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[SeriousMoney]

EU Seeking to Wean Itself from Russian Gas
Stratfor.com, January 03, 2006 18 15 GMT

Summary

The Organization of the Petroleum Exporting Countries crises of the 1970s forced the Europeans to diversify their oil sources away from the Middle East. The Ukraine crisis of 2006 could be what ultimately drives them to go back to the region for natural gas.



Analysis

EU energy ministers will cut their holiday vacation short Jan. 4 to hold an emergency meeting about the Russo-Ukrainian natural gas dispute. Russia reduced the output on its westward line to Ukraine on Jan. 1 because of a pricing quarrel, and since the Ukrainians continued taking natural gas (which they claimed was Turkmen in origin), throughput on to Europe was sliced by approximately 30 percent. The result was supply reductions in France, Germany, Italy, Poland, the Czech Republic, Slovakia, Austria, Hungary and Serbia of anywhere from 20 percent to 50 percent.

Ironically, Russia began its chairmanship of the Group of Eight (G-8) the same day -- a chairmanship it had themed on "energy security."

By Jan. 2, European states were all calling on Russia to resume normal export levels, with the Germans putting things in the starkest terms: German Economy Minister Michael Glos said, "Thirty percent of our gas comes from Russia at the moment. That should be increased, but it can only be increased if we know that deliveries from the east are dependable." Less than 12 hours later, the Russians agreed to resume normal delivery volumes; they delivered on that pledge the morning of Jan. 3.

The immediate crisis (for the Europeans, at least) is over, even if the Russians and Ukrainians are no closer to solving their dispute. But while the geopolitical and commercial storm between the two largest Soviet successor states rages, the Europeans are left wondering about a very uncertain future. Roughly 40 percent of Europe's natural gas imports come from or through Russia -- and 80 percent of that transits Ukraine. A glance at the map shows that there are not any obvious alternate suppliers.

But options are precisely what the Europeans need, and since it will be EU Energy Commissioner Andres Piebalgs -- a national of Latvia, by far the most Russophobic EU state -- hosting the emergency meeting, what options there are will be discussed in full.

They fall into four broad categories.

The first is additional natural gas from existing suppliers. Not much can be squeezed out of this particular turnip. Production from the North Sea has peaked, and Algeria is already a mature supplier -- there is not much room to increase production, even in the long term. Libya, which has only recently returned to the international fold, might be able to help out. But Libya has never been known as a large natural gas player; it is primarily an oil power. There is undoubtedly some gas under the Libyan Desert, particularly in the western parts of the country, but bringing it to market will be a multi-year effort necessitating pipelines under the Mediterranean -- and all for likely only a few billion cubic meters (bcm) per year. In comparison Europe's total demand is 540 bcm, of which 95 bcm currently comes from Russia.

The second option is tapping a slightly different version of natural gas: liquefied natural gas (LNG). Transporting natural gas is more difficult that transporting oil because it is, well, a gas. It can only be transported easily via pipeline, making most of the world's natural gas beyond the grasp of the Europeans, perched as they are on the western tip of Eurasia. But if it is supercooled into liquid form it can be loaded onto specialized tankers, shipped to Europe, offloaded at regasification facilities and fed into the existing distribution networks. Currently only France, Spain, Greece, Italy, Belgium and Portugal have LNG import facilities. Tapping LNG tends to be (relatively) cheaper and faster than building new multi-thousand-kilometer pipeline networks -- particularly if a country is only expanding an existing LNG terminal. Combined, Europe's LNG import facilities currently can handle 76 bcm per year.

Third, the Europeans can reduce the amount of sectors that use natural gas. The sector that theoretically could make the biggest change is power generation. This, of course, poses a problem for other policy goals. Europe has been steadily switching its electricity generation plants from oil and coal burners to natural gas because burning natural gas produces far fewer greenhouse gas emissions. Switching back might encourage energy dependence, but at the cost of abrogating Kyoto. The only direction Europe can go with this option, therefore, is to nuclear power.

That, in turn, creates its own set of complications. While the Green movement is not as strong in Europe as it once was, the Western European population remains broadly distrustful of the word "nuclear" no matter the context. Additionally, the 10 EU members who joined the bloc in 2004 had to negotiate away their nuclear facilities as part of the terms of their accession. Only the Czech Republic's Temelin facility was able to get a full exception.

But this is not the closed door it might seem. Finland and France already are enthusiastic nuclear energy users, with France getting 70 percent of its electricity needs from atomic power and working on a new fleet of reactors. Central European states are likely to push hard for the ability to split the atom, too. Not only are countries such as Poland habitually leery of the colossus to their east, unlike Western European states that import natural gas from places such as Norway or Algeria these states have fewer replacement options. Slovakia, for example, gets 100 percent of its natural gas imports from Russia. For them a nuclear renaissance will be their only means of mitigating their Russian dependence.

But nuclear power is not a panacea. Although nuclear power might allow European states completely indigenous electricity supplies, it is a costly option that would take years and tens of billions of euros to realize. Moreover, it cannot replace natural gas completely; some industries -- such as petrochemicals, plastics and fertilizers -- have to have natural gas as an actual feedstock. The substance of natural gas is in many ways nonsubstitutable. Nuclear power can take the edge off, but not much more and only over a long time frame.

So ultimately, the Europeans are going to have to seek out the fourth alternative: fundamentally new suppliers of piped natural gas. While there has been on-again, off-again talk of a line south under the Mediterranean and across the Sahara Desert to Nigeria, the only serious option would be to look southeast past Turkey to an odd crop of new suppliers: Azerbaijan, Iraq, Iran and Turkmenistan.

Though that seems a long haul, it is not the pipe dream it appears at first glance. Turkey already has a relatively well-developed infrastructure, so most of such a mega-project would not have to start from scratch. Azerbaijan, Georgia and Turkey already have broken ground on the Shah Deniz project that will send Caspian natural gas to the edge of Europe, hopefully by the end of 2006. Likewise, Greece and Turkey have managed to bury the hatchet and have agreed to build the Poseidon link that will allow natural gas in the Turkish network to flow under the Strait of Otranto to Italy. Similarly, there already are plans drawn up for the Nabucco line, a connecting link that runs from Iran through Turkey and the Balkans to Austria. More speculatively there also could be a pipeline starting in distant Turkmenistan that flows through northern Iran before joining up with this migrating pipeline herd in Turkey, or a link that originates in Iraq.

The problems, of course, would be time, cost and the United States. While natural gas pipelines build faster than their oil counterparts, even a rush job on Poseidon, Nabucco and Shah Deniz probably would not get the lines up and running before 2009. And even then those combined options in their current incarnations would supply only about 35 bcm per year at a cost of $10 billion. And even that assumes that the Europeans can get along with Iranians long enough to invest a few billion without Washington (or perhaps even a spurned Russia) throwing a monkey wrench into the works.

But though that sounds like an awful lot for an awful little, bear in mind that Russia has alerted its European consumers that their prices will increase by about 50 percent to $240 per 1,000 cubic meters by the end of 2006, and the Ukrainian crisis provides no confidence that Russia has any intention of seeing its largely state-run energy industry as anything other than a political tool. EU members will have to write checks to Russia for natural gas in 2006 edging up toward some $30 billion. In that light, coughing up an extra $10 billion to reduce their long-term Russian exposure seems a much more viable -- and likely unavoidable -- option.

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[SeriousMoney]

RPT - Oil prices end near three-month high; natural gas drops
Wednesday, January 4, 2006 12:44:10 AM
http://www.afxpress.com

SAN FRANCISCO (AFX) - Crude-oil futures began the year on a higher note, closing above 63 usd a barrel Tuesday to mark their highest finish since mid-October, but natural-gas prices dropped to their lowest level in four months

Traders eyed developments in the Russia-Ukraine dispute that erupted over the weekend regarding natural-gas prices, a dispute that ignited concerns that Russia may use its energy resources as a political tool

"The US natural-gas market is essentially a North American market with almost all of the gas coming from the US or Canada," said James Williams, an economist at WTRG Economics. "This insulates our market from the European natural-gas market." But "if this Russia/Ukraine problem reduces natural gas to Europe there will be some fuel switching there" and "higher demand in Europe could drive up crude prices worldwide," he said. Against this backdrop, crude for February delivery traded as high as 63.80 usd a barrel on the New York Mercantile Exchange, a level not seen since Oct 13. The contract closed up 2.10 usd, or 3.4 pct, at 63.14 usd a barrel. February heating oil also climbed, gaining 2.66 cents to end at 1.7964 usd a gallon after trading at 1.855 usd, its highest since mid-December. February unleaded gasoline traded at a mid-October high of 1.793 usd a gallon before closing at 1.7505 usd, up 2.31 cents

http://futures.fxstreet.com/Futures/news/afx/singleNew.asp?menu=latestnews&pv_noticia=1136335448...