Europe Gas Options Seen Limited by Costs at $200 Billion

Europe will struggle to eliminate its dependence on Russian natural gas any time soon, with Sanford C. Bernstein & Co. estimating the cost at more than $200 billion.

Existing projects and anticipated future supply suggest the region’s reliance on Russia can drop to 25 percent by the end of the decade, from 30 percent now, according to Wood Mackenzie Ltd., a consultant. That’s about the same proportion as in 2011. While Europe has 12 options for replacing Russian gas, they would require $215 billion of infrastructure and boost annual costs by $37 billion, analysts at Sanford C. Bernstein said last month.

Group of Seven leaders pledged yesterday in Rome to find new sources of energy for Europe to prevent Russia from using its oil and gas as a political weapon. Russia has said it may cut off gas supplies to Ukraine because of unpaid bills, something it did in 2006 and 2009. That boosted gas costs across the region because Ukraine is the transit point for about half of Russia’s exports to Europe.

“In the short-term, there isn’t really a whole lot they can do,” Thomas Pugh, a commodities economist at Capital Economics in London, said yesterday by phone. “Energy security was taken as a given and it wasn’t something people were talking about a few months ago.”

Negotiators from Russia, Ukraine and the European Union agreed to guarantee no disruptions in gas supply through the end of this month, EU Energy Commissioner Guenther Oettinger said last week after a meeting between the three parties in Warsaw.

90 Days

Europe can cope with a 90-day interruption in flows from Ukraine, assuming “reasonably high” stockpiles, cooperation between European states and normal flows of Russian gas through routes other than Ukraine, consultant Poeyry Oyj said today in an e-mailed report.

European gas prices have fallen 33 percent since Feb. 28, the last trading day before Russia took control of Ukraine’s Crimea region. U.K. front-month gas, the benchmark European contract, declined as much as 2.3 percent today to 44.7 pence a therm ($7.58 a million British thermal units), its lowest since September 2010 as milder-than-normal weather and above-average storage levels offset the threat of supply disruptions.

Russian gas flows to Ukraine and transit to Europe via Ukraine remain uninterrupted, a Gazprom spokesman said today by telephone, asking not to be identified in line with company policy. Ukraine imported 105.4 million cubic meters of gas from Russia on May 5 versus 109.9 million the previous day while exports to Turkey and western Europe rose to 434.7 million from 423.1 million, according to data from the Russian Energy Ministry’s CDU-TEK unit.

Sanctions List

Storage facilities in Europe were 53 percent full as of yesterday as the mildest winter in seven years cut demand for the fuel, according to data from Gas Infrastructure Europe, a Brussels-based lobby group. That’s the highest level for this time of the year since at least 2007.

The U.S. and EU have imposed sanctions on people and companies close to President Vladimir Putin and threatened to tighten them if Russia doesn’t stop supporting separatists in Ukraine before a presidential vote on May 25. Russia pulled back troops from its border with Ukraine and urged the separatists to delay a referendum to ease the tensions, Putin said today.

The 28-nation EU should reduce its reliance on imports of the fuel and place “gas at the very back end of the sanctions list” on Russia over the crisis in Ukraine, Oettinger said yesterday in Berlin.

New gas developments in Norway, Europe’s biggest supplier after Russia, and Azerbaijan will help reduce dependency while new LNG projects from Australia to the U.S. should lead to more fuel ending up in Europe, Massimo Di Odoardo, a gas analyst at Woodmac, said yesterday by phone from London.

12 Options

Europe received 163 billion cubic meters of gas from Russia last year, Bernstein said in an April 2 report. Six short-term alternatives would help save 57 billion cubic meters of annual demand and cost $33 billion a year, it said.

They are drawing down gas stocks, switching to oil in power and paying higher prices for LNG than Japan, the world’s biggest consumer of the super-chilled fuel. To reduce demand, the region could close unprofitable refineries, shut down or cut gas-intensive industries such as chemicals and force “every single person in Europe to be willing to take a cold shower and turn off their central heating one day a month,” Bernstein said.

Within five years, the options would expand to providing tax breaks for Norway’s marginal gas fields, build more coal-fired, nuclear and renewable generation capacity and importing gas as LNG from the U.S. and by pipeline from the Caspian region, the researcher said. These measures would help replace 114 billion cubic meters of Russian gas a year and require $215 billion in investments, Bernstein said.

Contracted Volumes

With about 120 billion cubic meters a year of Russian gas contracted for supply after 2020 under long-term take-or-pay agreements, Gazprom would claim about $50 billion annually for the fuel European buyers might reject to import, Bernstein said.

The U.K., which will have to import 70 percent of its gas by 2030 because of declining production in the North Sea, should try to drill for shale gas to see if it can be extracted as easily as it has been in the U.S., Energy Minister Michael Fallon said after yesterday’s G-7 meeting.

Replicating the U.S. success in tapping gas trapped in shale-rock formations will take years. Poland is developing Europe’s largest recoverable deposits, estimated at 4.2 trillion cubic meters by the U.S. Energy Information Administration. While that’s enough to meet nine years of EU consumption, the country will likely be producing no more than 20 billion cubic meters annually by 2020, according to Trevor Sikorski, head of natural gas, coal and carbon at Energy Aspects Ltd., a research company.

More Coal

While using more dirtier-burning coal in power generation to replace gas is possible, it will go “against the renewable push,” Capital Economics’ Pugh said.

Russia also supplies Europe with oil. Europe’s developed economies bought 3.1 million barrels of Russian crude every day last year, or 36 percent of their total net imports, according to the International Energy Agency.

The U.S. could help to replace these imports by releasing oil from its Strategic Petroleum Reserve and asking Saudi Arabia and other Persian Gulf allies to increase production, Abhishek Deshpande, an oil markets analyst at Natixis SA in London, said by e-mail.

Oil, Products

Europe bought 1 million barrels of refined fuels from Russia every day last year, including about 69 percent of its net imports of diesel and heating oil, according to the IEA, a Paris-based adviser to developed nations.

The continent could boost non-Russian fuel supplies by importing from new refineries in Asia and using surplus capacity at its own processing plants, Olivier Jakob, managing director of Petromatrix GmbH in Zug, Switzerland, said by phone. Taking barrels to Europe from other regions would tighten supplies in those markets, he said.

Sanctions on energy would be too expensive for both Russia and Europe, Amrita Sen, chief oil markets analyst at Energy Aspects in London, said by phone.

“Even during the height of the Cold War, there were never any sanctions on oil and gas exports,” she said.