A pair of proposed pipeline projects may bring more than 90 billion cubic meters per year of natural gas to European markets, but this will not undermine the rationale for developing the continent’s indigenous shale resources, which could offer a range of other economic and security benefits, says Eurasia Group global gas analyst Leslie Palti-Guzman.
Two pipeline projects to supply gas to Europe – Nabucco West, which counts Turkey’s Botas and Austria’s OMV among partners, and South Stream, spearheaded by Russian gas giant Gazprom – are both inching closer to construction.
Nabucco West would run from the Turkey-Bulgaria border to the Central European gas hub in Baumgarten, Austria via Turkey, Bulgaria, Romania and Hungary. The Trans-Anatolian Pipeline (TANAP) would connect it to the BP-led Shah Deniz II gas project in Azerbaijan. The Shah Deniz II consortium selected Nabucco West as its preferred route to transport gas to Europe in June 2012. A final decision is due this month. Construction is expected to take four to five years.
Gazprom’s project – South Stream – would originate in Russia, with possible end points in Austria, Slovenia and Italy. Route options could see it pass through Bulgaria, Romania, Greece, Slovenia and Hungary. Gazprom reached a final investment decision on the pipeline in November, and has set a 2015 start-up date.
Both projects have political backing – Nabucco from the EU And US as a means of diversifying sources of supply to Europe, which receives about a third of its imports from Russia, and South Stream from Russian President Vladimir Putin.
And both are likely to move forward, said Palti-Guzman, though she noted that questions remain surrounding the economics of both projects, as well as the unresolved issue of EU regulatory approval for South Stream.
This influx of new supply may alter the European gas market in several ways, Palti-Guzman told Breaking Energy. It could compensate for declining North Sea gas production, and it may displace other sources of gas, such as imports from North Africa or LNG deliveries that are either less reliable or more expensive, she said. This could negatively impact the outlook for US LNG exports to European markets, which may not be able to compete with new Russian and Azeri pipeline sources on price.
It may also give European buyers more leverage in price negotiations. “It could replace long-term contracts that are expiring”, she said. “At the end of this decade, about 120 billion cubic meters of Europe’s long-term gas deliveries, or roughly 20% of total demand – in most cases oil-indexed – will expire. This is a window of opportunity to negotiate new contracts and create more pressure on established suppliers that will face competition from new entrants, such as Azerbaijan, Mozambique and the US, with cheaper gas,” Palti-Guzman said.
More supply and enhanced supply diversity are also likely to raise questions as to whether, and at what price, investing in exploration and development of Europe’s shale resources is justified. Shale development in Europe already faces substantial environmental, regulatory and logistical hurdles.
But the security and economic benefits of shale go beyond the simple equation of which Btu of gas is cheaper, said Palti-Guzman. On the economic side, developing European shale should help to reduce trade balance deficits, create jobs, and spur economic growth, and from a security standpoint, developing indigenous resources will reduce reliance on imports and make Europe less vulnerable to supply disruptions, she said.
“Nothing can replace the economic and security of supply benefits of developing unconventional gas,” she said. But the volumes Europe could produce from shale would not be enough to satisfy demand. “Even if shale happens in Europe, it will not be enough volume,” Palti-Guzman said. “Imports will still be needed.”
