In June I listened to Andreis Piebalgs, the EU's energy commissioner, tell a gathering of gas industry executives from around the world—including ministers of energy from Russia, Qatar and all the other largest suppliers—that "the client is king," and that "the buyer is more important than the seller." Most in the room were too polite to laugh. But if the events of the past year—including Russia's "gas war" with Ukraine—reveal anything, it is that the European client state is very much not "king." In the gas sector, Europe is more like a parched man begging at the gates of the desert's only water vendor.
Indeed, Europe's rush to gas over the past couple of decades—designed to reduce environmental costs and dependence on oil-producing countries—now looks like a big strategic blunder. Europe faces a potentially devastating shortage of natural gas—a supply crunch that, given the EU's transition to an economy powered by gas, will mean a sharp rise in prices and a slowing of the economy. And the spectre of this shortage is already exposing cracks in the EU itself.
If that all sounds alarmist, consider the statistics. By 2012, Europe will face a shortage of up to 70bn cubic metres a year. That's almost twice as much as France currently consumes. Demand in Britain, the EU's biggest gas consumer, is around 95bn m3/y. And the 70bn m3/y shortage will amount to around one third of Europe's total demand for imported gas by 2012.
Those predictions, made in June by Paolo Scaroni, the chief executive of Italy's Eni, include all the pipelines and LNG (liquefied natural gas) terminals that are already planned, such as new infrastructure linking Norway, Russia, and north Africa with the EU.
Scaroni believes that a number of different measures are available to the EU to meet this problem. On the demand side, they all relate to building more capacity. He says that Europe could, for example, build another 12 terminals to receive LNG. Doing that would allow the continent to secure the necessary gas from suppliers in the middle east, like Qatar, or in the Atlantic, like Nigeria and Trinidad. LNG requires no pipeline—just a massive ship to carry it from the plant where the gas is liquefied to the terminal where it is regasified.
In principle, it's a great idea. Except for two things. First, the world's total LNG production capacity in 2012 is expected to be just 70bn m3/y more than it is now. Enough to meet the expected demand growth in Europe, sure, but while Europe talks about more receiving terminals, China and India are already building them and signing contracts to secure the extra production. Europe will be left competing with Asian, North American and other countries for its LNG.
The second problem is that because it is so expensive to build an LNG plant, the big companies and producer countries that do so want long-term sales guarantees. Most plants that reach the market have sold 100 per cent of their capacity before they are on stream. In fact, producer countries and energy companies say that it is the desire of economies in the EU and North America for short-term contracts that is undermining their long-term investment plans.
Despite record prices, companies are not spending their profits finding more oil and gas. In the world's gas sector, that reluctance to spend money drilling for more gas and building more pipelines and other infrastructure to bring it to the market is at the root of the coming supply shortage. The International Energy Agency says that to meet demand, some $520bn in investment is required by 2010. But, says the agency, the current planned investment comes to just $210bn. That is disastrous for consumers, but gives producers the kind of leverage they need when asking for long-term supply contracts.
Such contracts stick in the craw of the average Brussels bureaucrat, who remains convinced—despite all the evidence—that Europe's "liberalised" energy market will bring prices down and "pass on advantages to the consumer." But any British consumer who watched his gas bills soar last winter while companies on the continent refused to sell gas through the interconnector pipeline should already have an idea about how badly the EU's "single energy market" actually works.
It is also an attitude that reflects Brussels's bizarrely misplaced confidence in dealing with the countries that supply the continent with gas. In its none too subtle way, Russia's Gazprom has begun to ratchet up the pressure on Europe, reminding Brussels that it can always export its gas elsewhere—to China, for example. A gas pipeline from Siberia to China has been talked about since the 1970s, and never got anywhere. But given the growth forecasts of the Chinese economy and Russia's renewed desire to seek the highest price for its resources, the possibility of a competing buyer of Russian gas should not be discounted.
Russia has already said, after all, that its massive Shtokman LNG project in the Barents sea will supply markets in North America, not in Europe, when it comes on stream in 2012.
Most of all, the plan to build a $5bn pipeline from Russia through the Baltic sea to Germany has shown just how powerless Brussels has become in the face of Gazprom's pressure. That pipeline might have been a welcome project for Europe—after all, when it comes on stream in 2011, it will deliver 27.5bn m3/y right to the heart of the continent. But it is bad news, especially for anyone who still believes that Europe has a common energy policy.
The much cheaper route would have been through the Baltic states and Poland. Spurs from the pipeline could have supplied those countries, too. Now they will have to buy that gas from Gazprom's partners in Germany. The German companies, which seem to believe that energy liberalisation has always been a matter for their competitors, stand to gain from this cosy relationship with Gazprom. Gerhard Schröder, who after losing last year's German election took a job with the Gazprom-led consortium building the line, is naturally helping their cause.
Germany's collusion in Gazprom's ambition to erect bilateral supply arrangements with consumers in Europe—something the single energy market in the continent was designed to avoid—has been likened to a new "Molotov-Ribbentrop" pact. And Robert Amsterdam, the lawyer for Mikhail Khodorkovsky, has become a vocal opponent of Russia's "energy imperialism." He told me last month that German critics of the pipeline had been receiving "threatening calls in the night." With more Russian gas will come other Russian "business practices." "Germany is the motor of Putinism," he says. "We have Russian energy imperialism, brought to you by the financiers of Germany."
But Germany has simply done its sums before the other European countries. Berlin has realised that pretty words about liberalisation are now irrelevant. Liberalised markets have brought Europe to the edge of a natural gas supply crisis. Germany is scrambling to secure its own supplies, careless of whether it undermines its European partners in the process.
Gazprom is enjoying its ascendancy. It has already demanded that its new pipeline be exempt from EU rules that require all energy infrastructure to be available to third parties. Those rules are fundamental to Europe's liberalisation project. But Gazprom knows that, under pressure, Brussels will cave in. After all, the commission has already exempted others. Despite what Piebalgs thinks, such are Europe's needs that it is in no position to refuse Gazprom's terms.
And, furthermore, Gazprom is right. Third-party access—a shibboleth of the energy market liberalisers—has led to weird results. When the allocations were made for capacity on the TAG (Trans Austria Gasleitung) pipeline between Austria and Italy, for example, around 149 companies won capacity up to 2038. But as Alexander Medvedev, the head of Gazprom's Gazexport, complained last month, only a handful of those companies actually had "physically available resources of gas." Many of those smaller companies have already sought to resell their gas to Gazprom at a mark-up over the access price they originally paid. Gazprom will, of course, pass on those price rises to the next buyer. That, says Medvedev, is an example of how the implementation of the gas directive has brought "no benefit to consumers."
That's the kind of anti-market propaganda that Gazprom wants to spread in Europe so that Brussels will allow the Russian company to operate without the nuisance of small firms getting in its way. The problem is that the propaganda is true: the single European energy market is not working.
Gazprom also knows that it holds the ace in the pack: it has the world's largest reserves of gas. But will Gazprom be willing to spend all the money it makes from selling gas to Europe on getting more of it out of the ground, so rescuing the continent from its coming supply crisis?
At the moment the company seems eager to spend its money on buying other companies. It knows that despite the British government's wishes, no one in Europe will stop it buying whichever company it likes, be it Centrica or a European media company. But buying other companies will do nothing to supply Europe with more gas. That is why Gazprom knows it has Europe where it wants it. If the EU wants Gazprom to find more gas, then Europe needs to make it worth Gazprom's while. That means no third-party nonsense, a return to bilateral long-term contracts and guarantees over "security of demand." It also means continued political acquiescence in Russia's gas-driven revival—what Robert Amsterdam calls the "free pass" over human rights and other issues.
Europe did well to lessen its oil addiction. But its gas dependence could turn out to be worse. As long as the continent continues to punish nuclear, coal and other forms of power, the EU is likely to face a serious energy shortage. The threat of it has already exposed clashes of interest between EU states, and the irrelevance of the continent's liberalisation process. Just wait for the shortage to really kick in.
