This post is a re-organized version of an article by Bloomberg’s Anna Shiryaevskaya and Marek Strzelecki, on an ENERGY SUPPLIES (and also possible PRICE) CHALLENGE faced by European Union mainly due to a decrease in supply from Russia.

Before the Crimea Crisis:

• Europe gets a third of its gas from Russia, mostly via Ukraine, at an annual cost of about $53 billion, although BG Group Plc noted that it imported the least LNG in nine years in 2013 as demand weakened.
• Russia supplied 138 billion cubic meters to the EU last year at an average price of $387 per thousand cubic meters ($10.50 per million British thermal units), according to OAO Gazprom, the Moscow-based Russian pipeline gas export monopoly.
• Dependence on Russian gas: Finland -100%, Lithuania – 100%, Poland – 59%, Germany – 37%, France – 16%, Belgium – 0%, Spain – 0%
• Europe is Gazprom’s biggest market by sales and it pays more than Russian customers or some other buyers in the former Soviet Union. Within Europe, Germany is Gazprom’s biggest market.

Current Situation: Russia’s annexation of Ukraine’s Crimea region this month sparked the biggest regional crisis since the Cold War.

“Gas is flowing from Russia to the EU as normal and the bloc expects Russia to meet its supply commitments” — Sabine Berger, an energy spokeswoman for the European Commission

“There are no alternatives to Russian gas for Germany” — Economy and Energy Minister Sigmar Gabriel in an interview with the Neue Osnarbruecker Zeitung.

Future: Unavailability of Russia’s Gas Supply this summer >> A need to attract enough cargoes from the global market to replace Russian supplies >> Possibility of a price Increase: Europe’s natural gas prices would have to double; U.K. price to double to more than $18 per million British thermal units

“Benchmark U.K. prices would need to rise 127 percent to attract liquefied natural gas (LNG) if Europe had to replace all its Russian fuel for two summer months” — Energy Aspects Ltd. in London

Implications:

1. Surging energy costs would threaten the recovery of the Euro area’s economy, which, according to the Bloomberg’s median estimates, is predicted to expand 1.1 percent in 2014, after contracting for two consecutive years.
2. Increased competition for LNG supply >> 19% increase in costs for Asia [Mike Fulwood, a London-based principal for global gas at Nexant Ltd]
3. “A halt in supplies would hurt Russia more than the EU. Lost revenue from the EU would also deplete the state budget, 15 percent of which comes from gas sales.” — Georg Zachmann, a research fellow at Bruegel in Berlin

Possible Solutions for the EU:

1. To reduce its reliance on Russia >> to  develop domestic resources

• Poland will complete an LNG terminal by May 2015. It is already developing Europe’s largest recoverable deposits, estimated at 4.2 trillion cubic meters [U.S. Energy Information Administration] and predicted to meet nine years of EU consumption.
• Lithuania will receive a floating LNG facility by the end of 2014.
• France will start an LNG terminal next year.
• Germany will have to find new investors for a previously canceled project.
• Croatia and Ukraine will aim to finish reviewing the projects.

2.To buy more gas from Norway and the Netherlands [Each with a capacity to boost pipeline exports by at least 20 billion cubic meters, or enough combined to supply France for a year — Bruegel estimates.]

3.To make use of coal in power plants

“Nothing can be a game changer which will make any immediate and significant difference. The only thing which can be done quickly would be to use massive amounts of additional coal rather than gas. This would massively add to environmental problems.” — Jonathan Stern, the founder of the Oxford Institute for Energy Studies

4. To import LNG from the United States and Australia

“European terminals can import as much as 199 billion cubic meters (7 trillion cubic feet) of gas a year)” — Gas Infrastructure Europe, a lobby group in Brussels

Follow