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
Date: 2014-10-16
Institutions: European Commission
Subjects: energy cooperation, energy supply, gas, group of leading industrialised countries, security of supply, third country













EUR-Lex - 52014SC0324 - EN











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52014SC0324

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 /* SWD/2014/0324 final */










 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.

 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. 
 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. 

 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 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 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.
(…)
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."

 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.