What is the status of the Euro-Mediterranean gas strategy and the U.S. plans to contain Russia?

«The ecological transition could be a bloodbath», Roberto Cingolani, Minister of the Ecological Transition, La Stampa, July 1st 2021

In 2020, the Covid-19 outbreak had a dramatic impact on global energy markets. In particular, oil and coal consumption fell by 9.3% (y-o-y) and by 4.2% (y-o-y) respectively. According to the BP Statistical Review of World Energy 2021, published on July 8, in 2020, global natural gas consumptions dropped by 2.3% (y-o-y) equal to 81 Gm3. However, the share of natural gas in the global energy mix reached a record high of 24.7%.

In 2020, EU gas consumption decreased by 3.1% (y-o-y) to 379.9 Gm3, EU production decreased by 21.9% (y-o-y) to 47.8 Gm3, and EU imports increased to 332.1 Gm3 (+0.6% y-o-y). In the 10-year period 2009-19, EU gas consumption remained fundamentally steady (-0.1% a year), while EU output dropped by 6.3% a year due to the depletion of its gas fields. In 2020, EU’s natural gas suppliers were:

In particular, the 2020 Netherlands’ output dropped by 28.5% (y-o-y) to 20 Gm3, while in the 10-year period 2009-19, its production fell by 8.2% per year. As regards the main EU gas suppliers, the current situation may be summed up as follows:

  1. Norway’s gas output is expected to decline from 2030 onwards;
  2. Algeria’s gas consumption has been increasing more than production since 2009 due to a lack of investments;
  3. Azerbaijan can pump approximatel 10 Gm3 of additional natural gas a year  thanks to the Southern Gas Corridor;
  4. TThe offshore gas reserves estimated in the South Eastern Mediterranean Sea, in the future , will probably supply Egypt than the EU, while the Eastmed project, which appears to be much too expensive, will have a maximum transport capacity of 10-12 Gm3 of gas a year;
  5. Among EU gas suppliers, U.S. LNG is the most expensive.

Russia’s colossur Gazprom has steadily been increasing its natural gas supplies to Europe since 1967

Based on the estimates provided by Gazprom Export, in 2020, the Russian giant exported 175 Gm3 of natural gas to Europe, which is less than the 199 Gm3 exported in 2019, but more than the volumes supplied during the Ukrainian crisis between 2014 and 2016

In the first half of 2021, Gazprom produced 260.8 Gm3 of natural gas (+18% y-o-y), while its exports to Europe were close to their historical record high. In the 10-year period 2009-19, the Russian Federation produced an average of 650 Gm3 of natural gas per year, which could increase to 750 Gm3 in 2025 and 850 Gm3 by 2040 thanks to its enormous reserves, equal to 37.4 Tm3 (19.9% of global share) in 2020, and a R/P ratio of 58.6. According to the forecasts released by Oilprice.com on April 12, 2021, 390 Gm3 of this amount, that is more than half, might be destined to the European and Asian exports. Furthermore, the Russian giant located in St. Petersburg forecasts that natural gas will satisfy 39% of the additional global energy demand between 2020 and 2040, compared to 34% of renewables.

Therefore, the share of natural gas in the world energy mix is set to increase from the current 24% to approximately 27% by 2040. Since 2015, despite the numerous sanctions imposed by the United States on European enterprises involved in the realization of the Nord Stream II pipeline (in particular, those applied to the Swiss consortium Allseas, initially engaged in the laying of the pipes), the U.S. has not been able to stop its construction. The launch of Nord Stream II represents the failure of the U.S.-EU strategy, aimed at blocking the construction of the gas pipelines from the Russian Federation.

Running across the seabed of the Baltic Sea, the transport capacity of Russian natural gas to Europe will increase from 55 Gm3 to 110 Gm3 a year. In particular, the Russian Federation will bypass the Baltic countries and Poland. At the same time, Russia will further reduce the transit of natural gas through the territory of Ukraine, but without completely cancelling it, due to the 5-year contract signed in 2019, which compelled Moscow to pump at least 40 Gm3 of gas a year through Kiev.

As regards the Euro-Russian infrastructural gas transport system, it is important to highlight that if the South Stream pipeline had been built, the Nord Stream II pipeline would have never been born. In fact, South Stream expressed Italy’s interests, but the United States of America and others disliked it. The impression is that rather than defending us from the alleged geopolitical use of natural gas by the Russian Federation (blackmail), the European Energy Union has favoured the rise of an infrastructural context that has been making Germany the main European gas hub to the detriment of Italy.

As regards the attempt to reduce the supply of Russian gas to the EU and elsewhere (for example, the pipelines directed to China), the White House has actually changed its strategy. Given the aim of a carbon-neutral economy, the United States will hit the use of fossil fuels rather than boycotting the projects through sanctions, which still remain in place for Nord Stream II. In particular, the U.S. Administration thinks that the energy transition will be more costly for the world’s leading energy exporters and consumers – especially the Russian Federation and China – rather than for the United States of America. Hence, the necessity to impose a series of environmental parameters, even import duties, in order to limit the production of goods made with the use of fossil energy sources.

According to the Taxonomy Climate Delegated Act, the European Union “introduces clear performance criteria for determining which economic activities make a substantial contribution to the Green Deal objectives”. These criteria exclude the use of fossil fuels. Even so, the EU specified that natural gas would be the only fossil fuel to be included in a separate document, concerning the “transitional” activities. 

In particular, on March 29, 2021, EU vice President in charge of the European Green Deal, Frans Timmermans, stated: «Where, and as long as, clean energy cannot yet be deployed on the scale needed, fossil gas may still play a role in the transition from coal to zero-emission electricity. However, I want to be clear with you – fossil fuels have no viable future. That also goes for fossil gas, in the longer run». Simply put, «the EU legislation will restore natural gas to its bridge-fuel status» the U.S. site Oilprice.com wrote on April 26, 2021.

Given the EU’s current and future energy mix, its intensive gas production system, and its transportation-infrastructure, I would like to suggest to the European Commission, as well as to the Italian Parlament, to discard the attempt to replace Russia as the main European natural gas supplier. According to the statistics, it would be impossible for a 25-year period at least. Furthermore, it would be impossible to substitute the total amount of Russia’s imports with the U.S. shale gas extracted through the fracking tecnique.
Over the last decade, the European Union has diversified its suppliers, implemented the so-called reverse flow, and has adopted a legislation with the aim of favouring consumers to the detriment of producers. Even so, “Russia will remain the most important exporter to Europe for decades”, Oilprice.com wrote on April 12, 2021.

More precisely, in the years to come, the Russian Federation will continue to represent one of the two lungs of both Italy’s and Europe’s gas supply,  strengthening its leadership as a net gas exporter