SEPTEMBER 2014


Europe, renewable energy requires intensive capital and maintenance and although it provides environmentally friendly energy, renewable energy cannot match the quantities of energy produced by fossil fuels. Europe still has large deposits of coal, which remains the primary energy source for a number of European countries. There is an opportunity for increased capacity alongside existing mining operations, however, Kyoto Protocol commitments and the slow development of clean coal technologies continue to impact the overall feasibility of coal based power generation. The European shale industry is in a relatively nascent stage of development with many countries carrying on only limited exploration work. The shale industry faces a number of social, geological and technical challenges, many of which are specific to Europe, and commercial production of shale gas in Europe is not anticipated until at least 2020. Whilst there has been much discussion in recent months about the potential role US gas can play in “rescuing” Europe from its reliance on Russian gas supplies, and there are a number of LNG supply options available to Europe, the cost of shipping LNG from the US, Qatar or Africa is considerably higher than pipeline gas, as Europe will have to compete with buoyant Asian consumer markets and limited tanker availability.


A number of recent statements by Oettinger suggest that Europe does, nevertheless, have options. There may not be a single or an immediate solution, and most will come at an increased cost, but Europe has an extensive internal gas pipeline network and the capacity to increase existing production, gas storage sites and LNG facilities to address in the short term any immediate disruptions in the supply of Russian gas. Although the long term goals outlined in the Strategy, which include increasing energy efficiency and energy production in the EU, diversifying supplier countries and routes and expanding internal infrastructure links, will require time and significant investment, it is clear that Europe is working now to implement measures designed to reduce its reliance on a single gas supplier.


In the meantime, we are also seeing a significant shift in Russia’s gas transportation policy as Russia looks for new export routes and new consumers. With more than half of Russia’s gas being exported to Europe, it cannot afford to lose Europe as a key customer, at least not yet. According to Gazprom Export in 2013 Gazprom exported 161.5 billion cubic metres of gas to Europe. Currently, there is no immediate alternative customer that is ready and willing to take this gas. Therefore, from a pragmatic perspective, it would appear unlikely that Russia will shut off or redirect European gas supplies in the short term. However, Russia’s development of alternative export routes, such as the completion of the Nord Stream network, the availability of spare capacity in the Yamal-Europe pipeline and


the launch of the Power of Siberia pipeline, has increased supplies to existing customers outside of the EU. most notably the US$400 billion gas deal with China, are clear indicators that Russia is looking to expand and diversify its supply markets, thus reducing its dependence on revenues from European gas sales and Europe’s influence on its economy and policies.


Russian Energy Minister Alexander Novak, in his address to the forum of energy ministers of the Asia-Pacific Economic Co-operation Organization on 2 September 2014, confirmed Russia’s change of prime focus from the European to Asia-Pacific markets, according to ITAR-TASS saying that “obviously, not all are satisfied with Russia’s high status in the worked energy industry. Often in a bid to weaken our position, these countries act to the detriment of themselves. In this context the less politicised Asia-Pacific markets are more attractive for us, not only the increased volume of energy supplies to the region.”


Russia, recognising its dependency on revenues generated by natural gas exports, is looking east to China as a potential customer and more so than before a powerful trading partner. China is already Russia’s largest single trading partner, with bilateral trade flows in 2013 reaching US$90 billion, and recent developments, including Russia’s commitment to supply China with 38 billion cubic metres of natural gas over the next thirty years, are ushering in a new era of Sino-Russian trade relations, opening new opportunities and trade routes for both countries. The Power of Siberia pipeline, which will deliver gas to China, is scheduled to be commissioned in 2017 and will be the largest pipeline in the world with an annual capacity of 61 billion cubic meters of natural gas. But the progress required to be undertaken to displace Europe as the key gas market becomes clear when it is observed that even at full capacity, 61 billion cubic meters of gas per annum is a fraction of Europe’s 2013 gas consumption of 161.5 billion cubic meters.


Spurred on by their often fraught relations with the US, Russia and China have long advocated reducing the role of the US dollar in international trade. Both countries have now taken an active step in this regard, having pledged to encourage settlements of bilateral trade in rouble and yuan rather than US dollars (Reuters, 9 September 2014), which has been the preferred currency in cross-border Russian contracts. In addition to curtailing the US dollar’s influence and the long- term gas supply commitment to China, Russia is opening new domestic opportunities to Chinese investors, including a stake in a number of energy projects, for example, the Chinese investment in the Vankorskoye field, which would be the biggest Chinese equity participation to date in the Russian onshore oil market, and an initiative, which President Putin in his recent meeting with


Morgan Lewis


China’s Deputy Prime Minister Zhang Gaoli, said that “the government will support”. This sentiment was echoed by Russia’s First Deputy Prime Minister, Igor Shuvalov, during his recent visit to Beijing where he mentioned that Russia is considering numerous proposals from Chinese firms to invest in more than thirty projects in Russia, valued at several hundred million dollars. These include broader infrastructure projects such as building roads and bridges, resource development, agricultural production and transportation facilities, signalling a broad commitment between the two states to working together towards mutual advancement.


The relationship between Russia, as major supplier of European gas, and Europe, its main customer, is changing. Both Russia and the EU, recognising the weaknesses of their co-dependency exposed by recent events, are implementing new long term strategies giving Europe security over its gas supply and Russia independence from European political and economic influences. Nevertheless, Russia remains immediately dependent on Europe as a market for its gas, in much the same way that for the time being, Europe can realistically service its heavy and diverse need for power only by continuing to utilise Russian gas through existing pipelines in the way it has done for a number of years. This seems set to remain the case in the short term, even if political relations between Russia and the West continue to sour. The signs are, however, that both Russia and Europe are starting to take active steps to look beyond this near-symbiotic relationship, towards diversified options for their supply and demand. Europe, conscious of its high power need and comparatively low power production, is keen to utilise broader methods of energy supply and to reduce its dependence on gas supply from a nation with which a number of its states are frequently at loggerheads, or at least low-level disagreement. At the same time, Russia’s recent deal with China is a clear statement of intent; for Russia, China may well offer a feasible long-term market for its gas, and political relations to the East with China may be capable of providing a better fit for doing business than with Russia’s neighbours to the West. The coming years may bring around a marked change in the ultimate destination of the majority of Russian gas exports, to be watched with interest either side of each Russian border, and we could be seeing, in recent developments, the initial moves for such broader change. LM


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Amy Comer


Anna Nerush www.lawyer-monthly.com


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