Klima-, Energi- og Bygningsudvalget 2014
KOM (2014) 0654
Offentligt
1518185_0001.png
EUROPEAN
COMMISSION
Brussels, 16.10.2014
SWD(2014) 324 final
COMMISSION STAFF WORKING DOCUMENT
Report on the responses from the non-EU G7 countries and other key third country
energy partners
Accompanying the document
COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN
PARLIAMENT AND THE COUNCIL
on the short term resilience of the European gas system
Preparedness for a possible disruption of supplies from the East during the fall and
winter of 2014/2015
{COM(2014) 654 final}
{SWD(2014) 322 final}
{SWD(2014) 323 final}
{SWD(2014) 325 final}
{SWD(2014) 326 final}
EN
EN
PDF to HTML - Convert PDF files to HTML files
1. Consultations with other third countries
The European Commission invited key third country energy partners to contribute to the EU's
Energy Security Stress Test and to provide any observations or suggestions, particularly with
respect to the potential flexibility for additional supplies of gas.
These included the non-EU members of the G7 as well as Norway, Switzerland and Turkey.
2. G7 context
Following The Hague Declaration of G7 Leaders of March 24, the Energy Ministers of
Canada, France, Germany, Italy, Japan, the United Kingdom, the United States, and the EU
Commissioner for Energy, met in Rome on May 5-6 to discuss ways to strengthen collective
energy security.
In the statement issued after the Ministerial meeting, Energy Ministers expressed a belief that
that a broader energy security strategy is needed to address the larger dimensions of today’s
globalized energy markets shared among energy consumers, producers and transit countries.
G7 Energy Ministers also agreed to propose four immediate actions for endorsement by G7
Leaders. In addition, Ministers proposed to G7 Leaders to establish a working group to
develop comprehensively the Rome G7 Energy Initiative.
During the G7 Summit on 4-5 June 2014 in Brussels, G7 Leaders agreed that under the Rome
G7 Energy Initiative, G7 members would identify and implement concrete domestic policies
by each government separately and together, to build a more competitive, diversified, resilient
and low-carbon energy system. This work would be based on the core principles agreed by
G7 Ministers of Energy during the Rome Ministerial meeting. The G7 Leaders endorsed the
following four actions proposed by the G7 Energy Ministers during the Rome meeting:
G7 members would complement the efforts of the European Commission to develop
emergency energy plans for winter 2014-2015 at a regional level.
Working with international organisations such as the International Energy Agency
(IEA), the International Renewable Energy Agency, and the international financial
institutions, G7 members would supply technical assistance, including leveraging the
private sector, and facilitate exchanges with Ukraine and other European countries
seeking to develop indigenous hydrocarbon resources and renewable energies, as well
as to improve energy efficiency.
G7 members would conduct assessments of their energy security resilience and
enhance their joint efforts, including on critical infrastructure, transit routes, supply
chains and transport.
2
PDF to HTML - Convert PDF files to HTML files
G7 would ask the IEA, in close cooperation with the European Commission, to present
by the end of 2014 options for individual and collective actions of the G7 in the field
of gas security.
Following the G7 Rome Energy Ministerial and G7 Summit, in its work on stress tests, the
European Commission engaged actively and constructively with G7 members and the IEA.
The Commission wrote to the energy ministers of non-EU G7 members and the Executive
Director of IEA to inform on the state of play of the European Commission’s efforts to
develop energy emergency plans for the winter 2014-2015, sharing with the G7 partners the
four proposed scenarios.
In multiple G7 and bilateral engagements, Commission services have kept G7 partners
informed of the progress of the work and offered the possibility to provide comments and
additional suggestions on practical measures that could be taken. In addition to a request to
provide an inventory of possible emergency assistance that G7 partners could provide in the
case of a serious supply disruption leading to a shortage of gas and/or power, the Commission
also welcomed economic modelling assistance that could be provided on the impacts of
possible disruptions as regards Contracting Parties and Candidate Countries of the Energy
Community. The responses provided by the non-EU G7 members, detailed below, covered
issues such as scenario analysis, global LNG flows and capacities and modelling.
3. Responses received
a) Information received from the United States
As regards the overall methodology the United States pointed out the need to remain cautious
and flexible with the assumptions and the scenarios on which the stress test was conducted,
given the uncertainties of the upcoming winter.
The United States pointed out the necessity of cooperation between the EU Member States
and the Contracting Parties of the Energy Community, when drawing up national responses.
The United States also pointed out the importance of an early identification of demand side
measures, the impact on other energy sectors of fuel switching options and underlined the
need for early action regarding in respect to filling gas in the storages.
The US government offered information on the possibilities for mobile power generation
capacity and information on the state of play with the planned US LNG export facilities.
b) Information received from Canada
Canada provided details about its marketable natural gas resources, and its potential to
become a secure and reliable supplier of liquefied natural gas (LNG) to the EU and other
global markets. However, Canada's current and near-term ability to contribute LNG supply to
the E.U. in the event of a natural gas shortage is limited. Canada does not currently export
LNG, nor does it have the infrastructure ready for such exports. While 17 LNG projects are
3
PDF to HTML - Convert PDF files to HTML files
currently under consideration, including one project on Canada's east coast, most analysts
estimate that Canada will only see substantial LNG exports towards the end of the decade
given the lead times required to develop necessary export infrastructure. Canada indeed is
actively seeking to develop this infrastructure to enable export of LNG over the medium-term.
c) Information received from Japan
It is plausible that Japan’s demand for LNG, which increased considerably after the Great
East Japan Earthquake but then flattened out, would fall in the coming years if increased use
of clean coal, progress in energy efficiency, and the gradual restarting of its nuclear power
plants were realized. With respect to trade in LNG, Japan recalled destination clauses that
many contracts currently have and the current considerable price differential between the
Asian and European markets.
Japan recommends:
to continue and even step up efforts to accelerate global movements to relax
destination clauses in LNG contracts.
to increase the exchanges among consuming countries on emergency preparedness to
prevent panic buying on the LNG market that could lead to sharp rises in LNG spot
prices in the event of difficulties in certain markets.
to share its experience with energy conservation in the post-Fukushima context
d) Information received from Norway
Norway underlined in its response that decisions on oil and gas production are done by
commercial entities, with a firm separation between government administration and
commercial activities. Norway highlighted that most of its fields contain both oil and gas, so
in the context of sound resource management gas cannot be produced independently from oil.
Norway noted that oil and gas companies plan their daily/monthly activities to optimize their
production, and therefore it is not possible to give an assessment of gas production on any
given day.
Norway indicated that total production for years 2014 and 2015 is estimated respectively at
106 bcm and 105 bcm, but that actual production will depend on a variety of factors. Norway
highlighted that during the winter period, the utilization of pipeline is normally close to full
capacity.
e) Information received from Switzerland
In its reply, Switzerland noted that it has no domestic gas production and that it has a
diversified portfolio of suppliers, highlighting that it is fully interconnected with European gas
supply system and therefore stressing the importance of the overall European perspective as
well as any national measures that are undertaken. Switzerland highlighted the importance of
4
PDF to HTML - Convert PDF files to HTML files
retrofitting the Transitgas pipeline to operate under reverse flow conditions and regretted
protracted implementation of the project. Switzerland also recalled the importance of rapidly
moving ahead with the Southern Gas Corridor to increase the diversification of gas supplies
and stressed the importance of the mutual exchange of information on gas market
developments.
f) Information received from Turkey
Turkey welcomed the opportunity to be consulted and underlined the importance of continued
energy co-operation with the EU on a mutually beneficial basis. Turkey also noted the
important energy initiatives that are underway at a regional level contributing to the security
of supply of Europe. Turkey's increasing role as a strategic energy partner to the EU was also
highlighted.
g) Information received from IEA
The European Commission also engaged actively with the IEA on the IEA’s work on options
for individual and collective actions of the G7 in the field of gas security.
The IEA conducted a study "Europe’s gas supply security – the role of LNG". The main
conclusions of this study are the following:
"Europe has large underutilised LNG import capacities. While some internal bottlenecks
persist, even the existing infrastructure could deliver substantial LNG to the regions that
currently rely on Russian gas if, in the event of a disruption, LNG supplies were available.
If, in the case of a pipeline disruption, Europe increased LNG purchases, markets would have
to redirect existing supplies, especially from Asia. In recent years, Europe’s LNG imports
have fallen by half as markets reacted to a sudden demand jump in Asia. Europe replaced
LNG imports by switching to coal in the power sector and ramping up pipeline supplies from
Russia. Unfortunately, such a cost efficient and scalable fuel switching or alternative supply
option does not exist in Asia, so reducing Asian LNG consumption would not be
straightforward. No LNG exporter has a Saudi style policy of maintaining a swing production
capacity, and high spot prices of the past three years have failed to trigger a meaningful short-
term supply upswing.
Asian gas demand is price inelastic, with switching to oil-fired power generation being the
only large scale demand response capability. Given the structure of the power systems in the
Asian LNG importing countries, their oil switch could supply the LNG quantities that Europe
would need in the case of a disruption of Ukrainian transit, but only at very high spot prices.
LNG spot markets function with increasing efficiency and, in the case of raising European
hub prices, they would be able to readjust without a policy intervention. However, any price
cap or administrative regulation would prevent market adjustment.
(…)
5
PDF to HTML - Convert PDF files to HTML files
On the basis of these assessments we can safely conclude that the only demand response
potential in Asia that could reach the magnitude of European spot purchases in a crisis
situation is switching to oil, especially in the power generation sectors of Japan, China, and
some other ASEAN countries, possibly even in the Middle East. A smaller, but similarly
expensive source would be to switch to oil for process heat in industry. As a result, if a
European disruption were to increase European prices and narrow the Asia Premium, the
volumes redirected to Europe would quickly exceed volumetric flexibility that LNG markets
have in the form of supply and upstream upswing and non-oil related demand side response.
As a result, just like a minor supply – demand change led to a large price decline in Asia in
the first half of 2014, a sudden wave of European buying would quickly drive Asian prices
higher. As this would widen the Asia Premium, EU prices would have to rise even higher to
narrow it again. Eventually, the price level at which switching to oil in Asia and the Middle
East becomes economical would provide a ceiling to Asian spot prices at over USD 20/MBtu.
This is actually much higher than the “oil indexed” long-term contract level, since those
contracts usually have indexation formulas that blunt the impact of very high oil prices (the S-
curve mechanism). The 20 bcm volume that we assumed to be needed could be procured, but
European spot prices would need to more than double, to the range of USD 16 – 20/MBtu, an
oil switching Asian price level with a narrow Asia Premium. The main components of the
incremental supply to Europe would be:
Incremental LNG supply responding to price signals.
Turkmen imports to China
Reduced industrial demand in Japan and Korea
Switching to coal in China
Switching to oil in Asia and the Middle East (this last would have to be the largest by
far, and would determine the price level required).
Such a massive increase of spot prices in Europe would create massive windfall gains for
buyers of existing long-term contracts that are not indexed to spot (including any Russian
contract that remains operational) and for upstream assets that sell at spot prices. Importantly,
in the past five years, substantial import contracts have been renegotiated to be indexed to
spot prices. Those contracts would transfer substantial gains to their respective exporters.
Midstream utilities that resort to spot buying but sell at fixed prices – either because of the
structure of their retail contracts or because of regulation – would be under severe financial
strain."
4. Recommendation
The Commission will further engage with the key external energy partners, including those
with LNG export capacities and potential, also in the context of the G7 and the IEA.
6