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Will Europe freeze without Russian gas?

02 September 2014 [12:10] - TODAY.AZ
By Vagif Sharifov

Protracted conflicts in the Middle East, as well as the war in Ukraine, which "transported" to Europe 86 billion cubic meters of Russian gas last year, is forcing the "Old World" to urgently seek alternative sources of fuel supply.

Europe has partially solved this issue with plans to purchase Azerbaijani gas in the future. But these amounts do not reflect all the realities of an ever-increasing demand for fuel in the EU, for example, in 10-15 years. Judging by the current actions of European states, their governments are seeking gas sources corresponding to the following parameters:

Deliveries that will not be suspended because of armed conflict or geopolitical games;

The prices of gas from sources will only reflect the situation on the market and will not be a weapon of geopolitical and economic influence;

Deliveries by pipeline route or by sea shouldn't pass in transit through unstable regions;

The desired priority - production / gas transportation will involve the same companies working with the gas at the other end of the pipeline;

The source should not be too far away, since the distance is strongly reflected in the economy of any project.

A dramatically worsening situation in the southeast of Ukraine adds special urgency to the current European "search for a bride".

It is already September, and the situation concerning Russian gas for the winter is not clear. A part of it must pass through Ukraine, but this does not fundamentally meet any of the above conditions. And although the EU Energy Commissioner Guenther Oettinger said last week that he is not afraid of disruption of gas supplies from Russia via Ukraine, nevertheless, he did not rule out such a possibility and went to Moscow to solve the problem.

After Azerbaijan's promised 10 billion cubic meters per year from 2020, the Arctic, partly consisting of eight countries, such as Canada, Norway, Russia, U.S and others, is the following geographical area that meets the minimum number of European gas requirements.

In August the Canadian Foreign Ministry expressed concern about the increase in Russia's military potential in the Arctic. None of the international experts think that this situation will escalate into an open conflict.

According to the various data, the gas reserves in the Arctic account for more than 1,500 trillion cubic meters. However, not all these reserves can be called recoverable and commercially attractive.

Whatever category these gas reserves would be in, Norway at least, seems to know where to search and drill. Norway announced in August that it will give permission for the extraction of 160 hydrocarbon blocks in its part of the Arctic in 2016.

No doubt, many, including some of the "Seven Sisters" and, of course, "Statoil" show an interest in Artic oil and gas production. It seems that Oslo does not see a reason for dispute with Russia over production in the area, as four years ago the two countries divided these territories. Norway produced more than 108 billion cubic meters of gas in 2013 or by 5 percent less than in 2012. With effective use of the potential of the Arctic shelf of Norway, Oslo's experts hope for a 50 percent increase in oil and gas production in the country in 15 years.

Why in 2016?

Scrupulously dealing with the ecological issues of hydrocarbon production and transportation, Norway can not allow conducting energy work on its territory without a special set of laws, which will come into force in two years.

Besides the protection of environmental issues, such as concern for clean air and water, these legal norms will be an additional burden on the operating and capital costs. The companies must know them before making investment decisions.

The special "Polar Code" coming into force in 2016, will regulate not only shipping in the Arctic, but will require additional guarantees from governments, and ensuring additional environmental protection from the companies while drilling, producing and transporting hydrocarbons. Of course, this greatly increases the cost of the projects.

The need to introduce the "Polar Code" emerged due to the increasing scales of shipping in the Arctic in recent years.

Often the route between two distant points can be reduced by 5,000 or 6,000 kilometers passing through the Northern Sea Route, instead of, for example, the Suez Canal.

Paradoxically as it is, today there are simply no international conventions regulating shipping in the Arctic. The rules are the same with those applied in the Mediterranean, which has climatic conditions that obviously differ from polar ones.

Despite attractive gas reserves, the companies' large experience in hydrocarbons production, accumulated in the last 100 years, and the availability of funds, the production in the Arctic is associated with greater economic and environmental risks.

First of all, it is obvious that companies today simply do not have the technologies providing complete environmental safety of oil production in the Arctic, which is contrary to Norway's policies in this regard.

The high cost of polar projects is due to the fact that the provision of all environmental standards requires large investments, and this negatively impacts the timing of projects' reaching a payback point.

It seems that 160 Norwegian arctic hydrocarbon blocks will be taken by the oil companies in groups for the development of large deposits to allow compensating the costs of relatively smaller deposits.

Ernst & Young, a large British audit and consulting company also know as EY, believes that the exploration of the Arctic does not only open great opportunities to companies, but also imply economic, geopolitical and environmental risks.

However, EY believes that economic cooperation and competition, based primarily on the use of advanced technologies and resources of key players, in particular: Exxon, Shell, BP, Statoil, Total, Chevron and Conoco, can create preconditions for an effective exploration of this region.


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