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

DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
Russia supplies 35% of Europe's total gas demand but relies on a series of transit states to reach lucrative western markets 2
The origins of the January 2009 gas dispute are rooted in the weak, corrupt institutions which emerged from the collapse of the Soviet Union 2
The January 2009 Crisis was catalysed by Ukraine's high levels of debt and ambiguous contractual arrangements with Russia 3
Although Russia supplies 35% of total European demand, individual states in the east rely proportionally more on Russian imports 4
South Eastern European states' position prior to the crisis varied across the region, affecting their response 5
The crisis was resolved on January 19th with a new bilateral contract 5
The new contract obliges Ukraine to receive too much gas at too high a price, increasing the chances of debt accumulation 6
There remains a strong possibility that gas supplies will be disrupted again as the problems which catalysed the first crisis are still in place 7
The Crisis has added new momentum to EU efforts aimed at improving internal security of supply, implying deeper market integration 7
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 7
The January gas crisis has galvanised EU action on security of supply, precipitating new funding for internal connections 8
The majority of the new EU funding will be spent on connecting "stranded markets" encouraging the development of a pan-European market 9
Better interconnections and security of supply implies closer market integration, intensifying competition across Europe 10
The Crisis and recent geopolitical developments have brought both Nabucco and South Stream closer but it is still unclear which will actually be built 11
European demand for gas will rise as its role in the generation mix expands and overall generation capacity increases 11
Nord Stream will bring 55BCM/y into Europe, dwarfing all other projects and reducing market space for rival pipelines 12
Assuming planned projects are completed on schedule, competition to supply Europe through the Southern Energy Corridor is a Zero Sum Game 13
South Stream & Nabucco will seek to supply the same markets in South Eastern Europe and should be seen as rivals 13
There is a strong possibility that Nabucco will secure an Inter-Governmental Agreement in June 2009 - a critical step towards construction 14
Securing upstream assets remains Nabucco's Achilles' Heel... 15
...but Geopolitical developments have buoyed Nabucco's prospects 16
As Nabucco's prospects have improved, so Gazprom has sought to deliver a "knock out blow" through South Stream with increasing urgency 16
In the long-run, the Gas Crisis has served to stimulate construction of new connections, presenting opportunities to European Utilities 17
Appendix 18
Effects of the Gas Crisis and Nation States' Response 19
Austria 19
Bulgaria 19
Greece 19
Czech Republic 20
Poland 20
ITGI Poseidon will provide a further link between European markets and Caspian reserves if transit fee disputes can be resolved 21
Medgaz and GALSI will boost North African supplies to Europe but without improved internal connections, will have limited impact on overall security 22
Further reading 23
Ask the analyst 24
Datamonitor consulting 24
Disclaimer 24
List of Figures
Figure 1: Gas Flows to Europe 2
Figure 2: Map of Ukraine and neighbours 3
Figure 3: Russian gas as a proportion overall energy consumption 4
Figure 4: Reliance on Russian Gas and Response to January 2009 Crisis 5
Figure 5: Consequences of the January Gas Dispute: On average 45% of Europeans disapproved of Russia's performance during the Crisis 8
Figure 6: Electricity Interconnection Projects to receive EU funding 2009 - 2010 9
Figure 7: New Gas Interconnectors to receive EU Funding 10
Figure 8: Increased gas-fired generation will account for the majority of overall capacity growth 11
Figure 9: Nord Stream will supply 55BCM/yr to Europe 12
Figure 10: By 2025, EU gas demand will outstrip capacity but only by 30 BCMe 13
Figure 11: South Stream and Nabucco Compared 14
Figure 12: Proposed route for Nabucco 15
Figure 13: Dependency on Russian Supplies and short-term responses 18
Figure 14: Pipelines to Europe 21
Figure 15: North Africa will play a greater role in supplying Europe 23