Energy sectors, including natural gas, play an important role in Russian economy and were one of the driving forces of Russia’s economic recovery from the collapse in the 1990s. The country enjoyed more than 5% annual real economic growth in 2000–2008. However, over-reliance on the revenues from energy exports was also one of the major factors for Russian economic downturn during a global recession in 2008–2009, when a reduction in demand for fossil fuels, and a collapse of oil and energy prices greatly contributed to an almost 8% GDP loss in 2009. The IMF (2013) forecasts 3–3.5% annual GDP growth for Russia for 2014–2018, but the concerns about the viability of Russian growth based on fossil exports remain.
In the mid-2000s there were many popular predictions of a potential shortage of Russian gas exports due to the seemingly inadequate investments in Russian gas infrastructure. Those predictions of shortages are now transformed into the predictions of an excess of Russian gas exports (and switching away from them in Europe) due to LNG and shale gas competition. Indeed, in 2009–2011 Russian gas exports to Europe decreased from 5.5 to 4.5 the global recession, an increased LNG availability in Europe, and inflexible pricing arrangements for Russian gas. The exports have recovered to an estimated 5.3 Tcf in 2013 due to several price concessions, tighter LNG market, and colder temperatures in Europe.
Natural gas exports from Russia get special attention in comparison to other energy exports, because Russia has less diversified ways to export natural gas in comparison to oil and coal. On the demand side, it is also relatively easier to switch from one oil or coal supplier to another; hence the importers have fewer concerns about relying on a single supplier or a limited number of suppliers. As a result, Russian oil and coal exports have not had the disruptions seen in the gas transit routes through Ukraine and Belarus.
Because of the importance of Russian gas imports in the European energy mix, many researchers have analysed different aspects of Russian gas production and export structure but all agree that there are number of common underlying pressures upon Russian future gas production and use:
Evolution of existing gas assets
World gas production and trade
What form will emission reduction policies take and how stringent will the control levels be?
The recent concerns about nuclear energy
Asian gas markets developments
The current landscape
According to BP about 50% of the global gas reserves of about 6600 Tcf (trillion cubic feet) lie in three countries: Russia, Iran, and Qatar. Of these three, Russia has about 1160 Tcf of natural gas in proven reserves, while producing slightly more than 20 Tcf per year. As way of comparison, Europe (including Norway) has about 130 Tcf and total world natural gas consumption is around 115 Tcf/year.
After the break-up of the Soviet Union, most of the Russian gas reserves and pipelines have become an asset of a state-owned company Gazprom. The production shares of the other producers (Novatek, Rosneft, etc) have increased over time yet Gazprom remains the dominant producer with 90% of the market. In a global context Gazprom holds 25% of the world’s known gas reserves and produces 16% of global output
In the 2000s, gas exports from Russia reached 5.5 Tcf in 2008 before then easing to 4.5 Tcf by 2012, mainly due to the reduced volumes to Ukraine and Asian exports started in 2009 with majority of the supplies destined to Japan and South Korea. However, the main export markets of Russian natural gas are the European Union and the CIS. Russia supplies a quarter of the EU gas consumption, mainly via transit trough Ukraine (Soyuz, Brotherhood) and Belarus (Yamal-Europe pipeline) where the main importers are Germany, Ukraine, Belarus, Italy, Turkey, France and Hungary.
In addition to the existing pipelines through Ukraine and Belarus, Russia is also building The South Stream with a capacity of about 2.2 Tcf which would connect Russia and Bulgaria via the Black Sea and Nord Stream to connect Russia and Germany via the Baltic.
As a stated goal for The Nord Stream and The South Stream is a divergence of the gas flows from the transit routes of Ukraine and Belarus, Russia would be able to supply a substantial amount to Europe and Turkey via new pipelines and Blue Stream that do not depend on the CIS transit countries. However, additional volumes would require some transit flows or an expansion of the Nord Stream. If all expansions (two more pipelines of The Nord Stream and an additional pipeline of Yamal–Europe) were built, then the Europe-bound export capacity would reach about 13 Tcf.
While much focus is given to the export of Russian gas, a significant domestic market also exists. In many countries, coal is a primary source of energy for electricity and the role of gas is seen as moving from coal to a less carbon-emitting fuel. In Russia, the share of natural gas in total energy consumption is already more than 50%, and the same is true for electricity, so there is not as much room for an increase in gas usage. Gazprom is trying to boost its gasification efforts in the areas where gas is currently unavailable, so a major increase in domestic gas usage can be expected in residential and commercial uses for heating and cooking purposes. According to Gazprom, the degree of gasification, defined as a number of houses with access to natural gas to the total number of houses, increased in Russia from 53% in 2005 to 64% in 2012. Thus, the domestic market is growing, but its volumes are not expected to affect Gazprom’s ability to sustain or increase its export volumes for a while.
If the main market is Europe…how much natural gas does Europe need?
The EU gas consumption was growing at an average annual rate of 1.7% during the 10 years before 2008. In the recent World Energy Outlooks, the IEA has repeatedly revised down its projections for the EU gas consumption; in 2011 it projected that the EU in 2035 would consume about 22 Tcf, this was revised in 2012 to 21.7 Tcf and further changed in 2013 to 19.5 Tcf.
Looking at the projections for the European gas consumption, and considering the Middle East and Africa’s LNG expansion, many analysts have criticised Russia’s urge to build both the Nord Stream and the South Stream pipelines. An increase in shale gas production in the U.S. and prospects of shale gas production in Europe do not seem to change the attitude of Russian gas industry officials, who project an increase in gas prices by 2015–2020 in comparison to relatively low spot prices in 2009–2010. Indeed, according to The Economist spot prices in Europe in 2013 were closer to Russian long-term gas prices and purchases of Russian gas were increasing.
The majority of forecasts show a decline in Europe’s gas production and a gradual increase in its consumption up to 2025. After that, tighter emission targets bring renewables and nuclear power more aggressively into the mix and are coupled with accelerated improvement in overall energy efficiency. These result in a gradual decrease in natural gas use in the EU after 2030.
Caution should be taken in that it is possible to envisage situations where early stringent emissions regulations hasten the closure of coal plants and coincide with closure of aging nuclear assets in 2020-2030 throughout Europe. Whilst renewables would be expected to make up a larger proportion of the energy mix, there would be strong pressure to turn to Gas assets to make up the short fall and under such a scenario, gas could be expected to support intermittent generation from solar and wind.
If not west, then east for Russian gas?
As mentioned above, in 2009 natural gas started to serve the Asian market, primarily Japan and South Korea. Asian natural gas consumption is growing rapidly and both ExxonMobil and the IEA project it to be the fastest growth market for natural gas over the next 20 years. The recent shut-down of nuclear power plants in Japan increased the need for gas there, but Russia currently is not in a position to increase its exports in the short run and to serve an increasing demand from Asian countries, substantial investment in infrastructure is needed.
Additionally, the biggest unknown is how China’s demand for natural gas will develop over time. Natural gas is more expensive than coal, but China promotes its use in residential and commercial sectors. There are also plans for an increased natural gas-based electric generation and transportation, mostly to concerns about air pollution. Natural gas use in China rose from 1.7 to 5.2 Tcf between 2005 and 2012, but it is still just a small fraction of total energy. To expand gas use further, China needs to increase both production and imports with some commentators foreseeing Chinese gas demand being 20 Tcf.
As this blog has discussed, domestic shale gas had been expected to meet a large proportion of this increase and long running negotiations between China and Russia over the long term supply of gas to China had reached an impasse. However, in May 2014, Russia reversed a decade of resistance and accepted Chinese demands for a lower gas price of £212 per thousand cubic metres (42% per cent less than the price Lithuania pays) and a price so low that it risks depressing natural gas prices throughout the Far East and causing issues with future Russian sales to Japan. Moreover, Moscow will have to borrow £30bn to pay for new pipelines and other infrastructure.
Mr Putin was willing to accept such poor economics because his main goal was political: to intimidate Europe. But behind the grandstanding, the Russian president knows that Europe is the only viable market for Russian natural gas, and that it will continue to be so for decades. Russia sends four times as much gas to the EU as it will eventually pipe into China under the new deal.
Against the flow to America?
With a shale gas boom in the United States, nobody expects any sizable natural gas exports going from Russia to America anytime soon. A current price difference between the U.S. market and European/Asian markets makes the U.S. a potential natural gas exporter rather than importer. However, in 2011 MIT studied a potential situation where truly integrated natural gas markets are developed, where suppliers and buyers interact based on economic principles and do not restrict supply or engage in geopolitically driven trade. The study shows that with updated supply information for shale gas in North America, there is a potential for natural gas exports from the U.S. in the next decade. However, with global natural gas markets, by 2030–2040 relatively cheaper shale resources in the U.S. will be already produced and lower cost suppliers like the Middle East and Russia will be competitive again on the U.S. natural gas market. This results in lower gas prices for customers in the U.S. and an increased gas usage.
In almost every conceivable scenario, and for the foreseeable future, a majority of natural gas exports from Russia will continue to flow to Europe. Aggressive Greenhouse Gas regulations coupled with fears over energy security (along with possible LNG shipments) are likely to – but not eliminate – Russian gas imports. Whilst the development of solar, wind and biomass will displace existing generation assets, there will still be the need for base load and peaking plants. Gas will be ideally placed to supply these.
Alternative scenarios provide a wider range of projections, with many potential paths after 2020 considering the fate of nuclear and coal regulation in Europe and a level of support of natural gas in Asia. Projections of shale gas development in China (and in Europe) are still highly uncertain. Depending on the costs of these resources and environmental regulations in place, they may displace higher cost imports to these regions. At the same time, larger gas reserves in China would facilitate a shift from coal to gas and further induce gas use in different sectors of the economy, opening a door for additional lower cost imports. By 2030, more than a third of Russian natural gas exports might be destined to Asia, and by 2050 this share can reach almost 50%. Europe’s reliance on LNG imports increases, while it still maintains sizable imports from Russia.
What is certain however, that in any scenario, Russia will be a significant factor in global gas markets for decades to come.
- Scenarios for Russia’s natural gas exports to 2050 – Energy Economics Volume 42, March 2014, Pages 262–270
- Call Putin’s bluff – he will not cut off Europe’s gas – http://www.ft.com/cms/s/0/c03b931a-31c6-11e4-a19b-00144feabdc0.html
Natural Gas and Geopolitics: From 1970 to 2040 – Victor et al., 2006D. Victor, A. Jaffe, M. Heyes