Why does Japanese contango warn us to be more skeptical about an expected growth of European LNG market?

It is expected that liquefied natural gas (LNG) supplies will grow as a major potential energy source taking on one of basic roles in diversification of gas supplies to the EU. Let me remind you that in response to the political crisis in Ukraine and the threat of destabilizing energy supplies to the EU in May the European Commission adopted the European Energy Security Strategy. There is a number of LNG projects in this important energy policy paper listed among key security of supply infrastructure projects to be implemented in period up to 2020.

According to this strategy it is planned to build the following LNG facilities: LNG vessel in Lithuania, LNG terminal in Swinoujscie in Poland, Baltic LNG terminal with location to be decided, LNG terminal in Krk island in Croatia as well as two terminals in Greece - in Alexandroupolis and LNG floating terminal at Bay of Kavala. Along with that, the construction of the LNG terminal in Klaipeda in Lithuania is nearing completion at the end of this year but this project was not included into the Strategy covering medium term prospects.

LNG development is definitely one of the most important achievements in energy industry in the XXI century, and assimilation of these technologies is very essential.

But at the same time there are important questions.

Firstly, what are the prospects of filling our European LNG market with this source of energy to ensure all these projects are put into full capacity with an expected profitability?

Secondly, diversification involves maintaining a stable mixture of energy resources, and in our case, it is LNG and pipeline gas. Then why is it better not to rearrange further the historically achieved EC gas balance with high volumes of pipeline gas including those coming from Russia? In other words, why not reconsider the radical attempts to find at the long run a complete replacement of Russian gas supplies by LNG?

However, opponents, especially our politicians, argue that "gas pipe binds us up with a sole supplier that causes a loss of energy independence", etc. But excuse me for such a trivial argument that any pipe has two ends and gas suppliers also remain dependent upon us that means - upon our European gas distribution markets. This is not to mention more about the technologies used in gas production, where sharp fluctuations in volumes of gas field output are contraindicated. Virtually, on the one hand, there is a mutual dependence of consumers and suppliers in case of a pipeline gas, and, on the other hand, it is also a matter of common interest. After all, figuratively speaking, nobody of them is able to turn an existing pipeline in other direction.

It's another matter how to redirect LNG carriers. By different reasons all over the world, sometimes circumstances of insuperable force can alter LNG routes significantly.
So it happened, when in Japan a nuclear disaster at the Fukushima I Nuclear Power Plant on 11 March 2011 resulted in a meltdown of three of the plant's six nuclear reactors. Eventually it led to the closure of all 54 nuclear reactors in this country and the transition towards more sustainable use of LNG energy resources. As a result LNG flows were largely redirected to Asia and the nuclear disaster in Japan gave an unprecedented boost to LNG prices growth to 55%, which, in turn, made the European LNG market much less attractive.

Now let me remind you, that we are talking about the plans for the development of the LNG infrastructure in the EU countries. But at the moment even before the implementation of these plans, according to experts, the existing infrastructure of our LNG market is utilized only by 20%. It occurred primarily due to a high demand, and thus more attractive prices at Asian LNG market.
And the situation is still non reassuring. Prices of spot LNG for November delivery to Asia increased 12.4% month over month to average $14.426 per MMBtu, according to the latest Platts Japan/Korea Marker for month-ahead delivery.

The general manager of the trading department of a leading Japanese company Marubeni has been recently quoted by Reuters as saying that the Japanese LNG market continues to stay in a contango condition when prices with delayed delivery of LNG are significantly higher than prices for these energy resources on terms of immediate delivery.

Thus, we see that the Japanese contango has a real impact on competition in the global LNG market and it is not for the benefit of European consumers. Moreover an upcoming winter season most probably only will strengthen this market trend.

Therefore, it is worth repeating in the address of our esteemed politicians who are dealing with the future energy balance of Europe, analysts' estimates published in «oilprice.com» September 29 that “currently there is not enough LNG on the global markets to replace Russian imports… Any attempt to fully replace Russian gas with LNG in the short-term would force a 127 percent hike in Europe’s natural gas prices”.

Thus, favorable conditions to develop European LNG market is restrained by price competition with Asian markets of these energy resources. Along with that, now there is a competition between a pipeline gas and LNG continuing at the global gas market, in which the first traditional gas resource is not going to give up its positions. In this regard, for example, according to the Gazprom CEO Alexey Miller, LNG share on the global gas market will not surpass the 30% mark.

As known, Gazprom continues extending the gas pipeline infrastructure, fulfilling the largest to date in the world gas pipeline projects South Stream and the Power of Siberia. Besides this Russian company is performing big plans for increasing its LNG capacities. There are the Vladivostok LNG and the Baltic LNG projects in Gazprom plans, as well as the project for expanding the existing LNG plant on Sakhalin. It is expected that once these projects are launched, Gazprom’s share in the global LNG market will rise from the current 5 to 15 per cent.

This means that the EU refusal of Russian pipeline gas imports in favor of increasing LNG supplies may turn round Europe again back to Russian LNG from the Baltic or the Arctic region, where the Yamal LNG is being built as well, or from the Far East.
In this case it appears that from what we in Europe are trying to get away, that's the same what we'll come back to again!
Then what for will be such "a run in circles"?
Here is again economic feasibility suffers that will affect adversely our out-of-pocket expenses.
Meanwhile we can see that both current and future changes in the Asian part of the world energy market insufficiently is taken into consideration in the European Energy Security Strategy.

Perhaps someone with a sense of humor would joke that Far East market is too far, so this Japanese contango is just out of view of our energy strategy makers.

But if we talk seriously, inevitably the question occurs why our economic well-being, including provision of comfortable temperature for essential living conditions, depends on the policy makers, whose personal experience often has never been directly linked to energy sector and who are offering strategic solutions based on myopic expectations leaving such factors as Japanese contango behind the horizon?

Why MEPs are dissatisfied with the candidates for the new European Commission?
European Parliament conducted hearings of candidates for the new European Commission on October 6, and, according to many MEPs, this test was failed in some cases.

Of course, it is difficult to imagine in politics full or close to that consensus. And particularly, it concerns our MEPs corps, given a width of political views and different party platforms presented in European Parliament.

And yet, as if to justify, we could mention that selection process of candidates is influenced by the desire to observe some gender balance in the new composition of the European Commission.
But all these arguments are not enough, and the composition of a new team of European Commissioners, unfortunately, does not reassure us in their abilities to solve the complex problems that they have to meet in the near future.

Probably, those who listened attentively to the records of three-hour Internet TV broadcasting of Hearings for Commissioners designate on June 6, , just like to me, it seemed that Mrs. Alenka Bratusek's speech who is proposed to the position of Vice President for Energy Union, was particularly unconvincing.

One of the first questions to Mrs. Bratusek put by MEP Marek Grobarczyk from European Conservatives and Reformists Group was related to a widely known issue about where the European Union can obtain gas supplies in case of replacement of gas from Russia, if the Commission implements its intention to reduce EU dependence on Russian gas. To everybody's disappointment, the answer was very general, and too short especially with regard to possible changes in the geography of gas supplies. In answer, Mrs. Bratusek stated that, in the short term it was expected to replace Russian gas with the supplies "from Norway and from the side of Mediterranean Sea."
Such an answer, obviously, was one of the reasons for the disappointment in the audience comprised of rather informed MEPs who even urged several times Mrs. Bratusek to answer more specifically.
However, real Norwegian capabilities reveal the converse. No doubts that many of the MEPs should be aware of Norway opinions on this particular issue.

Back in June of this year, the Norwegian company Statoil announced that it would be unable to replace Russia in the European gas market. In an interview published by Reuters CEO of Statoil Helge Lund argued that the company could increase somewhat (supplies – ed.) but it could not replace Russian gas.

And over the past few months after this statement Statoil position has not changed. Moreover according to the data of 8 months of this year, there was a reduction of the Norwegian gas deliveries to the EU by 4 bcm.

In addition Statoil has made a new gas discovery in the Pingvin exploration area in the Barents Sea. According to Statoil estimates the volumes in Pingvin to be in the range of 30-120 million barrels of recoverable oil equivalent. But the discovery is currently assessed as non-commercial.
Thus, there are no real grounds for the proposal of Mrs. Bratusek regarding possibilities to displace Russian gas from EC market by the northern gas supplies from Norway.

The prospect of extending the south direction of gas supplies in particular from the Mediterranean area is meeting with a number of problems as well. But this topic definitely deserves a separate discussion, and we will come to it more than once again.

Much to everyone's dismay, there were many other incompetent answers. Assessing in overall the speech of Mrs. Bratusek at the hearing in the European Parliament, MEP Claude Turmes from the Group of the Greens/European Free Alliance argued that "the Energy Union, climate change - it requires a leadership, and we saw something completely different. There was no leadership, but just attempts of hiding behind the Articles of the EU Agreements... This is the end of progress in EU policy on energy and climate change".

As a result some days later The Parliament rejected Alenka Bratusek by 112 votes to 13, after she faced a strong criticism that she wasn’t up to the job of becoming the EU’s first-ever Vice President for Energy Union.

However in addition to reasonable concerns about our future energy well-being, which certainly our Europe and its citizens deserve to be better than now I have got a feeling that, unfortunately, our highest leaders are getting farther from a reality, carried away by political ambitions and globalist policies.

Now we have to focus on the question for who is it necessary to set up on the starting line of a new challenging phase of our European integration so much an inadequate team? And why should an essential level of energy security required actually for each European citizen be hold hostage because of this obvious incompetence?

Why doesn’t Europe respond to the threat of shutting down Russian gas transit declared by Ukraine?

The other day the information has appeared containing a statement of Mr. Kobolev, Chairman of the Board of "Naftogaz Ukraine". The essence of his statement is that Russia will shut off gas supplies to Europe, as it happened in the winter 2009.

Where does such a confidence come from? And what do we, Europeans really have to grasp from that message?

The basic meaning of that statement consists in the fact that Ukraine will siphon off gas from the export pipeline this winter.
It is no coincidence that we are sent back to the story of 2009.

What happened in winter 2009? And why was the gas transit through Ukraine to Europe disrupted?
At that time in the absence of a contract, Ukraine siphoned off an export gas as much as they needed, and the Russian side refused to compensate for such an illegal takeoff.

As a result of the conflict Russia shut off gas to Ukraine first since January 1, 2009 and after that since January 5 the gas supplies for European consumers were lowered. And then on January 7 the transit of Russian gas through Ukrainian territory was completely discontinued. After reaching agreements on prices and signing relevant contracts in Moscow on January 19 the supplies of gas to Ukraine and transit to Europe resumed next day. Thus, in the coldest part of winter for more than a fortnight Europe was surviving without the transit gas from Ukraine.

Meanwhile now, dear friends, there is a motion to suppress an undeniable fact that in 2009 Ukraine has neglected its transit responsibilities and their illegal actions caused shutting off the supplies of gas to Europe. In other words, in winter 2009 Ukraine focused on their own challenges of supplying gas to meet a local demand to the detriment of gas consumers in European countries.

In this context, the current statement of Mr. Kobolev should be regarded as a signal to Europe, in response to which our Europe has remained silent! But silence, as we know, means consent! That is, as it turns out, we agree that Ukraine will again siphon off the transit gas intended for Europe?!
Why?

The EU and Russia are no longer strategic partners, why?

A former Italian Foreign Minister Federica Mogherini appointed as EU’s foreign policy chief on 30 August 2014 stated publicly about it. This official statement regarding one of the important areas of international relations, obviously, will determine the foreign policy of a new team of the European Commission.

However, the question arises whether such a change is necessary for Europe? Will it be for the benefit of Europeans, and could it help reducing the risks of new shocks of the European economy, which only began to recover after the recent crisis years?

And answers here may be different. That, Gentlemen, depends on how to look at it. If we have a look from a policy making point of view, then there exists a great deal of experience in dramatic changes of inter-state relations often based on flimsy political grounds. That periodically occurs. But for business activities this kind of sharp curves in international relations are fraught with serious consequences, and in fact they should be avoided as much as possible.

Some of you are probably far from business and cannot realize fairly well both complexity and significance of this situation. Then let us imagine that you are sailing a boat and suddenly try to make a drastic turn in the direction of your movement. This maneuver creates a high risk that you will lose your balance and overturn. In the same way, similar rash acts in international relations can turn upside down even a successful and stable business that will suffer an undeserved damage.

Therefore, for many people in Europe and for me as well it is very doubtful of that the EU is losing Russia as a strategic partner and that it is a realistic statement, because we see it far otherwise both in theory and in everyday life.

As to theory, almost any university student in Europe should learn from courses of "Business Administration" or "Corporate Governance" that in business a strategic partnership means a mutually beneficial and long-term commitment between organizations. This partnership is accompanied by investment process, exchange of various assets, joint work to strengthen their market position. And all that is going on for many years.

Meanwhile in practice, we are witnessing now a serious undermining of strategic business relationships, imposing of economic sanctions as a tool of political pressure that, I would like to emphasize, creates significant problems for business partners.

In this case, we are talking about our European Union and Russia. Currently, our politicians' activities, especially in Brussels, cause a great concern and displeasure in European business circles. It happens because European business for its part sees no reasons to freeze its long-term partnerships in Russia. And the more so as European business dealing with Russia is against such rash political acts and sanctions that endanger to turn "upside down" many strategic projects that have been developed with mutual benefit for many years.

An outstanding example is the position of the Association of European Businesses (AEB), which brings together hundreds of European companies working with and in Russia. There are many well-known international energy companies among AEB members, including Dutch companies Gasunie and Shell E & P, French GDF SUEZ, German companies Wintershall and E.ON, Italian companies Eni and Enel and others In September the AEB sent official letters to all 28 Heads of States and Governments of the EU, as well as of Russia and Ukraine with request to protect foreign investors from both sides from any further restrictive measures.

It is stated in the letter in particular that there are members in AEB with businesses in sectors, which would be directly affected by these measures. Further on the letter read as follows “the introduction of such measures could lead to a serious decline in production volume and the number of workplaces, affecting not only the manufacturers themselves, but also suppliers and retailers working in these sectors. All this would harm not only the business of the companies concerned, but also fiscal revenues through the loss of tax and duty payments. The AEB strongly requests EU and Russian authorities to protect foreign investors from both sides from any further retaliatory measures”.

In other words, to protect against those forces that are stubbornly trying to cause troubles between the European Union and Russia and to undermine mutual economic relations, which was built for the last decades. Therefore, it is a matter of urgency to realise the importance of this situation and as a result to demonstrate on the contrary a political goodwill by supporting strategic partnerships of European Businesses in Russia.

Now you can see that currently such pressure on international business partnerships are rather illustrative of the energy sector, where the EU and Russia have reached significant results. Due to a high share of Russian gas in the total EU consumption as it was mentioned in previous articles Russia holds the first place among gas suppliers, although only slightly ahead of Norway. In Brussels, it is commonly known, this fact is indicated as something containing a threat to our energy security. However, it is beyond our doubts that in previous decades the imports of energy products from Russia went up entirely under conditions of mutual economic interests. That was correct for energy prices too.
For example, the official report on statistical analysis of EU trade in energy products, with focus on trade with Russia says the unit values for Russian imports of the two most important products - crude oil and natural gas in gaseous state - were of a similar size to those for the EU’s other trade partners in these products.

It's interesting to note that the relative importance of the EU in Russian exports of energy products decreased over the period 2005 - 2012, the same report points out. This means that Russia is also diversifying the geography of export deliveries of energy products, including natural gas. It reminds us how several years ago European energy companies enthusiastically discussed their participation in the project devoted to the Shtokman gas field development in the Barents Sea with subsequent deliveries to Europe. But later on Russia changed the geographical priorities in further development of production and exports of gas commencing new projects far to the east of the country.

But we see this process of gas flows relocation not only on the east. Expansion of energy supplies especially routes aimed to South and South-East Europe now provides for a real opportunity of obtaining a reliable gas flow from Russia thanks to construction of South Stream gas pipeline, which is being built to bypass a very unstable region of Ukraine.

No wonder many of us who are following the situation would like to join the call of European business for reducing a political rhetoric of Brussels politicians on cancellation of strategic partnership with Russia, which is being alleged in support of Ukraine. The ratification of the EU-Ukraine association agreement by comparison with a political impulse of reducing the strategic partnership with Russia in energy sector now looks like as an exchange of Russian gas for Ukrainian schnapps. We could hardly imagine that anybody does not understand the irrationality and the disparity of such an exchange for Europe.

I am confident that just as business consumers of gas so too owners of households in our countries do realize that if the EU energy market would be at least partially "liberated" from the so-called Russian gas dependence, a vacant place will be occupied by other energy supplies mostly imported at new prices well above the former prices.

Meanwhile, EU Trade Commissioner Karel De Gucht has recently stated once again that he would want to see oil and natural gas exports from the US to Europe included in the forthcoming transatlantic trade free trade zone and that allegedly Europe wants US oil and gas to help offset its dependence on Russian energy. And what is more the high level representative of Brussels pointed out that it should generate a pressure on Russia due to a downturn in world energy prices. But to expect a decrease in world prices as the phrase goes, indulge in wishful thinking. A prevailing majority of experts argue against anticipated downturn trends of world prices of energy in a near future.

In conclusion, I would like to quote the words of the well-known American economist Michael Porter: “The essence of strategy is choosing what not to do”.
The question remains: why to be exact does not do it?