Derek Brower in London -
The economies and citizens of emerging Europe can rest easy. As autumn approaches, another winter gas war between Russia and Ukraine is not looming over the region. For the first time in years, the outlook for energy supplies looks stable. And new drilling in countries such as Poland could even end the domination of Russia over the region's energy supplies.
Credit for much of this goes to the advent of new technology in the gas industry and the lingering hold of the recession, which has wiped billions of cubic metres (cm) from demand. It's a combination that has created a global glut of gas, led by the opening of unconventional reserves in the US and that country's effective disappearance from the liquefied natural gas (LNG) import market.
The domino effect has spread across the Atlantic and into Europe, leaving an abundance of cheap LNG on the market, and demolishing notions that Russia's pipelines would forever dominate the energy supplies - and the politics - of the continent. Along with cargoes of LNG, new expertise is also flooding into the European energy market.
Across Central and Eastern Europe (CEE), oil and gas firms have arrived to apply the same techniques that triggered the US shale-gas bonanza - horizontal drilling to tap wide subterranean gas reservoirs and hydraulic fracturing to bust open low-permeability rocks - to exploit promising gas-rich deposits. Hungary, Austria and Bulgaria have already attracted prospectors, but the most promising country is Poland.
In mid-August, the US oil services firm Halliburton carried out a hydraulic fracture on behalf of Poland's state company PGNiG at the Markowola-1 exploratory well, located near Kozienice in Lublin province. The results haven't been released, but the involvement of PGNiG, long Gazprom's partner as an importer of Russian gas, is telling. Meanwhile, a host of smaller firms drilling Polish shale have been joined by heavyweights such as ConocoPhillips and Chevron, two of the largest gas producers in the US. Another shale-gas expert from North America, Canada's Talisman Energy, says its drilling programme in Poland, which begins next year, could bring production on stream by 2013. The reserves in its Gdansk W, Braniewo and Szczawno licences could amount to 1.5 trillion cubic feet, more even than the company holds in the Marcellus shale in the US northeast, now the world's second largest gasfield. Polish shale is expensive now, and analysts say major production is unlikely within a decade. But if drilling results arriving in coming months are positive, this will change quickly, as it did in the US.
Most analysts say Poland's unconventional reserves could be around 3 trillion cm. Greg Pytel from Poland's Sobieski Institute reckons they could be far larger - at around 10 trillion cm, 10 times greater than the estimate in BP's statistical annual - and sufficient to meet not only Polish domestic demand (13.7bn cm in 2009), but support an export industry too. He speculates that the endgame for ExxonMobil, Chevron, ConocoPhillips, Marathon and other large firms drilling shale in CEE isn't the domestic Polish market, but the European one. Polish gas, he believes, could eventually be exported to the lucrative markets of Western Europe.
That's highly speculative, but that such ideas are now gaining currency shows just how much flux has been introduced into the European gas-supply picture, thanks to the shale gas revolution and the depression in demand.
Above all, new infrastructure to import gas from Russia, such as the proposed second tranche of the Nord Stream pipeline through the Baltic Sea and the South Stream link into Central Europe, has become much less pressing.
Foot off the gas
European gas demand fell by around 6.4% in 2009, according to Eurogas, an industry body. But this masks far greater declines in CEE. There, consumption slumped, with Bulgaria (-21.8%), Estonia (-15.1%), Hungary (-13.7%) Lithuania (-16%), Latvia (-9.9%), Romania (-14.8%), Slovakia (-10.5%) all recording huge drops, between them wiping some 6bn cm a year (cm/y) from demand. Forecasts for 2010 suggest that a recovery will be weak. IHS Global Insight, a consultancy, reckons that the rush to tie up new supplies in recent years now means that the EU is over-contracted for gas to the tune of 110bn cm this year (compared with demand of 413bn cm in 2009). In 2012, the figure will still be 70bn cm/y. And that doesn't include any assumptions about Poland or any other consumer developing its own domestic supplies.
For Gazprom, the Russian gas export monopoly that just two years ago was forecasting a tripling of gas prices in Europe and its own ascent to become the world's first trillion-dollar company, this shift in the fundamentals has been disastrous. As demand slumped in Europe, so did the company's sales - and its market share, which came under threat from LNG and new supplies out of Norway. The company's aggressive stance also disappeared: as spot-gas prices have fallen sharply in the past year, Gazprom's gas looked too pricey for its customers, so it reformulated them, injecting elements of the spot price to satisfy customers. At the same time, its boss Alexei Miller has warned buyers that such arrangements will still apply when the spot price rises. More bullish than most analysts, it also expects strong growth in its sales to Europe, rising from 160.8bn cm/y in 2010 to 170.9bn cm/y in 2012.
Nonetheless, its appetite for another reputation-damaging spat with Ukraine has also disappeared. The new relations between Naftogaz, the state Ukrainian firm, and Gazprom were consolidated in April, when the two countries agreed a deal to give Ukraine a 30% discount on the gas it imports in exchange for a 25-year extension to Russia's lease of the Black Sea naval base in Sevastopol. The agreement confirmed two things - the intrinsic link between Russian energy policy and its diplomatic strategy in the "near abroad"; and that the gas war era is over.
Beyond the relief this offers to consumers in CEE, the Ukraine deal has even bigger strategic consequences for the region. The Ukraine transit problem was behind Gazprom's strategy to diversify its import routes into Europe - and the EU's desire to broaden its range of suppliers. Yet, points out Naftogaz, Ukraine's gas transit system has 80bn cm/y of spare capacity, more than the combined capacity that would be added by the EU-backed Nabucco pipeline (31bn cm/y) and the proposed second Nord Stream link (27.5bn cm/y). Add to that the European Commission directives to increase energy efficiencies and renewable energy, says Edward Christie, a Vienna-based energy economist, and the need for pricey new pipelines becomes even less compelling. If these measures take hold, EU gas import needs in the next decade could be a third lower than previously forecast.
Of the infrastructure most put at risk by this combination of a global gas glut, potential new domestic supplies, Ukraine's re-emergence as a viable transit state, and EU measures that could yet dampen long-term gas demand, Nabucco stands out.
Nabucco's six shareholders, led by Austria's OMV, continue to talk up the pipeline's prospects, saying construction will start next year and first gas will flow in 2014. Yet the problem of finding adequate gas supplies in the upstream to justify the €7.9bn investment continues to undermine it. A new round of sanctions levied against Iran by the EU and US has exacerbated Nabucco's dilemma, because that country was to have been a supplier. Iraqi gas remains possible, and small volumes of Azerbaijani gas will also feed into the first phase of Nabucco. But the main hope for Nabucco has been to draw in exports from Central Asia. In July, Turkmenistan, that region's biggest potential exporter, opened its upstream for the first time to Western companies. Yet other forces now in play mean Turkmenistan's gas - even if US firms help develop it - will flow either to China or to Russia.
Indeed, for all Gazprom's troubles in the past two years, it has secured a new strategic hold over Central Asian gas exports, on which it depends for onward supplies to Ukraine and Europe. Its decision last year to revamp the pricing structure for gas it buys in Central Asia (abolishing the cost-plus system and installing a netback regime) has wiped out the competitive price advantage that European importers could have offered to Turkmenistan. Gazprom must now pay more for Turkmenistan's gas, but in doing so it has dissuaded Turkmenistan from pursuing more complex export arrangements, such as building a trans-Caspian pipeline to link up with Nabucco in Turkey.
That leaves Nord Stream's second phase and South Stream. Gazprom's decision to postpone development of its giant Shtokman field in the Barents Sea may yet affect Nord Stream's progress with the second half of its project (the first line is already being built). That field was to have supplied phased two. The consortium building it are adamant that the line will go ahead.
Meanwhile, despite South Stream's estimated €24bn price tag, it has garnered support from countries in CEE aware that 63bn cm/y of new supplies would bring them yet more abundance. And, suggests Jonathan Stern, a Gazprom expert at the Oxford Institute for Energy Studies, South Stream was no bluff by Russia to bring Ukraine into line. "Russia's game is chess, not poker." The project will still proceed, he says, even if Gazprom has scaled back its forecast for exports to the West.
That leaves CEE's gas supply outlook in a far healthier state than anyone expected during the height of the EU's rhetorical wars with Gazprom. Some countries, such as Bulgaria, will still depend on Russia for all of their gas imports (unless domestic production takes off there, too). But the dash for gas is now over. Eurogas says that while demand will recover in the coming years, growth could be 20% lower than expected before. A new era of abundant cheap gas supplies has arrived in CEE.
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