Event Reports

Ukraine/Crimea: Is Shale Gas from the U.S. an Alternative?

This report is for the second workshop in a series organised throughout 2014 by the Konrad Adenauer Stiftung in co-operation with EUCERS and the ISD.

2nd EUCERS/ISD/KAS Talk

In this year’s series of five roundtable discussions with the general theme of "Changing Political and Economic Dynamics of Global Energy Flows", hosted by the European Centre for Energy and Resource Security (EUCERS) with the Institute for Strategic Dialogue (ISD) and the Konrad Adenauer Foundation (KAS) in London, the second event dealt with the current Ukrainian crisis, its potential implications for the European gas market and the role of liquefied natural gas (LNG) coming from the US. The event under the title "Ukraine/ Crimea: Is Shale Gas from the U.S. an Alternative" was attended by members of academia, relevant businesses, the media, as well as government officials and proved to provide a comprehensive picture of the complex situation at hand.

The panel discussion commenced under the moderation of Professor Dr Friedbert Pflüger, director of EUCERS, who in his opening remarks stressed that diversification of energy supplies was as crucial for Europe's energy security as it was for the work of EUCERS. He pointed out that regarding the shale revolution in the U.S., EUCERS already published its very first strategy paper on this topic and its potential implications for Europe in as early as 2011. Professor Pflüger also outlined the internal debates that are taking place in the U.S. with respect to the prospective LNG trade vis-à-vis domestic energy independence. Following Professor Pflüger's opening remarks, Sasha Havlicek, CEO of the Institute for Strategic Dialogue, gave some incitements for the subsequent discussion by inter alia hinting at the fact that following the recent developments in Ukraine, even the UK's conservative party was bigging up Europe, which always indicated that something was afoot. She also questioned whether a similar shale revolution could take place in Europe, despite the very mixed public and governmental responses so far.

As the first speaker of the panel, Eric Mamer, Deputy Head of Cabinet in the DG Energy of the European Commission, stressed that while only a few months ago prices had been the primary focus for the European gas market, since Ukraine, this had shifted towards the actual security of supply. Regarding LNG from the U.S., Mamer also agreed with a statement made by Professor Pflüger earlier that even if LNG would reach the European instead of the Asian market - with its higher prices – this would only constitute a long-term option. He, however, also generally questioned whether an increased dependence on the U.S. was the solution to Europe's problem; "when there already is a U.S. military presence in Europe, does one need a U.S. energy presence?" Mamer instead focused on the need to progressively change the balance of energy, in which for the Commission efficiency remained key. With regard to the Ukrainian crisis, Mamer underlined the importance to maintain open channels towards the East in order to prevent a further escalation of the situation. Generally, he said that the Commission continued to hold on to their 2030 perspective and the overall target to lessen Europe's energy dependence and reduce the degree of imported energy.

Dr Petra Dolata, Research Director of EUCERS, moved the focus point of the discussion beyond just the U.S., by looking at Canada's role as well, whose Foreign Minister only a few weeks back announced he would be able to supply Europe with natural gas, especially the Baltic States. Dr Dolata stressed that this was in fact a perfect example of the complexity that followed when markets and politics intersect. Canada has a vocal Ukrainian community and, at the same time, a far more open energy market than i.e. the U.S., which continued to have several political hurdles for energy security reasons. Furthermore, Canada's dependence on U.S. demand might become an issue in the future considering U.S. production growth through the shale revolution. However, Dr Dolata also pointed out that Canada currently had not a single functioning export terminal and at the same time also required an expanded infrastructure to transport gas to the seven planned terminals – of which only one was situated on its eastern coast. Dr Dolata continued that climate change was further pushing demand for natural gas. In fact the demand side should be a greater focus for policies in response to the recent crisis, since these responses normally had the larger long-term effect compared to short-term actionism targeted at the supply side. Finally, Dr Dolata also outlined several decisive variables such as Australia's LNG ambitions and Chinese own shale gas developments with their respective implications for Asian market prices, which in the end might turn out favourable for the European market considering LNG imports from the U.S.

Henning Gloystein, Senior Correspondent and Head of European Power, Gas & Coal at Reuters News, added further insight regarding market developments through his assessment of current price levels. Showing the spot price evolution for the UK and considering the complete costs and hence price for LNG trade, according to Mr Gloystein, profits would continue to be higher for gas companies to sell their goods on the Asian and South American markets. This would most likely also be the case in the near future since Europe was in a situation of backwardation, meaning natural gas would continue to become cheaper on the continent. Nonetheless, by mentioning several new potential market players, such as Mozambique, Tanzania as well as Australia's expansion plans, Mr Gloystein depicted an outlook for Europe in which North-American LNG might not play a big role, however generally, diversified natural gas might still be feasible due to a growing global LNG market in general. To the delight of Dr Dolata, Mr Gloystein also pointed out that one should watch Canada.

Finally, Dr Frank Umbach, Associate Director of EUCERS, stressed that there was no silver bullet solution that would improve Europe's energy security but rather a multitude of approaches were needed. He also returned to the crisis in Ukraine and its energy implications by considering that compared to the last Russian-Ukrainian crisis in 2009, when little alternative sources of supply had been available, today the situation was totally different considering new pipeline options (i.e. Southern Corridor and regional gas interconnectors between EU-member states) and evolving exporters. At the same time, another change was taking place regarding Europe's natural gas demand, which was currently stagnating. Dr Umbach referred to the latest energy outlook by the IEA who expects this trend may even continue through to the year 2035. Furthermore, since many Gazprom contracts were to expire within the next two to three years, according to Dr Umbach, the basic need as well as an opportunity for change was currently developing. Moving to the actual shale developments in the US, Dr Umbach voiced scepticism regarding the pace and likelihood of further LNG approvals in the short-term perspective, especially considering the second instance of approval, the Federal Energy Regulatory Commission. He, however also stressed that if the government wanted to supply Europe with LNG it could overcome the profit differentials through tax incentives and other measures. Hence, U.S. LNG to Europe should not be precluded solely on economic grounds. Furthermore, Europe's own shale gas resources should be taken into account, especially considering their positive economic and geopolitical potential as well as lower greenhouse gas emissions in comparison with long-distance Russian gas pipeline imports. Dr Umbach continued to outline Ukrainian efforts for energy source diversification both regarding gas and oil projects in the Black Sea, which under the current circumstances and their proximity to Crimea are unlikely to continue, but also regarding shale gas developments in its eastern parts where again these are unlikely to continue for the time being. However, Ukraine’s shale gas projects in its western region could probably experience a boost in the near future. Finally, Dr Umbach moved to the implications a European energy source diversification might entail for Russia. He primarily stressed the South Stream project, which he called the “most expensive import option” since it also requires Russia to connect its own infrastructure with the Southern Corridor, at an overall cost of $21 billion. These costs were likely to be covered in the gas contracts of the future, and hence needed to be included in the calculation. In light of recent developments, and the general cost factors, Dr Umbach therefore questioned the justification of the project in addition to the unsolved questions of compliance with the common EU laws (Third Energy Package; Third –Party access etc.). Finally, considering that South Stream had always been a geopolitical project in order to circumvent Ukraine, if the Commission was to support South Stream, Ukraine would lose valuable transit fees and more importantly its leverage towards Russia considering its importance for the European market. Consequently, "Europe would sell the rope to Russia, on which they will hang Ukraine" as it would allow Russia to increase its pressure on Ukraine contrary to the EU’s promise to strengthen its energy cooperation with Ukraine and to reduce its gas dependence on Russia. Dr Umbach hence urged that this geopolitical component needed to be integrated into the current debates on the future of the European energy market and Ukraine.

Following the panel discussion, Jan-Justus Andreas, KAS-Research Fellow at EUCERS, and Dr Maximilian Kuhn, Research Associate at EUCERS, gave additional comments to the discussion. Mr Andreas generally agreed with the statements considering the Asian and European price differentials' impact potentially resulting in little LNG from the U.S. to reach the European market, and added in this respect the continuously increasing domestic demand for natural gas in the U.S.. He pointed out that this demand increase could coincide with a potentially stagnating or even decreasing production output by the time large scale LNG was to enter the global market. Consequently, current price levels of natural gas could most likely not be maintained, and with increasing domestic prices, the price for LNG would rise as well. Adding also a strategic perspective, Mr Andreas hinted at the fact that Japan had experienced the highest spot prices in its history early this year (above $20/ Million btu) and was largely dependent on fossil fuel exports transiting through the Malacca Straits and the East China Sea which in case of an escalation of i.e. the Islands dispute with China could threaten Japan's energy security. Consequently, also Japan was looking to the U.S. for a more diversified energy supply for its market.

Dr Maximilian Kuhn, having the last words of the panel discussion, summed up certain consequences from the debate, by also extending the focal point beyond natural gas to other liquid fuels. Dr Kuhn stressed both the importance of infrastructure and in this respect the issues regarding European refineries' specialisation on the Russian Naphtha, as well as the low gas price levels in Europe that actually cause much of the LNG reaching the European market to be resold to i.e. Asia. Furthermore, Dr Kuhn also hinted to the fact that energy relations with Russia were more than 50 years old and could not be replaced overnight, yet the increase in interconnectors in the European gas grid since the last crisis in 2009 could potentially enable reverse-flow towards Ukraine. However, in order to expand export, current market restrictions needed to be overcome from a political point of view. Finally, Dr Kuhn concluded that at least since the crisis was taking place now instead of autumn or winter, Europe had not only full gas storages but also some time to deal with this delicate situation.

Following the general debate, a Q&A session gave the audience the possibility to further discuss the variety of mentioned issues and aspects regarding shale gas, the Ukrainian crisis and European energy security. As always, the session itself was followed by a reception enabling further networking among the participants and speakers while enjoying both food and wine. The entire workshop was videotaped and will be available on EUCERS' YouTube channel in due time (www.youtube.com/EUCERS).