Gas Insurance Market Seen as Way for EU to Curb Supply Threat

  • Bruegel research group suggests way to ensure supply
  • EU effort to diversify sources of gas seen as expensive

Europe may be better off creating an insurance market to guarantee natural gas will keep flowing in a crisis instead of seeking supplies from a wider variety of nations.

That’s the conclusion of the Bruegel research group, a Brussels-based institution that suggested ways for the 28-nation European Union to strengthen the security of one of its main sources of energy.

Policymakers are concerned the region will become more dependent on Russia for its gas and are seeking new supplies in North Africa and the Middle East as tensions rise there. The researchers Simone Tagliapietra and Georg Zachmann at Bruegel suggested that the EU’s current focus on finding new sources of supply to offset dependence on Russia is both expensive and inadequate.

“We are proposing a new approach,” Tagliapietra said. “The only thing to do is to oblige importers and potentially domestic producers to have a margin of flexibility, or in other words a spare capacity from imports, storage or interruptible clients. They wouldn’t have to have it physically available, but they would be required to have a contract that will make additional gas available in case of emergency.”

The energy union strategy was proposed after the Ukrainian crisis highlighted the need for Europe to cut its energy dependence on Russia, which supplied 27 percent of the natural gas consumed in the bloc last year.

Russia currently ships about a third of its Europe-bound gas via Ukraine, down from about two-thirds in 2011. Eastern members of the EU suffered shortfalls at least twice in the past decade during price spats between the two former Soviet partners.

EU leaders last year endorsed a plan to accelerate cross-border gas and power interconnections, remove market barriers and diversify sources of energy. They’re also seeking to reduce fossil-fuel pollution blamed for global warming.

The Bruegel proposal is for a market that would give a a security margin for gas supplies. It would use a range of instruments -- option contracts, fuel switching, domestic production margin or swap contracts with suppliers in other countries. They would rely on excess capacity of the existing EU import pipelines, which are 58 percent full at the moment, and LNG terminals that use about a third of their capacity on average, according to the study.

“There is a number of uncertainties in the energy world, and a European insurance system may be the best solution at the cheapest price possible,” Tagliapietra said. “Russia is not the only potential problem. The neighborhood is very volatile. The outlook for Norwegian gas production after 2020 is declining while EU imports are set to increase in the coming decades.”

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