Ukraine & Turkey: The European energy coup

LNG'S Role in European Energy Security

The European Market for LNG at a Glance:

  • Relative to 2011, LNG deliveries to the EU fell 31% in 2012, with imports from Qatar down 35%, Nigeria 31% and Algeria 18%, while imports to Asia have grown by up to 70%
  • So far for 2013, LNG deliveries are in line with this downward trend
  • For the first quarter of 2013, gas flowing out of LNG terminals into pipelines (LNG send-out to grids) in the UK, Netherlands and Belgium was down by 60% over the same period in 2012, and down 40% in France and 30% in Spain, Italy and Portugal
  • The average price of spot pipeline gas in Europe is around $10 per MMBtu, while the average spot LNG price is $11.40/MMBtu (there is a wide range of LNG pricing across Europe)
  • In Japan, LNG prices are about 40% higher (as of Q1 2013) than spot prices in the UK, for example

LNG in Europe, Present and Future

At the close of 2012, LNG accounted for 19% of Europe's gas supply, while 81% was natural gas transported via pipeline.

The Fukushima disaster in Japan forced European countries to reconsider their nuclear policies, and this has forced a stronger focus on coal, natural gas and LNG. Before Fukushima, LNG was favored over natural gas because supplies were greater at that time and prices were cheaper than piped-in gas. As a result of the Fukushima disaster and Japan's resultant eschewing of nuclear power reliance, is a run on LNG by Japan and other Asian nations who are willing to pay higher prices. This has driven LNG prices up and diverted supplies to the Asian market. In addition, it has caused fewer LNG development projects to be pursued in Europe. This translates into future gas shortages when LNG supplies can no longer meet growing Asian demand and when there is a lack of long-term LNG commitment in Europe. This is the critical window of opportunity in the market for Ukraine and Turkey. (There is a certain counter-intuitive momentum to be grasped here.)

Because Asia signs on to long-term LNG agreements with high, oil-linked prices, there are predictions that Europe will find itself with extremely restricted access to LNG in the near- to medium-term future, with a recovery in demand and a growing reluctance to rely on dirty coal for power generation.

This past decade has seen global LNG supplies double and regasification and shipping capacity triple. The exception is Europe, where Ukraine and Turkey are singularly positioned to take advantage of this LNG gap before demand picks up and the opportunity for strategic positioning is weakened.

The LNG market is set to expand globally over the next decade, and demand for LNG in Europe is most likely set to rise even without affecting natural gas supplies. Thus, TANAP and a Ukrainian-Turkish LNG agreement would work in tandem, not in competition, to control an even greater market share.

If Russia ends up building natural gas storage facilities in Turkey—an idea for which Gazprom expressed interest earlier this year—Turkey will lose its chance for maximum political leverage. This past winter, Gazprom redirected natural gas from its storage facilities in Europe after a spike in demand in Turkey. This prompted a Russian justification for potentially building storage facilities in Turkey ostensibly to come to the rescue when supplies are insufficient. In theory, though, this would represent an increased Russian energy footprint in Turkey that would negatively impact Turkey's energy hub ambitions and would only help to solidify its dependence on Russian supplies, which amount to about 58% of Turkey's total supplies. An LNG deal with Ukraine would give Turkey greater access to additional alternative supplies, and this, combined with an anticipated increase in Azerbaijani supplies from Shah Deniz will allow Turkey to become a true, diversified energy hub.

Qatar is heavily courting both Ukraine and Turkey for LNG through the Bosporus. From Qatar's perspective, if Qatari LNG is allowed to pass through the Turkish-controlled Bosporus, this will deal a heavy blow to Iran. As such, Qatar recognizes Turkey's role here as a key geopolitical power broker on the energy scene. Along this same line of thought, Qatar's perception is that Russia is not capable at this time of preventing a Turkey-Ukraine energy deal focused on Qatari gas.

For Turkey, though, such a deal would allow it to further diversify its supplies, reducing reliance on both Russian and Iran—the latter which has been unreliable in terms of supplies over recent years.

Such a deal also further underlines the extent of political leverage Ukraine and Turkey would enjoy well beyond Europe, and into the Middle East.

Geopolitically, if Ukraine and Turkey were to bring Qatari gas through the Bosporus and on to European markets, this would help balance the power of a Russian-Iranian axis. It would reshape geopolitical dynamics, with Turkey the driving force through its strategic position as a Middle East-Europe energy hub.

Turkish and Ukrainian interest can either merge, or diverge to be counter-productive both to their gas supply needs and to European energy security. The perceptions of competition between Ukraine and Turkey are there, however, it is only through the combined, complementary force of the two that we will see a new energy powerhouse emerge.

LNG is the future, and globally we are looking at a major upswing in demand, including for Europe in the medium-to-long term.

As becomes clearer every year, pipeline gas delivery is hindered severely by economics and geopolitics. It limits room for consumer maneuvering, especially for those who are reliant on few, or single, sources. LNG can avoid much of these same hurdles, despite the investment cost associated with LNG facilities. There is a great deal of market flexibility to be found in LNG due to the absence of piping contracts.

LNG will become the key fuel of the future, and the forces that grasp the Black Sea market for LNG first will be among the most influential players on the global energy market. There is also the Black Sea marine industry to consider here, and the future is likely to see this converted to LNG—with new and converted transport vehicles and vessels running on LNG.

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