Gulf and European Energy Supply Security - Feem-project.net

SESSION IV: LNG and Gas Supplies to Europe
Geopolitical Issues of Europe’s Future Gas Supply
Geopolitical Issues of europe’s Future Gas supply*
Introduction and Definition of the Concept
of Geopolitical Risk
The gas industry is gaining an ever-growing
importance in the energy system of the European
Union (EU) and on the global energy scene. As the
2020 target approaches, 1 the need for using less
carbon-producing energy resources becomes more
urgent. The targeted use of renewable resources
might account for 15 percent of the EU’s total energy
mix; it naturally follows that a complete halt to fossil
fuel usage is not possible in the short or medium
term. However, the process of switching to non-fossil
energy sources can be accompanied by increased use
of more environment-friendly fossil fuels. Natural
gas is indeed a particularly adequate alternative to
oil and coal, especially for power-producing plants.
Gas can be considered to emit half the amount of CO₂
compared to oil and one fourth compared to coal.
The strategic importance of natural gas for the
EU is very clear. Until recently, an important share
of gas consumed in the EU was produced internally,
thanks mainly to the Dutch and British resources.
Today, however, imports represent the major supply
source. This situation is expected to worsen as fields
in the Dutch and British part of the North Sea are
rapidly depleting. At this moment, the EU will face
the potentially dangerous situation of being forced
to import the vast majority of an energy source vital
for its functioning.
The major element causing unease among
experts and governments is that certain sources of
gas supplies to the EU are believed to be vulnerable
in the sense that they face the threat of being
disrupted or even completely stopped. The reasons
for this may lie in a technical issue, a physical
impossibility to supply the required volumes of gas,
or the inappropriate behavior of one actor in the
supply process. This last category, which falls under
‘geopolitical risks,’ is dealt with in this paper.
For the purpose of this paper, risk could be
described as the set of threats imposed on the
security of natural gas supply to European Union
members and caused by the specific behavior of one
or more countries (producing or transit) or non-state
actors and by the evolution of global institutions and
markets.
1.theoretical Geopolitical Risks
It seems appropriate, as a theoretical
recapitulation, to provide a list of events or situations
that could be considered as threats for the supply
of natural gas to the EU. At the outset, it must
also be stressed that the gas business functions
very differently from the oil one, the first reason
being the physical characteristics of each energy
source. While oil can be put in vessels and shipped
all over the world, gas is primarily transported by
pipeline. Consequently, the gas market is less prone
to experiencing high and unexpected volatility,
although gas prices are tied to oil prices.
Until now, the political economy of gas has
been much more regional and bilateral as the main
instrument used by the market is the take-or-pay
long-term contract. There are advantages and
disadvantages to this situation. First of all, gas prices
are less likely to experience dramatic increases, as a
shock in one part of this fragmented market does not
necessarily impact another part. Pipeline flows can
hardly be reversed unless the pipe is designed to do
so, and the customer at the end of the pipe cannot
* This paper was written by François-Loïc Henry (GRCF) also based on work by Stefan Schaar Kruse (Ramboll) and Sohbet Karbuz (OME)