The annual Flame conference, held this year on 16-20 April, brought together over 750 participants from the gas industry from all over the world, regulators, governments, international organisations, associations and academia. Secretary General Urban Rusnák spoke in the session on Achieving European Security of Supply. When evaluating the prospects of tightening supply and demand in Europe, Amb. Rusnák considered geopolitical, economic, technological and regulatory factors affecting the situation. He also pointed out that global energy trends indicated that most answers to European supply and demand questions lay outside Europe.
Please see below the text of the Secretary General's speech.
17 April 2012
Supply and Demand - Assessing Expectations in Europe:
When Will We See a Tightening in Demand and Supply and
How Long Is This Predicted to Last?
Speech by Amb. Urban Rusnák, ECS Secretary General
I am very pleased and honoured to speak at Flame on this important issue. However I have been asked to deal with a very challenging question. We all know that any predictions for future events or trends are most difficult, particularly when global political and economic events have such an influence. So I will not be so daring as to attempt to give you a precise answer. What I will try to do is to share some reflections with you in an attempt to stimulate discussion. Because, as Niels Bohr once said: "Prediction is very difficult, especially about the future".
I am addressing you in my capacity as Secretary General of the Energy Charter Secretariat, a role which I took up on 1 January of this year. Although based in Brussels, the Energy Charter is not solely a European organisation. The constituency includes all countries of the former Soviet Union, particularly those energy producing states of the Caspian and the Caucasus. It also includes important transit countries such as Turkey. The Charter's member countries in the Pacific area include Japan and Australia.
The focus of this discussion is on assessing expectations in Europe. But clearly this question cannot be addressed by focusing on Europe alone. The answer does not lie there. Perhaps that is why the Energy Charter with its unique constituency is relevant to this discussion.
Are we likely to see a tightening of gas demand and supply in Europe?
Currently there is no particular problem: demand for gas is relatively low. Key traditional suppliers Russia, Norway and Algeria are doing well; more pipeline routes are available. Apart from pipelines deliveries, more and more LNG is also available. In the coming decade new supplies are likely to come from the Caspian region. There is even the possibility of shale gas development in Poland. During the 2009 crisis there was in fact no real shortage of gas within the EU as whole. The problem was the lack of infrastructure linking relatively isolated gas systems (which left countries like Bulgaria with practically no gas), or the technical problem of reverse flows through the main transit pipeline in the case of Slovakia.
The possible risks for future supplies are well known. These include insufficient timely upstream investment, inter alia due to potential problems in some producing states; regulatory uncertainties in the EU, which still officially proclaims that gas is only a transition fuel and disincentivises gas investment. Then there is the unclear general prospect for economic recovery and the projection of different EU policies on gas demand.
Energy supply and demand is inextricably linked to energy security. Without energy security, there is no national security. This applies to all countries across the globe. Energy security is no longer just a question of secure supplies. These supplies must also be sustainable, affordable and if possible clean and safe to the extent demanded by different policy frameworks. Similarly for producing states and companies, security of demand is an issue of paramount importance - their assumptions on how much and where to invest in upstream development are based on predictable demand.
I will attempt to deal with this question of supply and demand from four aspects: geopolitical, economic, technological and regulatory.
Without doubt the geopolitical events that have unfolded over the course of 2011 and 2012 to date and which are still unfolding as I speak, are of great significance to the global energy sector. The events that I refer to include the so-called "Arab Spring" in the MENA region (now in particular the Syria crisis) and the Fukushima accident which arose from the tragic tsunami of 2011. Moreover, 2012 is a year of significant elections. Following elections in the Russian Federation there is soon to be a change there. There are the presidential elections in the US, and imminently in France. There are also leadership changes anticipated in China. There is also the global reality of a gradual shift in economic power and governance from the G8 group of nations towards the developing world, to what have become known as the BRICS countries. This shift is reflected in the establishment of the G20 forum of nations which have started to discuss energy issues as well.
Lack of predictability is not an entirely new situation in energy relations. It was for precisely the reason of political instability and perceived hostility that Europe switched its energy supplies in the 1970s as much as was possible from the Middle East in the direction of the Soviet Union which was viewed as stable and reliable. I should add that even if the Soviet Union may not have been as stable as anticipated, it has proved to be a reliable partner even at the height of the Cold War, and during the collapse of the communist bloc.
The economic events to which I refer are particularly relevant to Europe. I am thinking of the on-going crisis surrounding the Euro and perhaps even the European project itself. The economic crisis has had a significant impact on energy. The slowdown of industry has reduced energy demand in all sectors: construction, the car industry, services etc. The financial crisis, a consequence of the economic crisis, has also had its effects. Investors have become more cautious, credit is tight, and major projects are being reconsidered in the light of these new circumstances.
There are immense changes taking place in the technology available to exploit energy resources. High energy prices are driving this factor. As a direct result in recent years we have seen the emergence of unconventional gas, which is frequently described as a "game changer". Now thanks to technological breakthroughs shale gas is produced in the US, thus making the North American market almost self-sufficient. Remarkably as a consequence, large LNG volumes are now excluded from the very market for which they were intended.
On the other side of the world, Asia is today the main and rapidly growing client for gas, both LNG and pipeline gas. Japan, South Korea and China are to the fore, as they seek energy for their booming economies. As the gas market is changing from isolated regional markets, linked to fixed pipeline infrastructure, to the supra-regional markets interconnected by the rapidly growing share of LNG in overall gas trade, the implications of global changes bring the question of demand and supply to prominence in the European market.
Furthermore, to understand the difficulties of the current situation, consideration must be given to the regulatory framework. Until relatively recently, gas exported by Russia and others to the EU was mainly by way of pipeline. Supply contracts were for a long term (25-30 years). The essential element of these contracts was not the price, but rather the volume and the price determination mechanism, which was generally linked to oil prices. From all viewpoints this ensured security of demand and of supply. There was no credible alternative to gas pipelines at the local level.
LNG also has been supplied to Europe for a long time, and until very recently all LNG contracts were long-term too. But this situation is changing now. The implementation of the Third Energy Package, adopted in 2009, has started a great transformation of the EU internal energy market. The independent national energy regulators were given the task to work on technical measures, such as harmonised 'network codes', to implement the legislation.
The political direction of the reform undertaken by the EU will change the European gas market dramatically in the coming decade. The former market structure, based on bilateral long-term contracts between a limited number of big suppliers and buyers, is expected to be replaced by wholesale markets where sellers and buyers meet on trading hubs to make short-term deals.
Will this reform of the internal market create a new equilibrium between producers and consumers? Will it do so by altering the clarity of relations between a well defined supplier and its customer with the creation of one "super-consumer" supplied by a number of producers relaying its expected growing absorption capacity? What will be the direct implication of the reform for security of supply? Is it likely that, the head of Gazprom Export Alexander Medvedev, might look at the spot prices every morning and then decide if he will send gas to Europe that day? If the Russians, Norwegians and Algerians have an interest in driving up spot prices in a model with majority of short-term contracts and pricing, they probably may be in a position to do so. Could this reform boost closer coordination within the Forum of Gas Exporting Countries?
As you can see, all four aspects - political, economic, technological and regulatory - do not give us a clear picture of how this complex situation will develop. For the abovementioned reasons I admit, that I do not have an answer to the question on the tightening of gas demand and supply in Europe. There are simply too many variables in the equation. What I can only conclude is that in this sea of uncertainty and different policy trends and changing consumption patterns, through cooperation we must attempt to reduce risks related to the international energy business and investment.
In all possible supply/demand scenarios, investments, massive investments, will be needed. To attract and encourage those investments two important factors could help.
The first one is price. There are some benefits to higher prices for energy: higher prices attract investors, they encourage energy efficiency, and they lead to a better energy mix. Of course sight should never be lost of the necessity of a balanced economic development.
The other factor which is essential for investment is a suitable legal and judicial framework. In that respect, the Energy Charter Treaty is the right answer. The main purpose of this Treaty is precisely to give international investments an international protection umbrella and to arm this protection with efficient dispute settlement mechanisms. The rules of international trade and cooperation must be defined, accepted and known by the players. Very generally this is the aim of the WTO. More specifically, in the energy context, this is the aim of the Energy Charter Treaty which now involves more than 50 states. The Energy Charter Treaty is the only international treaty which sets out the rules of the game.
With my conclusion focused on the Energy Charter Treaty, I would like to convey my strong belief that energy will stay at the heart of all economic issues and at the front page of all papers. And in all changing circumstances as far as Europe is concerned natural gas, in all its forms will certainly be the fuel of choice for decades to come.
Share on Facebook