Monday, 31 October 2016

Why does the European Commission care especially about energy independence of Ukraine but at the same time continue the TTIP negotiations standing ready to give up a piece of our own interests?

Two and a half years after the European Commission published a new energy security strategy for the EU on 28 May 2016 the logic of its implementation contains more and more paradoxes in regarding the gas market.

Paradox of the European Commission forecasts - it is expected that there will be no a significant increase in demand for gas in the EU until 2030

In the current year, European Commission Vice-President for Energy Union Maroš Šefčovič has repeatedly point out that it is important to take into account the future demand for gas in Europe, while noting that "according to the European Commission, in 2030 the EU would need from 380 to 450 bcm of gas."

Meanwhile, currently the actual consumption of gas is approaching the upper boundary of the specified forecast range. According to Eurostat, in 2015, gross inland consumption of natural gas in EU-28 increased by 4.3 % in comparison with 2014, to reach 16 733 thousand terajoules or about 430.4 bcm.


Thus, the European Commission believes that the next 15 years the demand for gas in the EU can either increase more slowly by 4.5 % at most or even decline. However it would be enough just to consider the current situation in the EU gas market to cast doubts on the reliability of this forecast. As the graph above shows, the previous year marked an important turning point when consumption of gas in the EU, after having sunk to the 1995 level, in 2015 for the first time in four years increased by 4.3 %. Moreover, according to the most recent data published by Eurogas, initial 2016 estimates suggest that demand has grown even faster by 6% amounting to 447.1 bcm getting close to the level acturelly anticipated in 15 years.

It is also important to mention that the change of bullish trend with a bearish one in perceptions of gas demand prospects in EU-28 suggested by the European Commission conceals a particular circumstance that should be taken into account. As a matter of fact, gas demand is not evenly distributed throughout the EU countries – three quarters of the EU’s total gas consumption comes from only six western European countries including Germany, UK, Italy, France, the Netherlands and Spain, of which the first three countries consume more than half the EU’s gas demand.

It should be clear that thanks to its leading position on the market, these countries contribute most significantly to the future development of gas consumption in the EU. However, their influence is largely directed towards slowing growth in consumption, as those countries are also leaders in deployment of energy efficiency and renewables programs.

Yet at the same time, many other EU countries have not achieved such results in enhancing the national potential for energy efficiency and renewable energy sources. Furthermore, in South East Europe many people still have to live on the edge of energy poverty. It is not difficult to see how much the EU represents a very heterogeneous group of consumers with a wide spread of demand for natural gas. Therefore it would not have been correct to use only an aggregate of gross inland gas consumption in EU-28 for demand forecasting, which does not reveal unique needs of each member state, whether leaders in the EU gas market such as Germany and Italy or outsiders as Greece and Bulgaria.

Paradox of rather inconsistent intentions of the European Commission to look for the most cost-efficient ways to transport gas where there might be none of them

On a whole number of occasions, many could hear arguments from Brussels regarding the necessity "to estimate what is the most cost-efficient way to transport gas."

How the European Commission manages to apply this principle in practice can be seen in the negotiations between the EU and the US on Transatlantic Trade and Investment Partnership (TTIP), which received wide coverage in every EU country. Fifteen rounds of the TTIP negotiations have been left already behind since July 2013 when EU and US officials had started talks on setting up a transatlantic free trade zone.

It would seem that the wide-scale removal of various kinds of barriers to trade and investments between the European and American continents is for a good cause. However, everybody noticed that the future of TTIP was always negotiated behind closed doors, as this was done not by accident. In fact, concessions and commitments on market access as well as other measures of trade flows liberalization under TTIP to be undertaken by EU states as trading partners could entail far greater costs than the benefits of new market opportunities looming up behind the Atlantic Ocean.

In this context, energy market did not become an exception because such a rebooting of the balance of interests between the two parties on the TTIP basis can result in escalating the costs of implementation of the Energy Security Strategy released by the European Commission in 2014. Nevertheless, the energy policy makers in Brussels do not seem to care much. We have to recall the speech made by EU Climate Action and Energy Commissioner Miguel Cañete at the Atlantic Council, Washington in February 2015 when he said, "Energy needs to be a key part of Trans-Atlantic Trade and Investment Partnership discussions. Our trans-Atlantic energy approach needs to be embedded in this new agreement, we need detailed provisions and promote common standards for the energy sector, and we need gas to be traded freely across the Atlantic."

With regard to LNG suppliers from the US, it is expected that they can benefit from modifying US longstanding energy legislation to simplify license approval for energy export to the EU. However, administrative and bureaucratic barriers will not be the main obstacle to the US LNG supplies to Europe. The biggest challenges lying ahead with LNG imports from the US are related to strong competition on the EU market. In an ever more competitive environment, the most probable scenario is that US LNG exports can actually shift into reverse towards the Asian and Latin American markets.
One of previous posts have partly addressed the issue of increasingly unfavorable competitive situation for US LNG on the European market. To all of that it should be added that recent developments in the EU gas market have not opened a window of opportunities for LNG imports from the US even a little wider. Quite the contrary, for example, Norwegian company Statoil, operator of the only European LNG export plant at Hammerfest producing around 4.2 MTPA reported its third-quarter losses widened compared with last year as result of low oil and natural gas prices, extensive planned maintenance and expensive exploration wells.
The present reality is that up to now shale LNG from the US just supplemented the list of potential sources of gas supplies to the EU but it has not proved itself as a commercially profitable resource for energy imports. It is evident that shale LNG from the US could be an economically feasible market product in the near future only in the event of a substantial increase in energy prices in the EU market, but that would be against the interests of consumers in our countries. So far the US LNG imports to the EU has been confined to two cargoes apparently to pursue the goals of encouraging the enthusiasm of TTIP supporters in Brussels as well as performing promotional activities needed for any new brand in the market. It is rather symbolic that two LNG tankers sailed across the Atlantic to LNG import terminals in Western part of the European continent, which are the closest to the US – one is in Spain and the other in Portugal.
The total volume of two LNG tankers was amounted to slightly above 140 thousand tons or 192 million cubic meters that is comparatively small quantity even on the market scale in individual EU countries. This point can be illustrated by making a comparison of the LNG volume delivered by two tankers from the US with annual gas consumption in any of EU countries. For example, according to Eurogas in Austria, where in 2015 consumers bought 8.2 bcm of gas, these two LNG tankers would be only sufficient for a bit more than a one-week consumption. This once again indicates that at least in the near future no market opportunities for significant cost-efficient gains are anticipated for ensuring the Energy Security Strategy by means of TTIP as it has been mistakenly believed.

It is high time for TTIP's supporters in the EU to understand that they are being incredibly short-sighted concentrating only on the political "benefit" side of LNG imports from the US and ignoring the economic "cost" side. Let us see, perhaps the Trump/Clinton election will bring their mind more into balance.
The remaining open question is: how much longer will the high-ranking energy policy makers in Brussels try to attain the contradictory goals instead of responding to the EU gas market realities of today as well as to the challenges of tomorrow?