In recent years one of the main aims of the EU energy policy was to reduce dependence on Russian energy. However, the start of 2011 has prompted to take a different view on the security of energy supply to Europe, especially given an unprecedented increase in gas demand observed in the European market in 2010.
In the first three months of 2011 oil prices rose by over 20%, while European spot gas prices came close to 400 US Dollars / 1000 cm (22% more than the average price of gas supplies to Europe under Gazprom’s long term contracts). This is primarily a reaction to geopolitical risks, since a tense situation in Africa and the Middle East became the main driver behind price rises. Secondly, this was a reaction of the market to the situation in Japan and an abrupt change in the prospects for the European nuclear power industry.
According to various estimates, oil production fell by 500-750 thousand barrels a day as a result of political unrest in North Africa. In some countries energy companies suspended projects and there has been a reduction in exports and an increase in terrorist threats. In addition to Libya, several other countries could completely suspend deliveries due to political reasons. However, interruptions to gas supply represent more of a threat for Europe than oil supply problems, since the countries affected by political unrest provide a third of the European gas supply. Therefore security of gas deliveries to Europe via the southern corridor has been severely compromised.
According to ERI RAS estimates, if tensions in this region were to continue and grow, gas prices in Europe could rise by 60% (half of this price increase is provided by fundamental market factors and the other half is a speculative component). The estimate was made using the modelling complex of ERI RAS, following the scenario of gas exports from Africa and the Middle East falling by 25%. At the same time a comparative analysis shows that out of all the countries delivering gas to Europe, the countries which provide only 8% of deliveries to the region have a country rating above that of Russia. The country rating is in line with the speculative category for all other suppliers (below investment category, as in the case with Russia), or there is no country rating at all. Therefore the question which Russian experts have repeatedly posed to their European colleagues is becoming ever more relevant: should any diversification of supply sources be viewed as increasing energy security or is it worth taking into account the reliability of new suppliers and their country risks.
Earthquakes in Japan have also had an impact on the European gas market, and continue to do so. Japan accounts for around 35% f world LNG imports (in 2010 Japan imported 70 mt of LNG, which is around 10% of the world total gas imports). Loss and shutdown of some nuclear power facilities will primarily lead to an increase in LNG demand. Additional deliveries to Japan will mainly be made at the expense of the European market which, having lost some of LNG volumes, will replace them with pipeline gas.
Despite the fact that in the last five years the number of gas liquefaction facilities has virtually doubled, as demand grows in Japan, it will be natural to expect a growing pressure on the global gas market. Producers risk not being able to meet demand as soon as in the next year or two, resulting in another wave of a gas deficit.
Additionally, events in Japan will in the long term lead to a shutdown of old nuclear power plants in Europe, an increase in construction costs of nuclear power plants and a deferral of new projects because of stricter safety measures. EU will therefore be paying particular attention to the development of renewable energy sources and, undoubtedly, gas.
According to a new BP statistical report, gas consumption in the EU in 2010 was up 7.4% compared to 2009. The European gas market is recovering after the crisis much faster than expected.
Growing demand, an increase of imports by Japan, limitations to gas supplies from a number of Arab countries and Europe reconsidering its nuclear programmes will increase tensions in the European gas market in the next few years. According to the ERI RAS forecast, the “nuclear” factor alone (shutdown of several nuclear power plants in Japan and Europe) will add 10% to the European spot gas prices. Overall prices will grow by around 20-30%, taking into account all of the above factors. Short term and speculative price hikes could be significantly above that.
The EU has to re-evaluate its energy policy and approaches to energy security given the events at the start of 2011. Developing cooperation with Russia will become one of the main priorities, in contrast to the previous years, when there was a clear focus on expanding energy communication with Africa and the Middle East. The logic and the pressure of the recent events leave Europe with little choice but to support Russian energy transportation projects.