Since 2000, Europe’s energy security scene has been marked by efforts to overhaul the European Union’s dependence on foreign imports of natural gas.
In an effort to secure natural gas for its growing needs, almost a 26 percent increase from current levels over the next 25 years, the EU has looked for a more diverse, flexible natural gas grid with a focal point on obtaining hydrocarbons from nontraditional suppliers.
The Caspian region has been the focus of this search over the last decade, but recent developments may signal that this search is futile and now obsolete.
The attempt to create a Southern Energy Corridor linking natural gas via pipeline from the Caspian to Europe has been a policy objective ever since the success of the BTC Pipeline, the second largest oil pipeline in the world.
In 2002, the Nabucco pipeline project was introduced, an ambitious, far-reaching effort to bring natural gas from as far as Turkmenistan, with inputs in Azerbaijan and Northern Iraq along the way.
The project, in its original form, was to span nearly 2,500 miles over at least five different countries. In 2009, a pan-European agreement was signed supporting the project, but, as of 2012, the pipeline has not been built and no other pipeline project has succeeded in bringing Caspian gas to Europe.
Elsewhere, a far more unique dynamic is being played out with China front and center.
China’s incremental natural gas growth rate dwarfs all other emerging economies and its needs have been cemented due to its rapidly growing middle class and desire to move away from the less environmentally friendly coal.
China’s unique form of state capitalism allows it to be efficient and dynamic by pooling resources toward state policy initiatives. In 2007, China rolled into Turkmenistan, holding the sixth largest proven natural gas reserves in the world, and signed a pipeline agreement. Two years later it was built and gas was flowing eastward.
Increasingly, frustrated Caspian states are looking to the east for consumers because of the European Union’s inability to secure agreements and capital from investors to build pipelines to the Caspian. If the EU is unable to implement a pipeline project to the landlocked nations of the Caspian, it will lose out to energy hungry Asia and its goal of creating a more diverse, sustainable natural gas grid will be threatened.
EU cannot count on Russia
More recently, Russia is looking eastward for customers.
In late May, the Russians declared a shift to LNG with Asian customers as its new focus for growth. Russia’s scheduled production decline due to a lack of investment in its upstream sector means that the EU cannot “count on” Russia to continually maintain its current production levels.
This fact combined with the loss of Caspian consumers to Asia presents the EU with a new problem — where does it get natural gas from?
Enter the United States, the world’s largest producer of natural gas in 2011 thanks to the innovations of shale gas technology. Unconventional gas production has increased from 4 percent of American natural gas production in 2004 to 24 percent today.
Further, the United States’ natural gas reserves have increased from 9 to 31 percent of global recoverable natural gas reserves. Accordingly, the United States will become a net exporter of natural gas by 2021 and of LNG in 2016. Since markets need to be at least 1,000 miles away for LNG to be competitive versus a pipeline, the United States should target the largest energy market in the world, Europe.
Although Asia would be the most profitable LNG export market, the majority of American tankers would end up in Europe because most of the export terminals will be in the Atlantic basin. The natural gas trade between the EU and American offers a promising new dynamic in the global natural gas market, more stability and flexibility.
For years, the European natural gas market has been dictated by long-term contracts linked to oil prices rather than spot natural gas prices, moving away from prices determined on a supply and demand basis.
The likelihood of increased American exports to Europe helps the energy security problems of both nations.
For the European Union, American imports offer a chance to reduce source risk or the degree of import diversification a nation has.
For the United States, a new demand hub will put upward pressure on natural gas prices which are currently at a historic low.
The current dynamics in Asia and Russia make the coordination between Europe and the United States all too likely. Russia seems intent on containing Western influence in the Caspian, its historic backyard. Incidents with Turkmenistan in 2009, Georgia in 2008 and Ukraine on a seemingly annual basis make it hard for the European Union to raise enough capital to build a pipeline in one of the most unstable regions in the world. As Caspian producers look eastward to monetize their large hydrocarbon case, the EU must begin to invest in its LNG infrastructure to meet future American import capacity.
The Europeans currently lack this infrastructure but their 20-20-20 by 2020 energy policy initiatives calls for huge capital injections into interconnectors in the natural gas grid and new LNG terminals which will look westward for new sources of natural gas.
This article was published as the winning entry in an internship competition at Wikistrat, the world’s first massively multiplayer online consultancy.