|Issue Number: 108||May 2014|
The Russian-Ukrainian Conflict, Pipeline Politics and European Gas Markets as Collateral Damage
If domestic energy issues have dominated the British news over the past six months, it is just possible that the media focus could now turn to international energy matters for the next half a year - or longer. A crisis is emerging between Ukraine and Russia that is embroiling the rest of the world. It is a story that has complex historical precedents, and one that is still being played out with no clear conclusions. What's more is that it has the potential to completely transform the West's relationship with Russia, and how Europe sources its gas.
In brief, the situation is that Naftogaz, Ukraine's national oil and gas company, owes, and is unable to pay, the Russian gas giant Gazprom a large sum of money that has been estimated to be about $22bn by the New York Times . This sum has increased from $3.5bn from the end of April, due to Gazprom's recent additional claims for unpaid take-or-pay volumes from 2012 and 2013. Gazprom issued an ultimatum for the debt to be paid by May 7 and threatened that gas supply to Ukraine would cease from June, but at the time of writing there has been no indication that this will happen.
Whilst this might seem like a relatively insular issue - between Ukraine and Russia - it is not. If Gazprom ceases all gas supply through Ukraine, then Europe will have a deficit of around 80 billion cubic metres (bcm) of gas per year since several important pipelines (Brotherhood and Soyuz) go through Ukraine that connect to the rest of Europe. 80 bcm of gas is roughly equivalent to the UK's consumption of gas in 2012.
The Russian Energy Minister, Alexander Novak has been clear in how he wants Europe to respond, hoping that the EU 'will take measures towards the speediest disbursement of financial aid to Ukraine by European financial institutions… for ensuring Naftogaz of Ukraine's timely payments for natural gas supplies from Gazprom' . However, if the debt remains unpaid and Gazprom ceases gas exports to Ukraine, are there any other options for Europe to make up the missing 80bcm of gas?
Figure 1: Map of major pipelines.
Short-term fix from an unlikely customer
Undoubtedly, if a gas crisis emerges in the next few months, European countries will want to find short-term solutions to the potential 80 bcm gas gap. If Russia is purely out to punish Ukraine, and wants to maintain a relationship with the rest of Europe, then a solid commercial solution could be reached between Europe and Russia. This would involve maximising current gas capacity of pipelines that skirt around Ukraine. One pipeline in particular, Nord Stream, which runs along the Baltic seabed to Germany, is currently only supplying around 30 bcm of its 55 bcm capacity. If this could be increased by 25 bcm, then over 30% of the 80 bcm deficit could be recovered. Fully utilizing the existing capacities of the Yamal Europe and Blue Steam pipelines to 33bcm and 16bcm respectively would further decrease the gas deficit.
Next to Russia, Norway is another key player in Europe's gas markets. Given current arrangements, the Economist estimates that perhaps an additional 10 bcm of natural gas could come from Norway . But the situation in Norway is unclear: in 2013, a total of 102.5bcm of gas was exported; a figure that represents a 4.9bcm decline from the year before . There is public pressure for there to be less gas production in the future because of concerns about carbon emissions. It is unclear whether Norway will continue the trend in exporting less gas, or perhaps see an opportunity to supply Europe with more gas.
Could American Shale Gas Save Europe?
The US LNG scene might sound like a good source of gas for Europe. Recently, ambassadors to Washington from Poland, Hungary, Slovakia and the Czech Republic have sent letters to lawmakers in the Senate and the House of Representatives asking for assistance . But there currently needs to be Congressional approval for LNG exports, and it is uncertain whether Obama will grant this in the lead-up to the midterm elections in November. Only one LNG export facility, Sabine Pass in Louisiana, has so far been granted all the necessary permits to export LNG.
Figure 2: Sabine Pass liquefaction site. 
Even if a greater number of LNG exports to Europe are approved, it will not be until around 2019 or 2020 before the US has enough LNG projects onstream to make a difference to European gas supplies . Furthermore, it is unlikely that the US will ship much LNG to Europe because prices in Asia are so much higher. European buyers would have to match Asian LNG prices, which may mean high prices for gas (currently Asian LNG costs around $15/MMbtu, compared with about $10/MMbtu for Russian gas). All in all, LNG exports from America is certainly not a short-term solution, though there might be some value for Europe to import from America in the future, particularly as it would be a way to diversify energy portfolios. A high number of LNG projects will be coming onstream in Australia, and others (though at a later date) in Papua New Guinea, Mozambique and Tanzania, which could prove to be other useful sources of LNG in the future.
Increasing gas imports via Nord Stream, Yamal Europe and Blue Steam pipelines, upping imports from Norway and securing more LNG cargoes are all only partial solutions. There are other stronger ways to increase Europe's energy security, but these are long-term measures; such as building more gas storage facilities, constructing more nuclear plants and investing in more renewable energy sources. There is also a more controversial solution, and one that is increasingly becoming more possible.
European's source of shale gas?
There is little doubt that the situation between Russia and Ukraine, and the uncertainty over gas supplies to Europe, will put fracking high on the agenda for many European governments. The UK is currently reviewing the Infrastructure Bill, a law that will allow energy companies to run shale gas pipelines under private land .. Ukraine itself is developing its shale gas with the investment from Chevron and Shell. This could in theory give the country a degree of energy independence from Russia, much to Gazprom's chagrin .. There is significant shale potential across Europe as a whole with the EU's Joint Research Centre putting unconventional reserves at high, best and low estimates of 17.6, 15.9 and 2.3 trillion cubic metres . However, public opinion and politics will present challenges to the commercial production of shale gas. IHS CERA estimates that by 2020 European shale gas production will only be 4bcm per year . At best, shale gas is a long-term solution to meeting some of Europe's gas demand.
The next few weeks will provide important clues over how European leaders will respond to the Russian-Ukrainian crisis. The crisis has exposed Europe's vulnerability and energy dependence; it is likely to act as a catalyst for developments in Europe's indigenous energy sources, such as fracking. What is clear is that if gas exports are ceased to Ukraine, Europe will have to develop some clever solutions to make up for the shortfall. Overall, it might prove easier for the EU to loan money to Ukraine so it can pay off its debt to Gazprom, which has become a more possible option now that the International Monetary Fund has approved a $17bn emergency loan for Ukraine. But loaning money in order to help settle Ukraine's debts with Gazprom might jar with the recent sanctions that have been imposed on Russia.
Researched and written by MJMEnergy Analyst, Nico Cottrell,
 Steven Erlanger, 'Russia Ratchets Up Ukraine's Gas Bills in Shift to an Economic Battlefield', (May 10 2014) (Viewed 12/05/14). http://www.nytimes.com/2014/05/11/world/europe/russia-ratchets-up-ukraines-gas-bills-in-shift-to-an-economic-battlefield.html?hpw&rref=business&_r=0
 (Viewed 12/05/14) http://rt.com/business/155100-ukraine-gas-debt-eu/
 European energy security: Conscious uncoupling (accessed 1/05/2014) http://www.economist.com/news/briefing/21600111-reducing-europes-dependence-russian-gas-possiblebut-it-will-take-time-money-and-sustained
 BP Statistical Review of World Energy 2013.
 Callum O' Reilly, LNG Industry, p.3
 Although the Sabine Pass is expected to begin exporting LNG in 2015.
 Neil Buckley, 'Ukraine's shale gas lures western companies', http://www.ft.com/cms/s/0/abe8802a-4d0c-11e3-9f40-00144feabdc0.html#axzz30SI8SyLI (Viewed 1/05/14)