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Wednesday, September 06, 2006

Europe hopes Gazprom can handle possible gas shortages

MOSCOW. 06-09-2006 (Igor Tomberg for RIA Novosti) - Russian energy giant Gazprom and Germany's E.ON and BASF signed a final agreement on the North European Gas Pipeline in late August. This document sets out the project's legal and financial aspects. Although the official statement said the final document specified the basic agreement and set forth the project's legal and financial parameters, the document does not spell out the financial commitments of the parties involved. The cost of construction of the pipeline's shelf section had been previously estimated at 4 billion euros, but a feasibility study is still lacking. Analysts believe the North European Gas Pipeline project had been mothballed for political considerations. This pipeline with a projected annual capacity of 55 billion cubic meters of gas was Europe's main hope for expanded gas supplies. It was intended to launch construction of the pipeline's shelf section in 2008 and to start exporting gas in 2011. But unless the partners reach an agreement soon, construction deadlines may be delayed. Gazprom, however, has contracts to supply 13 billion cubic meters of gas annually for a period of 25 years after 2011, and if the North European Gas Pipeline is not commissioned by 2011, the Russian giant will have to use existing pipelines, which will inevitably lead to gas shortages. BASF and E.ON were the first to perceive this threat. E.ON Ruhrgas signed a contract to buy 400 billion cubic meters of Russian gas by 2036. Apart from the 2004 long-term contract, Wintershall, a BASF subsidiary, and Gazprom signed another document for the purchase of 90 billion cubic meters of gas for Ferbundents Gas over the 2014-2030 period. European energy majors are striving to extend their long-term contracts with Gazprom because the North European Gas Pipeline may never be completed. This is hardly surprising against the backdrop of snowballing gas consumption in the EU. Household gas consumption in the United Kingdom, the largest European gas consumer with 94 billion cubic meters in 2005, has doubled in the last three years and continues to grow in spite of skyrocketing prices. Last winter, 1,000 cubic meters of gas cost over $1,200 on the wholesale market, whereas Gazprom charged $250-270 for the same amount of gas on the continent under long-term contracts. Gas production in Europe has been falling. The Norwegian gas industry, which is posting 10% annual growth, is unable to compensate for the production slump in the British sector of the North Sea and a gradual recession plaguing the Dutch gas industry. The UK and Netherlands have reduced gas production by 14 billion cubic meters on 2004. The UK gas industry has posted a 20% recession since 2000, and this share will continue to increase. Consequently, the UK may face gas shortages in the foreseeable future. At the same time, the clash between Brussels and Moscow on energy issues has not abided. Russia meets 25% of European gas demand and accounts for 50% of EU gas imports. European politicians, who are feeling very nervous about this, have so far proved unable to find alternative gas suppliers other than Norway and Algeria. However, an Algerian-Russian gas rapprochement has now begun. Although the recently signed memorandum on cooperation between Gazprom and Sonatrach, Algeria's state-owned oil-and-gas giant, is not a direct action agreement, it has sparked off another anti-Gazprom campaign in European media and political circles. Although Brussels is opposed to long-term gas contracts, European energy companies are rushing to extend them. Apart from Germany, France, Italy and other European countries are trying to ensure gas-import guarantees for themselves. The French gas company Gaz de France SA is set to announce its new contract with Gazprom. Jean-Francois Cirelli, the company's president, told the press that the new gas-sale contract would replace the existing one, due to expire in 2012. I believe we can soon announce the signing of an important gas-supply agreement that will guarantee long-term supplies of Russian gas, Cirelli said. But he declined to explain specific motives for concluding a new contract when the previous document will remain valid for over five years. On August 28, Americo Amorim, co-owner of Portuguese Galp Energia energy major, said it was ready to offer a stake to Gazprom in exchange for sustained supplies in the future. This may become the first breakthrough in Gazprom's drive to obtain a stake in European gas distribution and pipeline assets. It appears that possible gas shortages have compelled Europe to assess the regional energy supply situation more soberly, as well as the role of Russia and Gazprom in this process. Russia, a traditional raw-materials appendage, is turning into a desirable partner. Moreover, foreign companies are offering a stake in national energy infrastructure to Gazprom because their assets are absolutely useless without Russian gas. The spectre of energy shortages compels EU bureaucrats to heed the demands made by Russia and other gas suppliers, which want gas producers and consumers to assume equal responsibility. A gas cartel may be established later on. Lessened EU solidarity on energy security issues in the face of possible gas shortages will force Brussels to strike a bargain with gas-producing countries because the latter may unite against the EU. However, this deal will carry increasingly harsher terms. Prof. Igor Tomberg, leading research associate, Center for Energy Research, Institute of World Economy and International Relations, Russian Academy of Sciences.

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