How's European gas race going?

/By AzerNews/

By Gulgiz Dadashova

Looking at developments the European Union has given the impression that it is working to solve both the Ukrainian crisis and find a solution to its energy problem. Coming next winter, the EU would need to have all its ducks in a row if it is to extract itself from under Russia's control.

Energy officials from Brussels to Sofia are pushing forward to secure more Caspian volumes against Russian gas leverage --- in an effort to secure gas for both their nationals and their businesses.

As it happens, the EU officials could just have found the solution they were looking for as they turned east to the Caspian region to solve their energy conundrum. Europe first considered Azerbaijan, the initiator of the only Caspian gas supply route in Western direction, and energy-rich Turkmenistan, but later turned to Moscow with a new proposal to join the TAP.

"Russia can use the Trans Adriatic Pipeline from a regulatory and political perspective, for shipping its gas to the EU countries, if the country builds the “Turkish Stream” pipeline,” Brendan Devlin, advisor in the European Commission’s DG energy told EurActiv.

“It doesn’t matter who the shipper is, and we don’t care if it is Russian gas, Libyan gas and Azerbaijani gas. The internal market works like that. It’s the rules that we have set up for Russia, or for Gazprom," Devlin said. "And as we require them to implement those rules, they are free and welcome to use pipelines in the European Union on the same basis.

TAP, one of the core links of the Southern Gas Corridor designed to Supply Shah-Deniz gas to Europe, has been granted an exemption from Third Party Access. But, beyond this exemption, TAP is subject to TPA as any other pipeline in the EU under the EU legislation. However, this does not nullify pipeline’s commitment to transport Azerbaijani Shah Deniz-2 gas to the European market.

It seems now that not only Russia has changed its tactics—using third parties as Turkey to bring gas to the EU borders, it looks Europe has tried to win more discounts.

Chi Kong Chyong, the research associate at the Judge Business School and director of the Energy Policy Forum at the University of Cambridge, believes it was a rather intelligent decision by regulators to exempt only the first phase of the TAP from TPA, since a fair competition should be applied to all suppliers who would like to use extra capacity, including shippers with Russian gas.

“This is exactly what the Russians are pointing to if you analyze their proposal for inland pipeline connecting the Turkish Stream offshore with Greece-Turkey border – the end point of this onshore pipeline is just 10km away from the entry point of TAP,” he wrote in an e-mail to AzerNews.

The expert notes that if Russia wants a ‘free ride’ and use the capacity of TAP they can do this by just lowering the price. “Hence, price competition might emerge between Russia and say Azerbaijan. This is exactly what Europe needs, as a consumer,” the expert notes.

The EU officials earlier insisted that the South Stream could not bring gas into Europe unless it confirmed to European energy competition rules, which would include allowing other suppliers to put gas into the pipeline. While some analysts doubt the feasibility of the Turkish Stream, which replaced the South Stream, others say a route to Turkey makes strategic sense.

Chi Kong Chyong said the European Commission has officially stated in its recent European Energy Union Strategy that it welcomes both supply and route diversification.

“Russia is only mentioned once in the context of revising Europe-Russia energy relations when the ‘time is right’. What one can tell from this is that there is a political will from the European Commission to diversify away from Russia. This, of course makes the Turkish Stream politically unpalatable for Europe, at least for the time being and this of course is a function of Russian-Ukrainian conflict,” he wrote.

The expert notes that should Europe welcome the Turkish Stream, the latest version of Russia’s pipeline politics, it could potentially drive down Europe’s gas import bill.

“The Turkish Stream is as about bypassing Ukraine as it is about foreclosing competition from Caspian gas, particular coming from Azerbaijan and potentially from Turkmenistan, Iran, Iraq and Eastern Mediterranean Sea – Turkish Stream is Russia’s policy insurance against supply disruption on the Ukrainian route but more importantly against a potential loss of market share to other supplies in that region."

Studies have predicted the use of natural gas in Europe to increase 1.5% annually, and the consumption to hit 550 billion cubic meters in Europe in 2020. At present, 160 billion cubic meters of the gas consumed in Europe comes from Europe, but this will fall to 140 billion cubic meters by 2020. As domestic production falls, EU states are increasingly dependent on imports from other regions in the world to meet their growing natural gas requirements.

Speaking about what could be Europe’s choice for supply routes, Chi Kong Chyong notes that Europe, as a net importer of energy, should have a strong interest in having well-functioning internal market so that to minimize market power and distortions – “a rational policy would be of course to welcome supply and route diversification, as it is officially stated in Europe’s policy documents”.

However, the expert does not exclude LNG both in terms of quantity and cost as other supply option in the long-term, saying “unless magic happens and shale gas potential can be unlocked in Europe, which I am skeptical about, especially observing the direction of the European energy policy – a strong call for further efficiency and more renewable."

“There is indeed a more serious concern which goes much deeper than the question about energy security and supply diversification - a more problematic question, which affects all gas supply options to Europe is the wider future of natural gas in Europe over the 2025–2030 time horizon,” the expert concluded.

Gas should represent about 31% of the world energy demand growth between 2005 and 2020 (coal 25% and oil 22%), according to Enerdata. The European gas consumption should increase by 40% until 2020. The power sector is the main driver of this growth, capturing 53% of this increase.