EU Energy Policy Blog

Conventional wisdom has it that Russia dominates Europe’s natural gas market, and that European imports of Russian gas are growing and can only continue to grow. This supposedly places the EU in a dangerous state of dependency and compromises its strategic position towards Russia. All sides of the debate over Europe’s Russia policy share these premises, including those “realists” who argue that dependency on Russian gas makes it irresponsible for the EU to pursue policies that antagonise Moscow. But the conventional wisdom is wrong: Europe’s gas supply is not dominated by Russia, or, for that matter, by any other exporter.

Since 1980, and particularly since 1995, Europe has considerably diversified its sources of gas imports. Today, for the EU as a whole, gas supply diversity is not a pressing problem.

As the figure below shows, over the past 40 years, natural gas consumption has grown steadily in Europe, and much faster than primary energy consumption. (Gas now accounts for around a quarter of energy use in Europe.) Since the mid-1970s, imports have covered all this growth. In 2007, Europe imported 300 billion cubic metres (bcm) of gas, accounting for 60% of consumption.

EU27 gas consumption, 1965-2007

Russia remains the largest exporter of gas to the EU, with total annual exports of 130 bcm today. But since the early 1980s, and particularly over the past decade, import growth from other countries has outpaced that from Russia. Since 1990, 80% of the growth in European gas imports has originated from countries other than Russia, especially Norway, Algeria, Nigeria and middle eastern countries. Accordingly, Russia’s share of EU gas imports has declined sharply, from 75% in 1990 to just over 40% today (see figure below). The share of EU gas consumption covered by Russian imports grew rapidly in the 1970s and 1980s, peaking at 30% in the early 1990s before stabilising at about 25%. Yet as a share of Europe’s primary energy consumption, gas imports from Russia have stabilised since 1990 at around 6.5% (see figure below).

EU27 dependence on Russian gas, 1990-2006

In other words, 93.5% of the energy consumed in Europe is covered by sources other than Russian gas – and natural gas, unlike oil, faces direct competition from other fuels and technologies.

Transport modes and routes for gas have also diversified. Until the early 2000s, most of Europe’s imports came via pipelines. But over the past decade, Europe has become a major customer in the rapidly growing market for liquefied natural gas (LNG), which is transported by sea. Since 2002, LNG from new suppliers such as Nigeria, Egypt, Trinidad or Qatar has accounted for most of the rise in EU gas imports. The share of LNG in EU gas imports has grown from 15% in 2000 to more than 20% in 2007. Even pipeline routes from Russia itself have diversified: the “Yamal-Europe” pipeline, which was opened in the 1990s, has reduced reliance on the Ukrainian corridor.

There may be no problem of European overdependence on Russian gas, but this is not to say that all is well on the supply front. Over the next 15-20 years, Gazprom faces serious supply challenges, and the international gas market is likely to experience considerable tightening. These issues, combined with declining indigenous production, mean that in the coming decades Europe could face a gas supply crunch, leading to stagnant or even declining consumption.

Despite controlling the world’s largest gas reserves, Gazprom will find it difficult to maintain its current supply levels. Production from the three “super-giant” west Siberian gas fields, which account for the bulk of Gazprom’s output, is now in steep decline. The company’s ability to maintain, let alone increase, production in the coming decades depends on the development of a new generation of fields on the Yamal Peninsula in northwest Siberia. Gazprom’s official line is that Yamal will come on stream in 2010. But independent analysts and most of the European gas industry think this is
highly unlikely. Some mention 2015 as a more realistic date for Yamal’s completion.

In fact, Gazprom’s production is already insufficient to meet all the company’s commitments. It depends on two other sources of gas – “independent” Russian producers and imports from Central Asia, especially Turkmenistan – to make up the shortfall. This “bridge” is supposed to supply Gazprom’s needs until the Yamal fields come online. But there is uncertainty over whether Gazprom will be able to source sufficient volumes from Turkmenistan, while independent Russian producers have little incentive to increase their production in the absence of access to Gazprom’s transmission network, which would enable them to reach consumers directly. Moreover, domestic gas consumption in Russia is growing, driven by economic expansion and a gas-intensive electricity mix. So there is at least a risk that Gazprom’s “bridge” to Yamal could collapse. Industry assessments vary from a tight but manageable supply situation to an impending crisis.

As long as Gazprom relies on the Turkmen/independent supplier “gas bridge”, it is unlikely that exports to Europe, at least those under long-term contracts, will increase at all. Depending on how quickly Gazprom can get the Yamal fields on stream, there could be room for increased exports to Europe in the second part of the next decade, though any additional commitments are unlikely to be large. In 2006, major long-term contracts with European importers were renewed until 2030-3514; as west Siberian production declines, these contracts will be serviced increasingly from Yamal, limiting the volumes available for new contracts. Finally, Russia’s political willingness to expand exports to Europe beyond current levels remains unclear.

Pierre Noël

P.S. This post is an excerpt from my report for the European Council of Foreign Relations ‘Beyond Dependence: How to Deal with Russian Gas‘

This entry was posted on Tuesday, November 18th, 2008 at 12:51 pm and is filed under Gas. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.