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Europe dependence on Russia

Europe dependence on Russia
A freezing Western Europe is potentially an innocent hostage of what appears to be becoming an annual gas showdown between Russia and Ukraine.

A freezing Western Europe is potentially an innocent hostage of what appears to be becoming an annual gas showdown between Russia and Ukraine.

Not for the first time, a freezing Western Europe is potentially an innocent hostage of what appears to be becoming an annual gas showdown between Russia and Ukraine.

Whatever the rights and wrongs of the ritual pricing face-off between the Russian gas giant Gazprom and Ukraine, those European countries most in the firing line might begin to think hard about their continuing dependence on supplies from the Russian gas giant.

It serves to underline the importance of Europe"s liquefied natural gas infrastructure, both as a means of dealing with shorter-term demand fluctuations and increasing longer-term supply diversity.

Yet this infrastructure ? essentially regasification terminals ? has been woefully under-utilised as markets in Asia have offered higher prices to lure LNG to their shores.

In addition, brokers estimate that globally there are 40 LNG carriers idle ? a hefty 15% of the fleet ? as vessels have been delivered on schedule while the start-up of liquefaction plants and import terminals has been delayed.

Even in the LNG market, however, Gazprom aims to become a leading player, an ambition which could also have a bearing on its commercial relationship with customers in Europe.

Gazprom is by far the world"s largest gas producer and meets, by pipeline, about 23% of the European Union"s consumption, or almost 40% of the community"s imports.

Ukraine gains its importance because much of the EU"s gas imports pass through the country and some observers believe Gazprom"s real interest lies in gaining control of this transit system, much as it has done in Belarus.

Newswire reports indicate that all supplies of Russian gas, via Ukraine, to Bulgaria, Turkey, Greece and Macedonia were halted today.

Gazprom has a "mutual dependency" with the EU, which accounts for about 25% of the Russian monopoly"s gas sales and are priced at a higher level than the controlled domestic market.

But to become a truly global gas player, Gazprom needs to create a substantial presence in the LNG business.

Gazprom entered the LNG market in 2005 when it bought an Egyptian cargo, which was delivered to the US.

A more decisive move into this industry was achieved two years later when Gazprom gained a majority share of the 9.6m tonnes a year Sakhalin-2 project, which is expected to start delivering cargoes later this year.

Russia"s next LNG project, part of the giant Shtokman field development in the Barents Sea, could require 20 large LNG carriers after the first phase comes into production in the next five or six years.

However, Gazprom is not just looking at developing domestic resources when it comes to infiltrating the LNG market.

Gazprom has been commercially promiscuous in developing relationships with many other players in the market: the company has about 30 framework agreements with LNG producers and market counterparties.

Equity research by French bank Société Générale recently said LNG could bring an extra dimension to the relationship between Gazprom and Europe for which it has been the swing producer of piped gas.

?Gazprom has spare capacity that can mitigate any demand increase caused by a cold winter and/or a supply shortfall,? the bank noted. ?This additional capacity is brought by Gazprom to the market at no extra cost. We believe this will change and Gazprom will be in a perfect position, with increased LNG supply, to arbitrage markets and to ask its European clients to pay for this flexibility.?

In the meantime, western Europe is not panicking in response to the Gazprom/Ukraine dispute as storage levels remain comfortable.

But analysts report that those who have gas ?are not willing to sell until they see what happens next?.
Indeed, those energy companies with destination-free LNG cargoes at sea will monitor developments closely to see whether it is worth employing some of the regasification capacity that is idle in Europe.


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