To Russia with love

In early August, as most Europeans were enjoying their holidays, Energy Commissioner Günther Oettinger broke a taboo by making a significant political energy statement at a time when the EU is still busy discussing its energy strategy for 2020. He told journalists from Kommersant, one of Russia’s leading business newspapers, that ‘Russia’s stake in the EU’s gas market will in the medium-term perspective increase to 35%’. Our Brussels correspondent Hughes Belin wonders what this means for the EU's energy diversification policy - and for the Nabucco pipeline in particular.

Oettinger's comment was probably made to put a smile on Russian officials’ faces when he visits them this month. But the figure is really quite significant, especially as it was uttered by a man who is in charge of the energy portfolio at the European Commission and who is very well trained not to say anything inadvertent. The current share of Russian gas in EU gas imports is about 41%, making Russia the biggest non-EU gas supplier, followed by Norway with 27% and Algeria with 17%. This translates into a total share of Russian gas in the EU’s energy consumption of 23%. Unofficially, a threshold of 25% has always been considered as the ceiling in Brussels, given the need to diversify sources of imported energy. Apparently, Commissioner Oettinger has another policy for security of supply in mind. A very personal one, because EU decision-makers have so far repeatedly argued for a diversification of EU energy imports, especially concerning natural gas.

So when Mr Oettinger made his statement, was there something he knew that we don’t? Well, maybe. As it happens, the European Commission has recently completed the new 2010 PRIMES energy scenarios for the EU for 2020. These figures are still confidential, but EER was able to see them. The PRIMES model is the economic model that the EU uses to forecast energy demand and supply, among other things. The last PRIMES scenario dates from 2008. The 2010-edition will be used to underpin the upcoming 2020 energy strategy.

The big news is that the new PRIMES scenario predicts a higher demand for gas in 2020 and a lower domestic production than the old PRIMES scenario, i.e. much higher import needs for the EU. Let’s take a look at the figures. PRIMES uses two scenarios. The “Baseline” scenario takes account of all energy policy measures taken up until April 2009, i.e. not including the famous “20-20-20” targets. (20% of EU energy consumption to come from renewables by 2020, 20% less CO2 by 2020 by comparison with 1990 and 20% more energy efficiency by 2020.) The “Reference” scenario assumes that the 20-20-20-targets have been achieved. The scenarios are based on the price of a barrel of oil standing at $88 in 2020 (and $106 in 2030).

Table: EER exclusive: confidential gas forecasts

EU 27
Bcm 		2005 2020 Baseline* scenario, oil price $88/bbl 2020 Reference** scenario, oil price $88/bbl 2030 Baseline* scenario, oil price $106/bbl  2030 Reference** scenario, oil price $106/bbl 
Demand for natural gas 519 538 479 511 457
Natural gas production 219 130 129 88 87
Natural gas imports 299 408 349 423 370

Source: European Commission (internal)
* includes energy policy measures implemented until April 2009
** includes 20% renewables in energy consumption, 20% less CO2 emissions, and policy measures implemented until the end of 2009 and a few energy efficiency measures.

In 2008, the Commission expected a drop of 10 to 22% in the demand for gas by 2020 by comparison with 2005 levels, if its energy strategy were implemented. (This was based on an oil price of $61 in the first case and $100 per barrel in the second.)
In its new forecasts, the Commission expects the demand for gas to be 3% higher (in the Baseline scenario) or to drop by at most 7.7% (in the reference scenario).

At the same time, the EU’s gas production forecasts have got worse: from an expected fall of 40-47% of production (depending on various policy scenarios and oil barrel price hypotheses) in the 2008 scenario, the expected fall is now 47% whatever the scenario.

This naturally results in higher natural gas import expectations, from +16.7% (Reference) to +36.5% (Baseline). In volume terms, this means that additional imports are needed of 50 to 109 bcm (billion cubic meters) by 2020.

Taking the new forecasts, which can well be described as a “medium-term perspective”, we could have an EU gas demand of 479 bcm (Reference) and 538 bcm (Baseline) in 2020. Now if we assume that Russia will supply 35% of total demand, this would lead to net Russian imports of 170-190 bcm. This is 50-70 bcm more than today. This fits perfectly into the additional imports forecasts (50-109 bcm), meaning that new Russian gas would be able to cover most of the additional imports the EU will need, in particular if we assume that the 20-20-20 targets will be achieved.

But this also leads to a much more disturbing conclusion, especially coming from Mr Oettinger, as it shows that the Nabucco pipeline is not a priority anymore in the Commission. Since Nord Stream will soon supply 55 bcm, South Stream – with a maximum capacity of 63 bcm – could take care of the rest, particularly in the Baseline scenario. Nabucco, with its 33 bcm coming from the Caspian, would not be necessary anymore.

Nabucco would only be needed if the EU fails to implement its energy and climate strategy. In that case, additional imports would be 109 bcm, whereas Russia could only supply an additional 70 bcm, on the assumption that the Russians would cover 35% of imports. Then Nabucco could fill the rest. But surely it is not the intention of the Commission not to reach its energy and climate targets?

So, what Oettinger said was a bad signal for Nabucco, a bad signal for the EU’s diversification policy, and a good signal sent to Russia. But perhaps that was the purpose of the message.