Over the past decade natural gas supply diversification has increasingly moved to the forefront of the EU’s political agenda. Europe’s natural gas market is dominated by imports from Russia. The natural gas pipeline infrastructure has evolved gradually over the past fifty years. Russia has been a reliable supplier to European markets for most of this time period. Over the past decade however, relations with Russia have become more complex. In 2006 and 2009 disputes between Russia and gas transit countries (Ukraine, Belarus) have led to supply interruptions in several European countries. Additionally, the ongoing conflict between Russia and the Ukraine that started in 2013 further deteriorated Russia’s political relations with the EU.
European Union gas imports
Natural gas accounts for roughly 24% of the EU-28’s Total Primary Energy Supply and is expected to remain unchanged throughout 2050. As the projected decline in European natural gas production is stronger than the decrease in consumption, import dependency is expected to increase from 73% in 2015 to 80% in 2035. In 2016 the major extra-EU importers of natural gas are Russia accounting for 38% followed by Norway with 36% and Algeria with 14%. Together these three countries account for 88% of imports of natural gas from outside the EU. Natural gas accounts for 85% of total EU-28 gas imports while LNG amounts to 15%.
Divergent market developments in the EU and Russia
Over the past decades the energy sectors of the EU and Russia have developed in very different ways. Through the introduction of various reforms and the implementation of The Third Energy Package in 2009, the EU succeeded to make its energy markets more competitive and sustainable. Russia’s energy sector has however remained highly concentrated and the supply chain shows a high degree of vertical integration.
While EU energy market reform aimed at increasing energy supply security, it did not automatically lead to natural gas import supply diversification. In 2016 the share imports from Russia in total extra-EU natural gas imports amounted to 75-100% in countries like Bulgaria, the Czech Republic, Estonia, Latvia, Austria, Poland, Rumania, Slovenia, Slovakia and Finland .
Options to improve gas supply security
Options to improve gas supply security include, on the one hand the construction of additional pipelines, connecting new resources to the EU pipeline network and on the other hand an increased reliance on LNG imports. Increasing the share of LNG imports requires the construction of additional receiving terminals and the further development of the EU pipeline network through additional inner EU pipeline connections. Poland and Lithuania, have built LNG terminals in recent years and thereby reduced dependency on Russian imports. These terminals were subsidized by the EU and national governments. Alternatively, imports of natural gas via the so-called East-Med pipeline project that has been classified as Project of Common Interest by the EU, would allow to diversify away from Russian imports and away from major zones of conflicts and instability on the EU’s northern and southern borders.
The Eastern Mediterranean Offshore Oil and Gas discoveries Over the past two decades major oil and gas discoveries off the shore of Egypt, Israel, Cyprus and Lebanon are gradually transforming the region into an energy hub. Table 1 provides an overview of natural gas and oil reserves in the four countries. While proved natural gas discoveries currently amount to around 84 Trillion Cubic Feet (Tcf) in Egypt and Israel, estimated reserves for Egypt, Israel, Cyprus and Lebanon reach up to 166 Tcf.
Forecasted domestic consumption needs and prospective export volumes
Forecasts of domestic natural gas consumption needs show that total cumulative natural gas consumption for Egypt, Israel, Cyprus and Lebanon over the period 2017-2042 is projected to reach 94 Tcf, which potentially allows for large volumes of gas to be exported. Furthermore, total yearly consumption needs in the four countries will reach around 5 Tcf in 2042.
The East Med pipeline
The East Med pipeline has an estimated length of 1700 km and spans from the Eastern Mediterranean Sea’s Levantine Basin to Cyprus, Crete and the Greek mainland where it joins the Poseidon pipeline. The East Med pipeline’s onshore segments only account for 500 km of its total length, the remaining 1200 km will be offshore. For a pipeline capacity of 32.5 Bcm with a yearly average gas volume flow of 25 Bcm, estimated capital costs amount to roughly $ 5 million per kilometer while total capital cost for the East Med pipeline are estimated at $ 8.6 billion. Transmission costs in Million British Thermal Units per 100 km reach roughly $ 0.25. If pipeline quality gas is fed into the East Med pipeline offshore Cyprus at a cost of $ 3 per MMBtu it could be offered at destination for $ 7.22 per MMBtu. For prices in the day ahead market at major European trading hubs ranging between $ 6.814 and $ 7.551, such as was the case in February 2017 natural gas deliveries through the East Med pipeline will be marginally competitive in Southern Europe.
To fully appreciate the energy security benefits of the East Med pipeline it should be noted that this project provides an alternative, not only to Russian gas but that it also constitutes a superior option to offshore Eastern Mediterranean gas being delivered through Turkey to the EU. European political relations with Turkey have significantly deteriorated over the past decade and the country has become increasingly unstable. Egypt, Israel and Lebanon have traditionally had very good relations with the European Union and Cyprus is itself an EU member state. The offshore location of gas resources presents an additional security advantage. Furthermore, the East Med pipeline would allow Europe to foster economic development within its borders along the Southern Gas Corridor. The development of a southern European energy hub would allow to further develop inner EU natural gas infrastructure and thereby increase the penetration rate of natural gas in the region which could boost economic growth.
Importing U.S. LNG
The second major option for natural gas supply diversification in the EU are increased LNG imports. The International Energy Association’s 2016 World Energy Outlook forecasts an increase in EU LNG imports, rising from 10% in 2014 to over 30% in 2040. The majority of the increased LNG imports is expected to come from North America and Qatar.
The U.S. shale gas boom has led to a steady increase in U.S. gas production over the past decade and gas production from unconventional resources has reached 50% of total gas production in the U.S. in 2016. Assuming a Henry Hub price of $ 3 per MMBtu, U.S. LNG could be delivered to Europe’s Zeebrugge Terminal for a price in the range of $ 5.8 to $ 8.21 per MMBtu. According to the U.S. Department of Energy Federal Regulatory Commission estimates, landed prices for LNG averaged $ 5.03 in Zeebrugge in April 2017 which indicates that under current market conditions U.S. LNG exports might not be competitive. However, the International Energy Agency in its 2016 World Economic Outlook, forecasts natural gas prices in Europe to increase to $ 9.2 per MMBtu by 2025 and to $ 11.5 per MMBtu by 2040 indicating that U.S. LNG exports could become an economically attractive alternative for supply diversification in the near future.
Given the forecasted rise in natural gas import dependency of the EU to reach 80% by 2035 a combination of new pipeline projects, with access to more diversified supply sources and increased LNG imports are likely to materialize. Both options require substantial infrastructure investments for access to new resources and for a more competitive gas market within the EU that would allow for greater energy security.
Note: A more detailed treatment of this subject titled ‘European Union energy supply security: The benefits of natural gas imports from the Eastern Mediterranean authored by Isabella Ruble appeared in Energy Policy 105 (2017) pp.341-353, June.