for four years. This means that the oil and gas industry in Europe will not gain access to any new promising deposits over the coming years.

In these circumstances, the increase of demand for imported gas is only natural. In 2017, the gross imports of gas to the European market increased by 24 billion cubic meters (8.3%) and rose beyond 300 billion cubic meters – for the first time in history. Simultaneously, the imports from Algeria to Europe decreased by 1.6 billion cubic meters (-3.1%) with the reduction of LNG supplies by 0.6 billion cubic meters (4.0%). The export of LNG from Qatar to Europe decreased slightly (-0.1 billion cubic meters or -0.4%), due to (among other things) the increase in the volume of supplies to the premium markets in Asia and Latin America.

New Europe: How does that affect the Russian production?

Igor Yusufov: Gas supplies from Russia are stable – Gazprom has maintained its share of gas imports by the European Union and continues to demonstrate stability in the market where it has traditionally been active. I would also like to note the implementation of the Russian “Yamal LNG” project – in 2017, the first two tankers got loaded and set off for the markets of Great Britain and the Netherlands. In 2018, this work continues. The strategic importance of Russia’s gas victory in the Arctic has been repeatedly noted by Western partners. In general, the LNG imports by Europe increased by 16.5% – up to to 65 billion cubic meters – compared to 2016. A number of experts predict the growth of the Russian LNG share by not less than a third by the year of 2035, which is up to 41% in consumption or 393 – 459 billion cubic meters per year.

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Last year, the LNG supplies from the United States amounted to 2.6 billion cubic meters. There also were quite modest (in terms of volumes) deliveries from a number of countries in Africa and South America. The incomparability of supply volumes from different regions is too obvious. Even if the supply of LNG from the U.S. may meet (to some extent) the needs of small markets in the Baltics, then for Germany, Italy, Great Britain or France that traditionally account for the main volumes of Russian gas export, there will be not enough American gas, and the increase of its supply volume will be inexcusably expensive for the European consumer. By the way, harsh American winters and the growing consumption in the domestic markets of the USA and Canada do not allow for the rapid increase in the volume of LNG exports. High costs of logistics and low capacity of transport system are the limitations that make the supplies of American gas to Europe quite difficult; therefore, such supplies are of no essential threat to Russia’s gas presence in Western European markets.

New Europe: Would you say that Europe is too dependent on Russian energy supplies?

Igor Yusufov: For several decades Europe has remained a region that felt more convenient and rational to be served by the Russian gas industry. The flexibility of supply routes is increasing every year. From the point of view of pricing policy, Russian gas is also available and worth its money, for Gazprom offers its partners such favorable prices and terms of cooperation that refusing them doesn’t make sense. There simply doesn’t exist any serious competition with other suppliers in this sphere. All these facts testify to the unified technological chain and mutual interest shared by the European economy and Russian gas.

In this context, the statements on the lack of alternatives for Europe in terms of Russian gas supplies, voiced by Gazprom’s leaders, appear to be logical and justified. I, however, would want to access the situation from another perspective: whether Russia is able to cover the growing demand in view of the gas consumption and imports increase by Europe will depend on the position that all parties will agree on with regard to the TurkStream and Nord Stream-2 pipelines construction.

Russia is interested in mutually beneficial cooperation and wishes to attract international investments in order to implement its large-scale joint energy projects in oil and gas industry. These projects are important for the efficient economic development of market participants – for both consumers and suppliers. We have a saying in Russia: “One body is nobody” or “One man in a field is no warrior.” And in this situation, I expect that European politicians, financiers and gas businessmen shall take most careful decisions and support our joint infrastructure projects that are significant energy-wise.

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