Pipelines and Infrastructure: Upstream Geopolitical Trends and Implications for European Utilities

Table of Contents

DATAMONITOR VIEW

• CATALYST
• SUMMARY

ANALYSIS

• Russia supplies 35% of Europe' s total gas demand but relies on a series of transit states to reach lucrative western markets
  • The origins of the January 2009 gas dispute are rooted in the weak, corrupt institutions which emerged from the collapse of the Soviet Union
  • The January 2009 Crisis was catalysed by Ukraine' s high levels of debt and ambiguous contractual arrangements with Russia
  • Although Russia supplies 35% of total European demand, individual states in the east rely proportionally more on Russian imports
  • South Eastern European states' position prior to the crisis varied across the region, affecting their response
  • The crisis was resolved on January 19th with a new bilateral contract
  • The new contract obliges Ukraine to receive too much gas at too high a price, increasing the chances of debt accumulation
  • There remains a strong possibility that gas supplies will be disrupted again as the problems which catalysed the first crisis are still in place

• The Crisis has added new momentum to EU efforts aimed at improving internal security of supply, implying deeper market integration
  • More damage was done to Russia' s reputation as a reliable supplier, and Ukraine' s as a transit partner than had been anticipated by either Moscow or Kiev
  • The January gas crisis has galvanised EU action on security of supply, precipitating new funding for internal connections
  • The majority of the new EU funding will be spent on connecting “stranded markets” encouraging the development of a pan-European market
  • Better interconnections and security of supply implies closer market integration, intensifying competition across Europe

• The Crisis and recent geopolitical developments have brought both Nabucco and South Stream closer but it is still unclear which will actually be built
  • European demand for gas will rise as its role in the generation mix expands and overall generation capacity increases
  • Nord Stream will bring 55BCM/y into Europe, dwarfing all other projects and reducing market space for rival pipelines
  • Assuming planned projects are completed on schedule, competition to supply Europe through the Southern Energy Corridor is a Zero Sum Game
  • South Stream & Nabucco will seek to supply the same markets in South Eastern Europe and should be seen as rivals
  • There is a strong possibility that Nabucco will secure an Inter-Governmental Agreement in June 2009 - a critical step towards construction
  • Securing upstream assets remains Nabucco' s Achilles' Heel.....
  • .....but Geopolitical developments have buoyed Nabucco' s prospects
  • As Nabucco' s prospects have improved, so Gazprom has sought to deliver a “knock out blow” through South Stream with increasing urgency
  • In the long-run, the Gas Crisis has served to stimulate construction of new connections, presenting opportunities to European Utilities

• Appendix
• Effects of the Gas Crisis and Nation States' Response
  • Austria
  • Bulgaria
  • Greece
  • Czech Republic
  • Poland
  • ITGI Poseidon will provide a further link between European markets and Caspian reserves if transit fee disputes can be resolved
  • Medgaz and GALSI will boost North African supplies to Europe but without improved internal connections, will have limited impact on overall security

• Further reading
• Ask the analyst
• Datamonitor consulting
• Disclaimer

FIGURES

• Figure: Gas Flows to Europe
• Figure: Map of Ukraine and neighbours
• Figure: Russian gas as a proportion overall energy consumption
• Figure: Reliance on Russian Gas and Response to January 2009 Crisis
• Figure: Consequences of the January Gas Dispute: On average 45% of Europeans disapproved of Russia' s performance during the Crisis
• Figure: Electricity Interconnection Projects to receive EU funding 2009 - 2010
• Figure: New Gas Interconnectors to receive EU Funding
• Figure: Increased gas-fired generation will account for the majority of overall capacity growth
• Figure: Nord Stream will supply 55BCM/yr to Europe
• Figure: By 2025, EU gas demand will outstrip capacity but only by 30 BCMe
• Figure: South Stream and Nabucco Compared
• Figure: Proposed route for Nabucco
• Figure: Dependency on Russian Supplies and short-term responses
• Figure: Pipelines to Europe
• Figure: North Africa will play a greater role in supplying Europe