1. LNG Prospects and Gas Supply Security in Europe
Can LNG reduce Energy Security Risks such as Supply Interruptions and Gas Producer Cooperation?
Presentation at the Political Economy of Energy in Europe and Russia (PEEER) Workshop Higher School of Economics Moscow State University
Moscow, 15 September 2009
Marcel Dietsch, MPP (Harvard) DPhil Student International Relations University of Oxford

2. ‘Energy Security’ and Core Questions
Energy Security: the absence of physical delivery interruptions of reasonably-priced energy supplies.
Does LNG contribute to Europe’s energy security overall?
Can LNG reduce short-term risks such as physical supply interruptions?
Does LNG contribute to more competitive (usually means lower) gas prices in the short- and long-run?

3. European Concerns about Security and Affordability of Gas Supplies (I)
Long-standing dependence on gas imports from (super-)giant fields
European indigenous gas reserves and production in decline – holding only 2% of world gas reserves
growing demand and hence even higher import dependence on Russia, the Middle East and Africa
Few new discoveries are made, with a consequent decline in reserves, and EU25 now holds only 1.4% of total known gas resources.
with the current production level, EU25 will have consumed its reserves in 13 years, without new discoveries.

4. Net EU imports in by country of origin
European Concerns about Security and Affordability of Gas Supplies (II)
growing gap between consumption and production in Europe covered by imports from very few countries
Most imports via inflexible pipelines - problematic since Russo-Ukrainian gas disputes in 2006, 07 and 09
Net EU imports in by country of origin
Chart: European Commission Report, July 2009

5. 1. Mitigating the Risk of Supply Disruptions?
LNG considered a valuable tool to diversify European gas imports in addition to winning new suppliers (e.g. Iran, Turkmenistan, …) and establishing alternative pipeline routes (Nabucco)
Geopolitical distribution of LNG suppliers different from pipeline supplies, which is both good and bad news
LNG share of gas imports is still low at about 47 bcm or 15% in EU - hence LNG adds to, but does not dominate, the supplier base

6. Western Europe: LNG beneficial...
Largest LNG consumers in EU are France (about 25% of imports) and Spain (approx. 50%) - both countries least affected by recent gas cut offs, not just because of their location
Hence: in some countries LNG contributes to diversification of energy supply; acts as backup supply and improves security of supply
Increased use of LNG buys Europe time to finish Nabucco pipeline to access Middle Eastern and Central Asian resources

7. ... but only up to a point (I)
Regasification capacity expansion until 2015 mostly predicted to be at existing terminals mostly in the UK, France, Spain, Italy and Germany
Projected LNG Regasification Capacity Atlantic Basin, bcm
over 80% of LNG currently tied up in long-term contracts – in case of supply disruptions, there are flexible quantities available – which will go to the highest bidder
Jensen Associates

8. ... but only up to a point (II)
Most of the LNG quantities come to Europe locked up in long- term contracts; less than 20% is non-committed LNG
These flexible, tradable quantities (3% of Europe’s gas needs) could increase security of supply to the extent that buyers in Europe could outbid others, especially the US, Japan and South Korea
 depends on the competitive situation
Construction of regasification capacity worldwide far ahead of liquefaction capacity  existence of regasification terminals does not always mean availability of actual supplies
over 80% of LNG currently tied up in long-term contracts – in case of supply disruptions, there are flexible quantities available – which will go to the highest bidder

9. Eastern Europe – LNG nonexistent
Eastern European states are highly or fully dependent on one gas source (Russia) and one transportation method (pipeline)
Considered highly undesirable especially after repeated gas cut offs in 2006, 2006 and regardless of whether Gazprom, Ukraine or both are to blame
Yet, no existing LNG regasification terminal, partly because countries are landlocked or there is no easy access to the Atlantic or the Mediterranean
Need for diversification to reduce impact of supply disruptions – LNG not a suitable solution?

10. Share of Russian Gas for Importing Countries’ Consumption Needs
Share of Russian Gas for Importing Countries’ Consumption Needs LNG receiving all via pipeline, for 2008, in bcm terminals in Europe
Country
Import Share
Consumption Share
Bulgaria
100%
95%
Finland
Lithuania
Slovakia
98%
Greece
68%
67%
Romania
78%
24%
Hungary
77%
74%
Czech Republic
76%
Poland
73%
52%
Turkey
63%
65%
Austria
72%
61%
Germany
50%
44%
Italy
32%
France
18%
20%
Switzerland
11%
Table: Marcel Dietsch; data: BP Statistical Review of World Energy, 2009.

11. Eastern Europe: increasing security of supply without LNG
Diversification through use of LNG or different pipeline suppliers not possible/optimal
Instead: integration into European gas grid, investment in interconnectors (with reverse flow technology)
Eastern European countries and the Baltic region remain at the periphery of the European transmission system
July 2009: European Commission initiates Baltic Energy Market Interconnection Plan and includes €310 million in EU Infrastructure Spending plan for regional gas interconnection projects linking Slovakia-Hungary; Slovenia-Austria; Bulgaria-Greece; Slovakia-Poland; Hungary-Croatia; Bulgaria-Romania and Romania-Hungary.

12. Initial question: Can LNG reduce risk of physical supply interruptions?
Yes, to an extent, mainly in Western European countries
Especially in countries with existing receiving facilities since capacity expansions are expected to be realised at existing terminals rather than through the construction of new terminals
Not in eastern Europe since there is practically no LNG infrastructure for various reasons
Integration into European grid by building interconnectors between countries more important
Overall: LNG useful, but no a panacea for European energy security in general

13. 2. Gas Pricing and the Geopolitics of Supply
Algeria, Norway and Russia derive some market power—i.e. being able to sell gas above their (marginal) production cost—due to two factors
1. high market concentration in their export markets (Russia as quasi- monopolist in Eastern Europe, oligopoly structure elsewhere except UK and Netherlands)
2. inelastic demand for natural gas as a result of widespread household use (cooking, heating)
 gas prices above competitive level
Does LNG contribute to more competitive gas prices in short-run?
In the absence of a fully integrated European gas grid: differences between those EU members states with LNG access and those without

14. ... in the short-run
LNG creates competition to Russian pipeline gas in Western Europe for two reasons
Countries in western part of EU are relatively far from Russian fields (cost advantage of LNG only over very long-distance pipelines)
UK, Netherlands, Spain and France already have infrastructure in place
increased use of LNG could well strengthen bargaining power of some EU gas importers vis-à-vis pipeline suppliers by reducing de- pendence on pipe- line gas
Transportation costs and the effects of scale
2,000
4,000
6,000
8,000
MILES
$0.00
$1.00
$2.00
$3.00
$4.00
$/MMBTU
Crude Oil Tanker
Onshore
Crude Line
Single Train LNG
36" LP Offshore
Gas Line (1,000)
56" LP Onshore
Gas Line (3,085)
36" LP Onshore
Gas Line
Jensen Associates

15. Gas Pricing in the Long-Run – LNG cartel?
LNG contributes to the globalisation of regional gas markets – increasingly susceptible to cartelisation?
Important to look at global distribution of gas reserves and production – and to examine the potential for cooperation among LNG producers and exporters
Russia, Iran and Qatar control about 55% of global gas reserves
EU Commission notes: “Iran holds the second largest reserves of both oil and gas worldwide, with 11% and 16% respectively. Russia, Iran and Qatar might be the only large providers of gas worldwide by So far, the geopolitical implications of such a scenario do not seem to have been subjected to a thorough study.”

16. Cooperation among Gas Producers
“An association of some kind among LNG exporters is likely.” (Daniel Yergin, CERA)
Unclear if and when such an association can be effective since gas trade is different from most commodity markets (storage, transportation costs)
Current gas price collapse might be catalyst (Jonathan Stern, OIES)
Motivation for closer cooperation perfectly understandable from producer point of view: raise or maintain high prices to extract value from their resource
Loose cooperation beginning to take shape in the GECF (next page)

17. The GECF Gas Exporting Countries Forum (GECF) created in 2001
Gathers the world’s leading gas producers to promote mutual interests
Includes measures aimed at maximising the value GECF member countries can derive from their gas reserves
GECF members exchange views and information on project development, supply and demand balances, exploration, production and transportation costs, etc
GECF’s share in global pipeline gas trade at about 38%
More impressive share in LNG production and exports: around 85% (2007)
GECF members
GECF observers

18. GECF and LNG in Europe
All of the EU’s LNG suppliers are part of the GECF
European Commission report argues that the “likelihood of GECF being able to exercise control over all gas movements worldwide seems unrealistic [...] but the Forum might take quite a firm grip on LNG.” (July 2009)
GECF does not engage in OPEC-type quota setting at the moment, but measures to achieve greater control and “preferred” price levels, the GECF may use “softer tools:”
Managing capacity expansion (Saudi-style spare capacity too expensive)
(re)-introducing destination clauses
Pursuing vertical integration
Using delivery swaps to use price arbitrage opportunities
 Medium- and long-term risk (especially for highly import- dependent EU consumers) of cartelisation of LNG market

19. The known Unknown: Unconventional Gas Resources in the US
Significant changes in the gas resource base in the US: discovery of new shale gas formations and arrival of new technology to exploit shales (hydraulic fracturing)
US reserve-to-production ratio previously at about 10 years, between 30 or 40 years (EIA, June 2009)
Consequence: growth of US production reduces LNG import needs
Indication of unconventional impact: operator of a LNG regasification terminal in US earlier this year tried to change the licence to a liquefaction facility
If US can exploit new unconventionals as planned1, this may render GECF completely ineffective
Why? For long time, it looked like US was going to depend on LNG imports, but now may become exporter again after new discoveries
Safe to assume that the US would counteract any cartelisation efforts by other LNG exporters
1 depends on US Federal and State regulations since hydro-cracking affects groundwater supply

20. Gas Pricing - Summary
LNG is a competitor for pipeline gas in Europe and (may) contribute to the erosion of market power that Algeria, Norway and Russia enjoy in parts of Europe
Global distribution of gas reserves highly concentrated
Cooperation among gas producers and exports, especially those using LNG for transportation, likely and taking shape in form of GECF
GECF countries control 85% of LNG exports worldwide and all shipments to Europe
Risk of cartelisation of globalising gas market in medium- and long-run (and hence higher prices – above the competitive level)
Possible mitigating factor: US re-emerges as an LNG exporter as a result of unconventional gas reserves that are now exploitable
Fuel switching, alternatives as way out

21. European Energy Security: Natural Gas
Gas Supply Security
1. Reliability (low impact of physical inter ruptions)
2. Affordability
Geographic Sources
Diversification
Liberalisation
Infrastructure and Storage
LNG contributes to geographic diversification by making available
sources previously not accessible by pipeline (e.g. Qatar, Nigeria, ...)
Transport Routes and Modes
Diversification: through increased use of a) renewable resources, b) new transport routes and c) new geographical sources of conventional supplies such as oil and natural gas.
Liberalisation: more competition and market mechanisms especially in the existing natural gas market
Also: deeper integration and better interconnection of national markets in Europe. The increased use of LNG is related in many ways to the first and second pillars of the European energy security strategy.
Hence, the moderate use of LNG does contribute to the security and diversity of EU gas supply at present. However, the benefits may not be so pronounced if LNG becomes more widely used in the coming decade since cartelisation of the LNG market (i.e. higher prices) will become a real risk for consuming countries in Europe.
As a new form of transportation for natural gas, LNG provides
a flexible alternative to pipeline

22. Discussion / Q&A
Marcel Dietsch MPP (Harvard) DPhil student, International Relations University of Oxford University College, Oxford | OX1 4BH | UK
marcel.dietsch (at) politics.ox.ac.uk