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

now, China has preferred the LNG option. Pipelines
are now on the agenda, and a first link to import gas
from Kazakhstan, Uzbekistan and Turkmenistan
became operational in December 2009. 10
It would take decades for gas flows towards
China to equal those towards Europe. Russian gas
exports to East Asia will continue and certainly
expand, but Russia will be able to keep on supplying
Europe and slowly expand its Asian markets.
Russia’s internal situation and domestic market
are likely to have more direct influence on gas
supply issues than China. Indeed, Russia’s available
export surplus is determined by domestic political
and social factors. Two major factors have broad
implications for the security of European supplies:
domestic prices and investments.
Gas prices in Russia are extremely low compared
to export prices, about $43/1000 cm for industrial
users and $32/1000cm for individual users 11 against
around $275/1000cm on average in 2009 for Western
Europe. Western European markets represent
70 percent of Gazprom’s profits. Consequently,
Gazprom is constantly pushing the government to
increase domestic prices. The Russian government
has promised to put industrial prices on par with
export prices from 2011. The increase of prices for
individual users is considered too politically sensitive
and is likely to remain untouched in the near future.
If Russian industrial prices are increased, and
the Russian domestic market liberalized, the
consequences for Europe would be very important.
First of all, many observers agree that it would
force Russian industrial infrastructure to become
more efficient. Therefore, if less gas is consumed
domestically, Gazprom (which still holds the state
monopoly on exports) would have larger surpluses
for exports. Those could potentially momentarily
offset the decrease of output due to the lack of
investment.
Another consequence would be the end of
friction between Russia and Central Asian producers.
The latter would have no particular incentive to
reach European markets if the Russian one offers a
similar price level.
The second problem concerns the lack of
investment in infrastructure and exploration. As
Geopolitical Issues of Europe’s Future Gas Supply
Jonathan Stern recently underlined, 12 European
gas demand has significantly decreased because of
the crisis and is difficult to predict in the long run.
Moreover, if supply capacity became tight, supplies
to the Russian domestic market and exports to CIS
countries would likely be reduced before exports to
Europe. It is also important to notice that Russia has
no interest in massive investments in new production
facilities, because tight supply allows prices to be
kept higher than if supply was abundant, and it
gives Russia leverage when negotiating contracts.
Moreover, Dasseleer (2008) even notices that a
present abundant supply would promote short-term
deals over long-term take-or-pay contracts. The
uncertainty on the markets and the EU’s insistence
on diversifying its imports away from Russia does
not favor accelerated investment; on the other
hand, Russia has no particular interest in letting the
situation deteriorate and thus risk being short of gas
to fulfil its commitment in the future.
2.2. Nigeria
Nigeria is Africa’s first oil producer and also
possesses large gas resources (about 5.22 tcm of
proved reserves according to BP, 2009). The gas
produced so far has largely been flared because
of the lack of the necessary infrastructure. Today
the flaring rate reaches 40 percent of a production
of about 35 bcm/yr; (this rate used to rise up to 75
percent a few years ago), which partly explains
why Nigeria remains below its potential production
capacity (35 bcm in 2008, while Egypt, for example,
produced 59 bcm, according to BP).
The relative distance of Nigeria from its export
markets requires that exports take the form of LNG.
A pipeline project connecting Algeria and Nigeria
is under study (Trans-Saharan Gas Pipeline) but
is subject to too much geopolitical instability to
represent a real step forward for the overall gas
industry. As in many other oil- and gas-producing
countries, the government aims at increasing the
domestic consumption of gas as a means to kickstart
the development of the country. Nevertheless,
it is not certain that the state will have the capacity
to do this on a large scale, as the country lacks the
most basic infrastructure.