How dependent is Europe on Russian gas?

Based on Pierre Noel´s report, until the early 2000s, most of Europe’s gas imports came via pipelines. But over the past decade, Europe has become a major customer in the rapidly growing market for liquefied natural gas (LNG), which is transported by sea. Since 2002, LNG from new suppliers such as Nigeria, Egypt, Trinidad or Qatar has accounted for most of the rise in EU gas imports. The share of LNG in EU gas imports has grown from 15% in 2000 to more than 20% in 2007. Even pipeline routes from Russia itself have diversified: the “Yamal-Europe” pipeline, which was opened in the 1990s, has reduced reliance on the Ukrainian corridor.There may be no problem of European overdependence on Russian gas, but this is not to say that all is well on the supply front. Over the next 15-20 years, Gazprom faces serious supply challenges, and the international gas market is likely to experience considerable tightening. These issues, combined with declining indigenous production, mean that in the coming decades Europe could face a gas supply crunch, leading to stagnant or even declining consumption.

Despite controlling the world’s largest gas reserves, Gazprom will find it difficult to maintain its current supply levels. Production from the three “super-giant” west Siberian gas fields, which account for the bulk of Gazprom’s output, is now in steep decline. The company’s ability to maintain, let alone increase, production in the coming decades depends on the development of a new generation of fields on the Yamal Peninsula in northwest Siberia. Gazprom’s official line is that Yamal will come on stream in 2010. But independent analysts and most of the European gas industry think this is highly unlikely. Some mention 2015 as a more realistic date for Yamal’s completion.

In fact, Gazprom’s production is already insufficient to meet all the company’s commitments. It depends on two other sources of gas – “independent” Russian producers and imports from Central Asia, especially Turkmenistan – to make up the shortfall. This “bridge” is supposed to supply Gazprom’s needs until the Yamal fields come online. But there is uncertainty over whether Gazprom will be able to source sufficient volumes from Turkmenistan, while independent Russian producers have little incentive to increase their production in the absence of access to Gazprom’s transmission network, which would enable them to reach consumers directly. Moreover, domestic gas consumption in Russia is growing, driven by economic expansion and a gas-intensive electricity mix. So there is at least a risk that Gazprom’s “bridge” to Yamal could collapse. Industry assessments vary from a tight but manageable supply situation to an impending crisis.

As long as Gazprom relies on the Turkmen/independent supplier “gas bridge”, it is unlikely that exports to Europe, at least those under long-term contracts, will increase at all. Depending on how quickly Gazprom can get the Yamal fields on stream, there could be room for increased exports to Europe in the second part of the next decade, though any additional commitments are unlikely to be large. In 2006, major long-term contracts with European importers were renewed until 2030-3514; as west Siberian production declines, these contracts will be serviced increasingly from Yamal, limiting the volumes available for new contracts. Finally, Russia’s political willingness to expand exports to Europe beyond current levels remains unclear.