1. OXFORD INSTITUTE FOR ENERGY STUDIES 1 European Energy Security and Russia: are we focussing on the right issues? Professor Jonathan Stern Director of Gas Research Oxford Institute for Energy Studies Society for International Development Amsterdam, April 28, 2008

2. OXFORD INSTITUTE FOR ENERGY STUDIES 22 OIES* Natural Gas Research Programme WHO WE ARE: a gas research programme at an independent academic institute, part of Oxford University, specialising in fossil fuel research WHO WE ARE NOT: consultants sellers of exclusive, high price business reports WHAT WE PRODUCE: independent research on national and international gas issues HOW WE ARE FUNDED: three-year sponsorship by companies and governments in gas producing and consuming countries *Oxford Institute for Energy Studies is an educational charity Information about our Institute, our Programme and its publications can be found on our website: http://www.oxfordenergy.org/gasprog.shtml

3. OXFORD INSTITUTE FOR ENERGY STUDIES 33 Recently Published Research Natural Gas Demand in Europe – the importance of power generation, Anouk Honore The New Security Environment for European Gas, Jonathan Stern The 2007 Russia-Belarus Gas Agreement, Katja Yafimava and Jonathan Stern US Natural Gas Prices: scenarios to 2015, Michelle Foss Gas-OPEC: a distraction from important issues of Russian gas supply to Europe, Jonathan Stern The Potential Contribution of Natural Gas to Sustainable Development in South Eastern Europe, Aleksandar Kovacevic Is there a rationale for the continuing link to oil product prices in Continental European gas contracts? Jonathan Stern Ukraine’s Gas Sector, Simon Pirani The Dolphin Gas Project, Justin Dargin The Dolphin Gas Project, Justin Dargin Free downloads from www.oxfordenergy.org

4. OXFORD INSTITUTE FOR ENERGY STUDIES 4 EUROPEAN ENERGY POLICY - AGENDA Energy policy issues and problems: agreeing priorities Europe, Russia and energy Gas in Europe – a case study of the issues /problems Conclusions

5. OXFORD INSTITUTE FOR ENERGY STUDIES 5 European Energy Security: what is the current focus? Europe’s dependence on imported oil and gas supplies will increase substantially over the next 10-20 years Much of the oil and gas which Europe will have to import will need to come from the Middle East (oil) and Russia (gas) This gives rise to two concerns: over-dependence leading to the potential for commercial/political blackmail political instability/conflict within or between these countries leading to supply disruption These issues periodically debated over the past 40 years, especially in relation to Russia

6. OXFORD INSTITUTE FOR ENERGY STUDIES 6 Urgent European (and Global) Oil and Gas Issues in the late 2000s Oil (and gas) prices at >$100/bbl – and going higher?? Most major oil and gas producers unable or unwilling to increase their production and export capacity Most OECD leaders complaining about: Lack of investment in new capacity by producers/exporters Chinese and Indian attempts to attract oil and gas towards their rapidly growing economies Can Europe obtain adequate oil and gas supplies in the 2010s and at what price?

7. OXFORD INSTITUTE FOR ENERGY STUDIES 7 European Energy Security: frequently discussed problems Is the problem that Europe will become more and more dependent on countries which we do not like and do not trust for our energy supplies? Or is the problem that Europe will not be able to obtain oil and gas supplies that it will need, or will not be able to pay very high prices for them? Or is the problem that the carbon which will be emitted in the burning of these fuels will create an unsustainable global climatic trends Europe needs to prioritise problems and solutions

8. OXFORD INSTITUTE FOR ENERGY STUDIES 8 Europe, Russia and Energy: a long running story with the emphasis on gas

9. OXFORD INSTITUTE FOR ENERGY STUDIES 9 OECD European Oil Product Imports from FSU Countries 1990-2006 18% of imports and 8% of demand in 2006 Source: IEA

10. OXFORD INSTITUTE FOR ENERGY STUDIES 10 OECD European Crude Oil Imports from FSU Countries 1990-2006 35% of imports and 32% of demand in 2006 Source: IEA

11. OXFORD INSTITUTE FOR ENERGY STUDIES 11 OECD European Steam Coal Imports from Russia 1990-2006 (thousand tons) 18% of demand in 2006 Source: IEA

12. OXFORD INSTITUTE FOR ENERGY STUDIES 12 Russian Gas Exports to Europe 1990-2006 27% of “Europe 34” demand in 2006 Source: Gazprom

13. OXFORD INSTITUTE FOR ENERGY STUDIES 13 Gazprom’s Exports to Europe Long term contracts extended 20-30 years with most European buyers well before expiry dates; legally binding agreements under international arbitration with liquidated damages Gazprom Marketing and Trading establishes major presence in north west Europe trading (not just Russian) gas and other products Nord Stream and South Stream pipelines are progressing Gazprom’s response to unreliable transit through Ukraine and Belarus is diversification of pipeline routes

14. OXFORD INSTITUTE FOR ENERGY STUDIES 14 Existing pipelines taking Russian gas to Europe

15. OXFORD INSTITUTE FOR ENERGY STUDIES 15 Nord Stream Gas Pipelines Can Baltic opposition halt – or only delay – development?

16. OXFORD INSTITUTE FOR ENERGY STUDIES 16 Blue Stream/South Stream Gas Pipelines Bulgaria-Serbia-Italy route is established

17. OXFORD INSTITUTE FOR ENERGY STUDIES 17 If all of these pipelines are built then, by 2015, Russian gas will be able to move to Europe via: a northern route – Nord Stream a central route – Ukraine/Belarus a southern route – Blue Stream/South Stream Gazprom be able to “arbitrage” between the routes, the power of individual transit countries will be much reduced; security will be improved; but still needs an international transit regime

18. OXFORD INSTITUTE FOR ENERGY STUDIES 18 Can Russia compete in Atlantic Basin LNG? Not easily, quickly or very profitably

19. OXFORD INSTITUTE FOR ENERGY STUDIES 19 China’s Gas Pipelines and LNG Terminals No Russian pipeline gas before the late 2010s

20. OXFORD INSTITUTE FOR ENERGY STUDIES 20 Will Russia Have Sufficient Supplies for Europe? Russian gas supplies will be tight from 2010-2015 or until new large scale Yamal Peninsula gas becomes available Main impact will be on the Russian and possibly on the CIS export market European markets will be less affected because of legally binding long term contracts with severe financial penalties for non-delivery BUT.. Short term gas supplies may disappear This is likely to mean no new long term contracts for Europe; Russian gas supplies will be limited to 180-200 Bcm/year

21. OXFORD INSTITUTE FOR ENERGY STUDIES 21 European Gas: a case study

22. OXFORD INSTITUTE FOR ENERGY STUDIES 22 Europe’s Future Gas Supplies: a problematic landscape? Plentiful “reserves” exist but…. what matters are the intentions and capabilities of suppliers: European Existing pipeline and LNG suppliers Possible new suppliers Future gas “security” is about motivations of, and relationships with, Europe’s suppliers

23. OXFORD INSTITUTE FOR ENERGY STUDIES 23 Projected Decline in European Gas Production 2005-17 (Bcm)

24. OXFORD INSTITUTE FOR ENERGY STUDIES 24 Availability of African Gas Supplies ALGERIA: major exporter, no major growth beyond currently contracted volumes EGYPT: sold out – minor growth potential LIBYA: major LNG growth potential but could take 10 years NIGERIA: NLNG Trains 1-6 achieved NLNG 7/8 + Brass River + OK LNG delayed domestic (power) demand will take priority over additional exports EQUATORIAL GUINEA: minor growth potential ANGOLA: some growth potential

25. OXFORD INSTITUTE FOR ENERGY STUDIES 25 Middle East/Caspian/Central Asian Pipeline Gas Availability Iran: highly unreliable gas exporter, major domestic demand requirements+political instability+conflicts with the international community create major problems; any significant gas pipeline exports will be to Pakistan (India?) Azerbaijan: around 15 Bcm of Shah Deniz gas from 2015(?) Turkmenistan: reserves uncertain, offshore prospects considerable but not before late 2010s? Kazakhstan: dependent on availability of Kashagan gas, and probably not until late 2010s

26. OXFORD INSTITUTE FOR ENERGY STUDIES 26 Gas Pipelines From the Caspian Region

27. OXFORD INSTITUTE FOR ENERGY STUDIES 27 Nabucco: a Caspian Pipeline to Europe Source: OMV A key part of the “4 th Corridor” to Europe

28. OXFORD INSTITUTE FOR ENERGY STUDIES 28 Problems for the 4 th Corridor: events of December 2007- April 2008 December 29th 2007: Turkmenistan cut off gas exports to Iran (supplies not yet recommenced) and as a result…. Iran cut off gas to Turkey (citing cold weather) and as a result… Turkey cut gas supplies to Greece and as a result… Gazprom supplied more gas to Turkey and Greece to make up for the shortfall Diversity does not always = security

29. OXFORD INSTITUTE FOR ENERGY STUDIES 29 Geopolitics of Central Asian gas is not (yet) a European game China has already started developing Turkmen gas reserves under a PSA China already has agreements to import (at least) 30 Bcm/year from a combination of 3 Central Asian countries (but mostly Turkmenistan) China is willing to spend staggering sums of money developing gas fields and pipelines without any risk guarantees The “great gas game” in Central Asia is between Russia and China; Europe (and the US) are possible future players

30. OXFORD INSTITUTE FOR ENERGY STUDIES 30 European LNG Terminals New regas capacity increasingly competes with North America and Asia for LNG

31. OXFORD INSTITUTE FOR ENERGY STUDIES 31 Emerging Policies of Producers/Exporters Increased exports are no longer urgent and may not be possible due to: increasing domestic demand higher export prices which means reduced need for revenues LNG exports will be preferable to dedicated pipeline gas to Europe because of: Greater arbitrage possibilities in higher value markets Less political exposure to US/Europe These issues are much more important than the (real or imagined) threat of a Gas-OPEC

32. OXFORD INSTITUTE FOR ENERGY STUDIES 32 The key question facing European gas markets is: from where will substantial additional gas post- 2015 and especially post-2020 be available? At present the answer looks like: not from Russia or many other current major suppliers CONCLUSION: Europe faces longer term gas supply uncertainty

33. OXFORD INSTITUTE FOR ENERGY STUDIES 33 THIS IS NOT A “DISASTER” BUT IT RAISES IMPORTANT QUESTIONS FOR THE FUTURE OF POWER GENERATION AND CARBON EMISSIONS WITHOUT SUBSTANTIAL INCREMENTAL GAS SUPPLIES, MOST COUNTRIES WILL NEED TO RETAIN/DEVELOP COAL WITH DISASTROUS CONSEQUENCES FOR CARBON TARGETS; THE BEST HOPE FOR CARBON REDUCTION BEFORE 2020 IS A RENEWABLES/GAS COMBINATION

34. OXFORD INSTITUTE FOR ENERGY STUDIES 34 CONCLUSIONS: European Energy Security ISSUES RECEIVING A LOT OF FOCUS: Can Europe trust the Russians (and other exporters)? Should Europe limit future Russian gas supplies? ISSUES NEEDING MORE FOCUS: From where will Europe get substantial additional gas post-2015? How should Europe develop successful relationships with Russia and other suppliers What will be the consequences for European energy and carbon balances if we don’t find answers to these questions?