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The Russian Gas Deficit

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  1. The Russian Gas Deficit Geopolitical Implications for Bulgaria and for Europe Professor Alan Riley. Sofia Friday 16th November

  2. A Russian Gas Deficit? • 47 Trillion Cubic Metres in the ground • Surely they cannot be running short of gas?

  3. Gas Deficit: A Serious Supply Issue • Declining Production in ‘legacy’ Gas Fields • Lack of Investment in New Fields • Low Domestic Prices • Diverted Investment • Capital Costs

  4. Gas sector: on the forefront of supply crisis Matured fields: over 20% decline in 6 years! Source: Gazprom, Institute of Energy Policy

  5. Gas production on Gazprom’s mature gas fields would continue to rapidly decline Urengoy and Yamburg will decline by 30% by 2010 as compared to 2004! Source: Jonathan Stern, Oxford Institute for Energy Studies, ‘The future of Russian gas and Gazprom’, 2005

  6. Where Gazprom had been investing in the previous years? Cumulative capital investment by Gazprom in 2000-2006, USD bn (money of the day) Source: Institute of Energy Policy, Gazprom data. * - Gazprom estimate

  7. IEA Concerns I • We are afraid that Gazprom will not have enough gas to supply even their existing customers and existing contracts. This is our data,” Claude Mandil, IEA executive director.

  8. IEA Concerns II • Inefficiency & Lack of Competition • Increasing Gasification • Ability of Central Asia to Deliver • Incentives for Gas Independents

  9. Stern: Future of Russian Gas? • OUP Book, The Future of Russian Gas & Gazprom • Extent of Depletion of NPT Fields • Lack of Investment in New Fields • Domestic Price Increases Vital • Raises Issue of Accelerated Depletion

  10. Gazprom in Crisis • UK Defence Academy Paper, Michael Fredholm • Gas Supply Shortage investment-depletion problem • Details of 05/06 Deficit • Looks at Potential Deficit Solutions

  11. Russia Short of Gas? • Milov former energy minister www.energypolicy.ru • Series of Papers and Speeches on Subject • Believes Potential Problem as early as 2010

  12. President Putin • Chaired a Meeting on the Deficit in the Kremlin • Looking for Solutions • Reportedly Unhappy with Gazprom • Influence on Price Increase Announcement in November 2006

  13. How Big and When? • Milov: 126bcm by 2010. • Central Asia and Domestic Gasification could make it worse • 155bcm current EU Imports • Accelerated Depletion…2008?

  14. Deficit Solutions I • Kremlin Meeting September 2006 • Short Term Supply Problems Nuclear, Hydro-Timing • Coal-Near Term Possibilities-But Rail Capacity • Energy Efficiency-Difficult to Put in Place Incentives

  15. Deficit Solutions II • Higher Domestic Prices? -Time Delay -Political Trouble -Economic Trouble • Energy Saving in Industry? -Kremlin Needs Effective Tax Regime

  16. Russian Deficit Analysis • Unclear how great • Significant • Very Little to be a lot worse-eg accelerated depletion or increase in domestic demand

  17. Deficit Consequences • Much More Serious than a Cut Off • Pressure to Switch to Alternatives • Pipeline Questions • Impact on Energy Liberalisation • Bulgarian Gas Market Development • Geopolitical Consequences

  18. Much More Serious than a Cut Off • Cut off-a day or two. • Fundamental Financial Incentive to sell to EU • No Pipelines to China • Chinese cannot pay EU rates with EU scale • Deficit-’we want to but we cannot’ • Much More Serious Supply Security Issue.

  19. Switch to Alternatives • LNG Gasification Plants • LNG Hubs? • Alternative Pipelines-Nabucco • Switch to Domestic Coal • Issue of Speed • Delay Closure of Nuclear Power Stations

  20. Pipeline Questions • If Gas Deficit how valuable Russian Pipeline plans? • Southstream a pipeline-but what about the gas? • Reliance on Nabucco and LNG Instead?

  21. Impact on Energy Market Liberalisation • Liberalisation: A EU Solution to Gas Supply Shortages • Physical Interconnection and Legal Right to Trade Bring Enhances Gas Security • Advantage of Increased LNG Facilities Across EU can be maximised • Liberalisation will bring more investment into energy market.

  22. Impact on German Liberalisation Debate • Leaves Ms Merkel Worried • Germany Heavily Dependent on Russian Gas • Particularly Vulnerable largest Western Customer

  23. Impact Bulgarian Energy Development • Importance of Nabucco for Bulgarian Gas Market • Vital Importance of interconnection other gas markets • Role of Coal • Role of Nuclear

  24. Geopolitical Consequences • Weaken Russian ‘Energy Power’ • Energy Superpower ‘out of gas’ • Encourage alternatives which will stimulate competition to Russian Gas • Encourage liberalisation across EU • Increase incentive for Bulgaria and rest of SEE to build themselves into EU energy markets • Make Central Asia & LNG Sources Vital.

  25. Market Lessons for EU & Russia • EU Big Energy Players E.ON & GDF • Favour-Vertical Closed Energy Market with-LTSC • Seen to Fail to Deliver • Failure of Gazprom- Force Re-assessment • Time to Liberalise the Russian Gas Market?

  26. You Cannot Buck the Market!