Caspian Report - Issue: 08 - Fall 2014

FATIH MACIT, HOLLY REHM
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kets, particularly after the Fukushima
nuclear plant accident. The European
Union has been trying to reduce
dependence on Russian gas, and tensions
in Ukraine have increased the
urgency of this issue. In this respect,
more LNG exports, potentially from
United States as well, could provide
a remedy. However, recent developments
show that pipeline trade will
continue to play a major role in European
markets and will increase the
competition for U.S. LNG. The Southern
Gas Corridor project, proposed
in 1990s, is now becoming a reality
with the development of Trans Anatolian
Natural Gas Pipeline (TANAP)
project between Turkey and Azerbaijan.
The first gas flows to European
markets through TANAP will happen
by the end of 2018, at 10 bcm a year.
By the mid-2020s the amount going
to Europe will increase to 20 bcm.
One could argue that compared to
the Europe’s total natural gas consumption,
this amount is fairly negligible,
and will not play a major role in
European natural gas markets. However,
we should think this 20 bcm as
an initial step in the development
of the Southern Gas Corridor. At the
first stage this corridor will be supported
by Azerbaijani gas, but there
are hopes that it will be fed by additional
sources in the future. Turkmen
gas, Iraqi gas and resources in East
Mediterranean may find their place
in this route, and ten years on, more
than 60 bcm of natural gas could be
transported to European markets via
this pipeline. This additional gas may
increase the competition in the market
and reduce the need for U.S. LNG.
Another important issue relates to
the nature of the natural gas business
in Europe. The North American
natural gas business model is mostly
based on a spot market. By contrast,
European markets are mainly based
on long-term contracts where the
natural gas price is indexed to oil
prices. In a spot market model there
might be large fluctuations in prices
for various reasons; this generates
significant uncertainty, particularly
for the manufacturing industry.
Therefore, European producers
might choose to go with current longterm
contracts that reduce this price
uncertainty instead of opting for LNG
exports from the United States.
Increased pipeline trade may also reduce
the competitiveness of U.S. LNG
exports to Asian markets. In contrast
to European countries, countries in
the Asia-Pacific region are largely
reliant on LNG for their domestic
natural gas demand. For some big
consumers in the region like Japan
and South Korea, LNG is the only
source by which natural gas demand
is met. These countries may remain
major LNG consumers, but other big
consumers are taking initiatives to
increase the consumption of pipeline
gas. China has recently signed
an agreement with Russia that that
involves the purchase of 38 bcm of
natural gas annually. China is already
importing a significant amount of gas
from Turkmenistan via pipeline and
is planning to increase this. Other important
consumers in the region like
India and Pakistan are also working
on pipeline projects that will increase
the gas supply from Turkmenistan.
All these developments indicate that
pipeline trade will play a greater role
in Asian markets. This may in turn
put a downward pressure on LNG
prices and reduce the competitiveness
of large scale U.S. LNG export.
The third barrier to large-scale U.S.
LNG export is related to developments
around renewables and energy
efficiency. This has been an important
issue for Europe in particular
over the last decade. The EU’s natural
gas consumption has remained
almost flat over the last ten years.
The rising share of renewables in total
primary energy consumption and
improvements in energy efficiency