Energy Future of Europe and the role of the Southern Corridor

ENERGY FUTURE OF EUROPEAND THE ROLE OF

THE SOUTHERN CORRIDOR

CASPIAN STRATEGY INSTITUTECENTER ON ENERGY AND ECONOMY

Authors:Efgan NiftiyevFatih Macit

September 2013

hazarstratejienstitüsüH A S E N

CASPIAN STRATEGY INSTITUTECENTER ON ENERGY AND ECONOMY

September 2013Authors:Efgan Niftiyev

Efgan Niftiyev has completed MA in International Politics and Journalism in 2009, where he served as a research assistant at Georgetown University. He has worked at USA Congress, the Heritage Foundation and many influential institutions in US capital. Currently, continues his academic studies in the field of International Relations and Political Science at George Washington University. His articles on international and political affairs are being published in many American, Turkish and Azerbaijani professional journals and popular media. Niftiyev’s areas of research are; Comparative Politics, Nation Building and Identity in the Former Soviet Countries, Political Development, Energy Security Policies and Turkish Foreign Policy. He speaks Turkish, Russian, Azerbaijani and English.

Dr. Fatih MacitDr.Macit received Ph.D. degree in economics from Georgetown University with a full scholarship in the United States. After PhD education he served at the University of Beykent as a faculty member in the economics department for two years. Fatih Macit’s areas of expertise are; Labor Market, Monetary Policy, Applied Econometrics, Energy Economics, International Finance and the Turkish Banking Sector. There are many articles published in international journals in these areas. He continues to serve as head of the department in the University of Suleyman Shah, Department of Economics, and director of the Economic Studies Centre.

energy future of europeAND THE ROLE OF

THE SOUTHERN CORRIDOR

ENERGY FUTURE OF EUROPEAND THE ROLE OF THE SOUTHERN CORRIDOR

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Introduction

Europe is one of the biggest importers of the natural gas in the globe. It has around 17 percent share in global natural gas consumption whereas it only produces 2 percent of the global natural gas volume.1 Thus, to maintain sustainable growth and national security, diverse and secure supply of the energy is essential for Europe. The development of the Southern Corridor has been envisioned to contribute to the diversity of supply sources of natural gas bringing energy from the Caspian region to Europe. This strategic goal is on the way to become reality as Trans Anatolian Pipeline Project (TANAP) is projected to supply initial deliveries of Caspian gas to Europe by 2019.

The realization of the Southern Corridor has been regarded as a strategic undertaking for addressing growing concerns over potential natural gas supply to Europe. However there are certain shifts in the global energy dynamics that would make eventual effect in European energy map. This paper is analyzing the future of the energy market, natural gas market in particular, and the role of the Southern Corridor in changing European energy landscape. The paper provides analytical insight concerning current and potential situation in European energy market and what place Southern Corridor would have in evolving energy future of the Europe.

1 Note: Data used in this paper comes from open publications of IEA, EIA, USGS, BP World Statistics, OME and others.

Publisher: Caspian Strategy Institute

Authors:Efgan NiftiyevFatih Macit

Editor:Hande Yaşar - Ünsal

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ENERGY FUTURE OF EUROPEAND THE ROLE OFTHE SOUTHERN CORRIDOR

ARTICLEENERGY FUTURE OF EUROPEAND THE ROLE OF THE SOUTHERN CORRIDOR

Efgan NiftiyevFatih Macit


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declining for a long time and the country is now a net importer of natural gas. The Netherlands has a relatively stable pattern in production, but given domestic demand, the country’s net exports are less than 30 bcm a year. Norway is an important natural gas import source for Europe: about 30% of region’s gas imports come from Norway. Due to the discovery of new gas fields, Norwegian production has been steadily increasing over the last decade and the total volume of its total gas exports reached 118 bcm by the end of 2012. The future trend in Norwegian production depends on the discovery of new fields, and the general consensus is that the production will peak in early 2020s, and by 2030, the total production will be less than today.

BCM/Year Current State 2012

Future State 2030

Domestic Production 202 155

Consumption 562 775

Imports 360 625

% Import Dependence 64% 80%

% in Energy Mix 24% 30%

Although there is some domestic production by other countries, Europe is still heavily dependent on imported natural gas. By the end of 2012, the total gas consumption of Europe - including Turkey and some Balkan countries - was around 562 bcm. About 64% of total consumption is met by imports. According to some estimates, the total demand will jump up to 775 bcm by 2030, and as domestic production goes down, import demand will rise to 625 bcm, which will in turn increase dependence on imported gas to 80%.

At this point it is useful to review the likely driving forces of the increases in natural gas demand for Europe over the coming decades. The first factor will be future economic growth. Although the region has been experiencing a severe economic slowdown since 2008, it is expected that the economic growth will pick up again, leading to a higher demand for energy and in particular natural gas. The second factor is related to the use of nuclear energy. After the Fukushima disaster, there is greater concern about the safety of nuclear

European Gas Market

In light of the development of the Southern Corridor is aimed at the transportation of natural gas resources from the Caspian region to European markets, it is important to analyze the key dynamics of the European gas market. This analysis will also help us to understand why and how the Southern Corridor will be an important natural gas resource for Europe, both in terms of meeting increased the market’s import demand and diversifying supply sources.

Looking at the consumption of natural gas in EU-27 over the past decade, a relatively flat pattern can easily be observed. The economic slowdown experienced by the region since 2008 is partly responsible for this trend. However, there are also other factors that have put downward pressure on natural gas demand in EU. One of these is the increased use of renewables in total primary energy consumption. By the end of 2001, the share of renewables in total primary energy consumption was less than 1% but within ten years, this figure has risen to almost 6%. The use of other energy sources has remained relatively stable over the past decade.

Another important factor in this general downward pattern is improvements in energy efficiency. There is a very strong emphasis in EU on energy efficiency, and the region has been very successful in this area. Over the last ten years, the EU-27 have achieved a 1% improvement in energy efficiency measured by gross inland consumption of energy divided by GDP. The region aims to continue to development initiatives that will increase energy efficiency; this may well reduce future gas demand.

Although some parameters such as future economic growth, energy efficiency and the use of other energy sources create uncertainty about the future of natural gas demand in Europe, what is certain is that production is declining. Norway, the United Kingdom, and the Netherlands are the major natural gas producers in Europe. Production in UK has been

0,00%

1,00%

2,00%

3,00%

4,00%

5,00%

6,00%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Share of Renewable Energy in Total Primary Energy Consumption

135,0140,0145,0150,0155,0160,0165,0170,0175,0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Energy Intensity (Gross inland consumption of energy divided by

GDP)

0,0

20,0

40,0

60,0

80,0

100,0

120,0

140,0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Natural Gas Production (bcm)

Norway UK Netherlands


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energy. Germany, for instance, has already announced its plans to close all nuclear plants by 2020. The decline in the use of nuclear energy may stimulate the demand for natural gas in the coming decades.

Gas Import Profile of Europe

In this section of the report, we will examine the current sources of natural gas imports for Europe and their potential in terms of meeting increased import demands. The importance of the Southern Corridor in terms of diversifying the natural gas resources will be emphasized.

Europe receives natural gas from various sources, either by pipeline or in the form of LNG. In 2012, a total of 363.7 bcm of gas was imported, and of this amount 296.2 bcm was transported by pipeline. Russia is the main exporter of natural gas to Europe. The average share of Russian gas of total imports is 38%, but for some countries the dependence on Russian gas is much higher; some states are actually 100% dependent on Russian imports. Eastern and Central Europe countries are heavily reliant on Russian gas, and these countries are experiencing a higher economic growth rate in comparison to the EU average. Therefore, for these countries, energy security and source diversification has become a much more pressing matter.

After Russia, Norway is the second key natural gas supplier to the region; in 2012 it exported a total of 112.3 bcm to Europe. Western Europe countries such as Germany, France, and UK are the main importers of Norwegian gas, which reaches European markets mainly through pipelines, with a very tiny portion transported as LNG.

Although about 81% of total imports come through pipelines, LNG imports also meet an important demand in Europe, imported from different countries. In this regard Algeria, Qatar, Nigeria, Egypt, and Trinidad & Tobago are the main exporting countries. Algeria’s total LNG export is around 14 bcm, and France, Spain, and Turkey are its main importers. Qatar is a major importer of LNG in Middle East, with total gas exports of over 100 bcm.

Although Asia-Pacific countries are the main markets for Qatar, about 30 bcm of natural gas goes to Europe. The UK, Italy, and Spain are the main importers of LNG from Qatar. Nigeria is another important LNG exporting country to Europe, and about 12 bcm gas goes to Europe from there. France, Spain, and Turkey are the main buyers of this gas. Egypt and Trinidad & Tobago export LNG to Europe but their supply is very small portion in relation to the total demand.

As it is mentioned before, domestic gas production in Europe is projected to decline while demand may increase up to 775 bcm by 2030, depending on future economic growth, developments in energy efficiency, and how intensively other energy sources are used. With production going down and consumption going up, demand for additional imports will jump up in the coming decades. Therefore, how to meet this additional import demand is an urgent question for Europe.

Before going into the details of additional supplies from other sources, it will be useful to clarify one important point. The discovery of shale gas has generated a significant revolution in United States and will make the country a net exporter of gas by 2020. Some countries in Europe have shale gas reserves, and it is claimed that shale gas may be an important resource in terms of meeting future demand. However, there are strong arguments that shale gas will not be able to generate significant change in market dynamics. First of all, environmental concerns and EU regulations make it impossible for any operator to explore or drill and produce shale gas in EU. For instance, France has already banned shale gas drilling. Poland and some other Eastern European countries are proceeding with shale gas exploration but these efforts do not by themselves have the capacity to revolutionise the gas market. Secondly, the laws relating to mineral rights are different in the US and the EU. In US, if a property owner discovers gas on his private property, he or she is able to extract and benefit from that resource. This has encouraged shale gas exploration and sales in the US. However, in the EU all mineral rights belong to the governments, and this eliminates the incentive for exploration by private parties. The third factor is related to population density. Compared to the US, population density is very high in the EU and this makes exploration activities very difficult.

Future Gas Supply Sources

Over the next two decades, the total natural gas import demand in Europe may increase by 300 bcm, and it is therefore crucial for Europe to secure additional supply and generate source diversification. Some current suppliers like Russia, Norway, and Algeria will continue to become major gas exporters to Europe.

Russia is the biggest natural gas producer in the world, and it hold the world’s largest natural gas resources. By the end of 2012, the total gas exports of Russia to Europe were around 136.4 bcm. In terms of gas trade the relationship between Europe and Russia might


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be characterized by interdependency. European countries meet an important portion of their gas demand from Russia but at the same European market is a significant source of revenue for Russia. Moscow has actually sought to diversify its export markets by signing new agreements with East-Asian countries, in particular China. Although insufficient investments in exploration create questions about the future growth of Russian gas production, Russia will continue to be a major gas supplier to Europe. According to the estimates by Observatoire Mediterranean de l’Energie (OME), the total exports of Russia to Europe could rise to 236 bcm by 2030.

Norway is Europe’s second largest gas supplier, and by the end 2012 the total volume of its gas exports to Europe was 113 bcm. Although Norway will continue to be a major supplier to Europe, due to the decline in its production, the total exports in 2030 will be less than today. Given the existing production fields, production will probably peak in 2020 and after this period, volumes will be largely dependent on new discoveries. According to estimates made by OME, Norwegian production will be around 100 bcm in 2030, and due to the increase in domestic demand the export capacity of the country will drop to 89 bcm.

Although most of gas that is imported by Europe comes through pipelines, LNG supply from Qatar, West Africa, and North Africa will also play an important role in meeting future demand. Europe has a very large LNG regasification capacity and the current utilization rate for these plants is only 30%. Therefore, there is a huge idle capacity able to absorb future increases in LNG imports.

Qatar is the world’s largest LNG exporter and about 45% of total LNG imports of Europe come from Qatar. The total proved reserves of Qatar is around 25 tcm and the country is not expected to face production constraints for a long time. In 2012 the total LNG export volume of Qatar was around 97 bcm, sold mainly to Asia-Pacific countries. Following the Fukushima nuclear disaster, LNG demand will probably increase, particularly from Japan, meaning that Qatar will direct more of its production to Asia-Pacific countries. High LNG prices in the Asia-Pacific region will also drive the direction of Qatar’s exports. Nonetheless, according to estimates by OME, Qatari LNG exports to Europe will continue to increase, reaching 39 bcm by 2030.

Algeria is an important natural gas supplier for Europe. In 2012, the total exports from Algeria to Europe were around 44.6 bcm, two-thirds of which is transported by pipeline. Italy and Spain are the main buyers of Algeria’s pipeline gas. The total proven gas reserves of Algeria are around 4.5 tcm; the country possesses the largest gas reserves in the Mediterranean Sea. Although the future export potential of Algeria is questionable due to rapidly increasing domestic demand and delays in new production and infrastructure projects, gas exports to Europe are expected to increase in the coming decades. According to estimates made by OME, Algerian gas exports to Europe could rise to 79 bcm by 2030.

Nigeria is another important LNG supplier to Europe. By the end of 2012, the country’s total exports to Europe reached to 11.6 bcm. Nigeria holds the largest natural gas reserves in Africa and the total proven reserves of the country is around 5 tcm. Given the large resource base the country has a huge potential to increase its exports in the long run. However, domestic violence, political instability and insufficient infrastructure are the main obstacles to increases in domestic production. According to OME estimates, Nigerian gas exports may increase up to 62 bcm by 2030. This estimate could be fairly optimistic given that the current domestic consumption of Nigeria is very low due to a lack of infrastructure. Although the total population of the country is over 155 million, domestic consumption is only 8 bcm. If political stability can be achieved in the longer term, this will increase production - but at the same time it could significantly stimulate domestic consumption and in turn reduce export potential.

Due to the shale gas revolution, the United States is also a potential gas supplier for Europe. Given the current production and consumption dynamics, the US may become a net exporter of natural gas by 2020. Theoretically, by 2020 (at the earliest), it could export 5 to 10 bcm, and by 2030 up to 50 bcm a year. However, as market dynamics are quite different in the US compared to Europe, there is very little chance that US exports will ever meet a significant portion of European demand. In addition to this, the construction of the country’s first liquefaction plant is planned on Pacific Coast rather than on the Atlantic, indicating that any LNG export potential will be directed toward Asia-Pacific markets where the prices are more attractive.

Southern Corridor

The Southern Corridor has long been on the EU’s agenda, and it has been assumed that the project will aid the EU in its efforts to diversify its gas supplies. Although transporting the natural gas resources of the Caspian region is the main priority of Southern Corridor, the first concrete step was the development of Baku-Tbilisi-Ceyhan pipeline, which carries Azerbaijani oil to international markets. The US government has always been a strong supporter of the Southern Corridor, and during the late 1990s they consistently promoted the Trans-Caspian-Pipeline (TCP), which was designed to deliver Turkmen gas to European markets. Although there was a very strong inter-governmental support for TCP, the project was not realized due to strong Russian opposition. But while TCP did not become a reality, another project, namely the South Caucasus Pipeline (SCP), has been successfully implemented. The project is designed to carry gas from Azerbaijan to the border between Georgia and Turkey and there it connects to a new pipeline built by BOTAS.

Recently, the Southern Corridor has come to the attention of the European gas market through the development of the Trans-Anatolian-Pipeline (TANAP) and Trans-Adriatic-Pipeline (TAP) projects. SOCAR, BOTAS, and TPAO are partners in TANAP, and AXPO,


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E.ON, and Statoil are partners in TAP. These pipeline projects are designed to transport gas from the second phase of Shah Deniz Field to Turkey and European markets. The total reserves of Shah Deniz Field are around 1.2 tcm, and the first phase is already producing around 10 bcm, of which 6.8 bcm goes to Turkey and the remaining gas goes to Azerbaijani and Georgian domestic markets. The second phase plans to produce 17.6 bcm. 6 bcm of the projected volume will go to Turkey and 10 bcm will be transported to South Eastern Europe via TAP. When the Southern Corridor was first mentioned, Turkmenistan was supposed to be the main potential supplier of gas. However, recent developments have caused a shift in emphasis from Turkmenistan to Azerbaijan. The latter has other gas reserves besides Shah Deniz Field, and its total proven gas reserves are around 3.2 tcm. Therefore, Azerbaijan is expected to be an important supplier for the Southern Gas Corridor.

An important recent development for the Southern Gas Corridor was the decision by the Shah Deniz consortium on which project will transport the gas to European markets. For years, Nabucco pipeline project was expected to be the main route by which the gas from Caspian region and Middle East would be transported to European markets. The projection was that the Central and Eastern European countries targeted by Nabucco project would be able to diversify their gas supplies, and become less dependent on Russian gas. However, the Shah Deniz consortium made their decision in favour of TAP, which follows a completely different path for transporting gas from Azerbaijan to European markets. It will take the gas at Turkish-Greek border, cross Albania and the Adriatic Sea, ending up in Italy. TAP has a current capacity of 10 bcm annually but this can easily be expanded to 20 bcm a year.

There has been a lot of discussion of the TAP versus Nabucco decision. The first criticism was that Italy, the final destination for TAP, is already sufficiently supplied and well diversified. However, this is not the case. Snam Rete Gas, the Italian natural gas infrastructure company, has huge investment plans for the period between 2012 and 2015 and these investments will generate important opportunities for transporting gas to other European countries such as France, Germany and the UK. The second issue is related with the final destination of Nabucco pipeline, which is Baumgarten in Austria. There are significant questions about the capacity of this hub to transport additional volumes of gas to Western European markets without significant additional investment in the grid. The third issue, and a strong advantage of TAP over Nabucco, is the gas market potential in South Eastern Europe. Some countries in this region such as Albania, Kosovo, and Montenegro do not have a domestic natural gas market and with the development of TAP, gas suppliers may have the option to build domestic gas infrastructure and sell the gas that they produce.

Although Southern Corridor has been initially enabled by Azerbaijani gas, new suppliers will certainly be needed given the potential for future gas imports of Europe and a need for diversification of gas supply. In this regard, gas from Northern Iraq and reserves in Eastern Mediterranean could play a significant role. In the Northern part of Iraq the total

proven reserves are around 2-3 tcm, and if the region can solve the political disputes with the central government in Baghdad the gas reserves here will generate a new supplies for the European markets. Reserves in Eastern Mediterranean may also provide an important source for the Southern Corridor. Expected reserves in this region are around 6 tcm, and connecting these resources to TANAP via a new pipeline project would make the Southern Corridor an important gas supply source for Europe.

Notes:

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Energy Future of Europe and the role of the Southern Corridor

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