Regulator: Renewed gas crisis ‘likely’

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The likelihood of renewed gas supply disruptions in Europe this winter has serious implications for the image of gas in the long run, Walter Boltz, chair of Austrian energy regulator E-Control, told EURACTIV in an interview.

Walter Boltz is chairman of Austrian Energy Regulator E-Control. He chairs the Gas Working Group (GWG) of the European energy regulators (CEER/ERGEG).

He was speaking to Susanna Ala-Kurikka.

To read a shortened version of this interview, please click here
.

As the chairman of the CEER/ERGEG Gas Working Group, you have been busy compiling recommendations in the aftermath of January’s Ukraine-Russia gas crisis on how the EU can avoid similar situations in the future. Where did things go wrong?

One of the conclusions in analysing the gas crisis was that more coordination between TSOs [transmission system operators] would have enabled a faster response: that the level of preparedness in different countries was very different. Some countries managed reasonably well the total fall of Russian imports, other countries had huge difficulties, and that had to do with being prepared, having gas in storage, having given thought to how to handle that.

And that some of the pipelines were not able to adapt quickly to different flow directions. This was unfortunate, because Europe as a whole did not have insufficient gas: there was enough gas in Europe. It was just difficult to get it from where it was, which was North and Western Europe, to where it was needed, which was in South East Europe.

Those basically were the problems. And maybe finally that countries had started to act unilaterally, which made it even more difficult for one country to help another, because if every country tries to keep the gas it has in its own territory, then it’s very difficult to send gas to where it might be needed.

Where are we now in terms of what has been done to secure Europe’s gas supply and what remains to be done?

First of all, a lot of pressure was put on the TSOs to do a counter-flow study. The results are out now, and it’s clear that it costs very little to make major pipelines technically able to transport in the opposite direction.

This is a very important step in increasing security of supply and making the system more flexible. Because that was obvious, the European Union has already committed some money from the recovery funds to finance some projects in Central and Eastern Europe, where TSOs might have more difficulty getting the necessary investment going.

So the investment project has already started in several countries. Not all of the investment will be done by this winter. Some of them will probably be concluded, others will take another year to do, because sometimes it’s a little bit more difficult to do it in some cases. But basically most of the counter-flow capability in the region in South East Europe will be implemented.

So that’s one thing. The other thing is that the European Commission has now tabled the Security of Supply Regulation, which mostly draws on the conclusions of the gas crisis and tries to address the issues that are of relevance here. That is, it would oblige countries to prepare a plan for handling emergencies, it would oblige them to coordinate the plan with neighbouring countries, it would try to get a similar approach implemented on who the vulnerable customers are.

It offers flexibility at national level, but still there are some basic guidelines that each country has to define: which are my vulnerable customers, which I am not going to disconnect, and therefore should include household customers, but maybe also power plants that produce heat, or district heating, or industries that are crucial to feeding the population.

So that has to be defined. And there is a mechanism to ensure that there has to be a certain amount of coordination between countries. It would prohibit unilateral measures, so it would prohibit one country from saying: “I block all my borders, I don’t let any gas out of the country even if that hurts the neighbouring country.”

There has been some discussion now, some member states are objecting to the regulation, but there’s not that much resistance because I think it’s pretty obvious that you should have these things implemented quickly and that requires a regulation, because if it’s a directive, we have after it’s approved another 18 months before it’s implemented. And some countries would probably – as we’ve seen in other areas – implement it slightly differently, which then gives rise to infringement procedures. I mean, it’s a long way before you have a common legal basis for it.

It also includes certain solidarity actions, so if a certain threshold of import fall happens, then the European Commission would be able to organise some solidarity measures. That’s basically the package.

I think what has happened in the meantime is that all countries have started to prepare, irrespective of these kind of technical EU developments, for a new crisis. So I guess if we were to have another disruption this winter, we would probably be able to handle it much better than last time.

How big a risk do you see for a renewed crisis this winter?

The basic situation between Ukraine and Russia has not improved a lot. The acute tension is maybe a little bit less but not much less, and the payment problem comes up every month.

It actually gets worse because Russia has paid in advance for all of the transit this year, sometimes beginning of the year, so they basically give liquidity assistance to the Ukrainians to move the gas.

Of course, the further the year progresses, the fewer of these reserves they have. So I think it’s probably as likely as last year.

What might make both parties think again before they start such a controversial fight again is that gas prices have declined, consumption has declined. Gazprom has suffered quite a bit of reduced sales to Europe. They have probably in the first half of the year sold 40% less gas than the year before, which is a lot. And if you multiply that with the lower prices, I mean, Gazprom has a huge reduction in revenue from gas exports – and of course the Russian state as well – so they are probably sensitive to potential further problems.

I think the political situation, having elections in Ukraine in January, is not much better than one year ago. I would hope that people are restraining themselves and keeping emotions down, but especially before an election, God knows what will happen.

The Ukrainian economic situation is even worse than one year ago. There was the IMF emergency loan. The overall economic situation has deteriorated.

So overall I would say there is a fair chance that something similar might happen. I think it’s totally impossible to predict if it will happen or not. I think different from last time, people are somewhat more aware of the negative consequences it might have, because last time I think some people involved in the controversy did not really assess how critical this would become, how serious the image of gas would be hurt in Europe.

What gas companies are telling us is that it’s very difficult to sell nowadays gas applications to new customers. Very few people want to switch to gas because they still have this lingering memory that gas could be cut off.

That of course is very bad because gas has been living off its reliable supply image and environmental friendliness, and the reliable supply image is now gone. It will take, I don’t know, five, six, seven years before people start to forget about it. Sure enough, if in the next five, six years nothing happens then gas will regain its image but not that quickly.

So I think that it is a serious risk for the whole gas industry if you jeopardise this reliability image once again. There could be a very strong move away from gas although logically from an industrial perspective, gas should have even more application than now, but if the image of being the reliable source of energy is proven to be totally wrong with yet another gas crisis, eventually people will just say, “I would love to use gas but it’s not reliable enough so I’ll stop using it.”

Hard to say, but I think we should work on the assumption that it can happen.

Are there any reasons for optimism?

The advantage is that due to the economic crisis, we have less consumption, we are basically oversupplied heavily by LNG so technically there is much less of a problem than last year.

Today, all the storages are already in summer totally full. Normally they are only at 80% in Europe, but now they are almost 100% full.

And there is a huge oversupply of LNG available so we could very easily supply all of Europe from LNG in storage for quite a while. Of course, we would still have some transportation problems to get the gas to places, but some of the transportation bottlenecks have been identified and people know better how to deal with them.

A simple thing in Greece – because we are sitting here in Greece – Greece has an LNG terminal which was only built for smaller tankers, but during the gas crisis they found that they can also unload bigger ships. So now they know.

So if the crisis comes again, they can relatively quickly turn around the pipeline to Bulgaria and unload relatively big ships and pump LNG. So some things have improved at operational level.

The deal between Russia and Ukraine eliminated the intermediary company that buys gas in advance and stocks it for sale during the winter. What consequences does this have?

I think between Russia and Ukraine, it has not caused any problems. It has caused some problems between Russia and Poland, because Poland was receiving gas from Ukraine through this intermediary. I don’t know what the status is now, but until very recently, there was no shipment of gas through Ukraine to Poland, because the intermediary says, “we have the contract, but we don’t have any gas,” so there’s no solution to that.

But for Poland it’s a relatively minor import volume so it’s not a big thing for the Polish gas market. Otherwise, for the main gas transit, this has not caused too many problems.

The deal now is that Ukraine must pay in monthly installments, so every 6th or 7th of the following month, the bill from last month has to be paid. So far, Ukraine has always somehow managed to put together the money for it. 

But if you have read the financial papers recently, Naftogaz had to reschedule a 500-million-dollar bond which matured at the end of September, and it has defaulted on the bond, and I think they are now discussing with the bond holders how to restructure the bond.

This shows how tight the financial situation of Naftogaz is. Basically, they didn’t start six months before but let it run very late, only then they hired investment banks to look at how to restructure this bond but didn’t manage it. I think the bond holders have agreed to hold back now any bankruptcy procedures.

I mean, this is a very, very tight liquidity situation for Naftogaz, so it will continue to be pretty tight. So the question always is – people are looking very carefully at Ukraine – is it possible to pay the next month’s installment? So far they have managed, but that could change.

What is also important is that the Ukrainian gas transport system is not built in a way that you could take gas from Russia and transit it through Ukraine to Europe. It was built in a way that gas from Russia is put into storage in summer, and in winter it’s taken out of storage and pumped to Western Europe.

So if Ukraine doesn’t have sufficient storage levels, it will not be able to supply Europe in winter.

Now, how much storage they have is a state secret in Ukraine, so nobody knows how much storage they have. The Russians claim they don’t have enough storage. I’m not in a position to know that, but it’s not that you could detach transit from national consumption. It’s interlinked.

When it was built, the system was part of the Soviet Union, so they said “we pump gas from the North into storage closer to Europe and when the winter comes, we supply Eastern Ukraine from Russia and this gas is pumped from Ukraine to Europe”.

So if there’s nothing in storage or not enough in storage then there’s a problem. Currently, people keep their fingers crossed every month and so far nothing has happened.

Are you happy with the European Commission’s proposal for a security of gas supply regulation?

We think it’s a good proposal. It has all the elements that are necessary and possible. We have sent some comments to the Commission and to the Parliament but only minor things – some definitions probably need to be more precise, there are a couple of details that we would like to organise in a different way. But overall we think it’s a good proposal and the regulators support it.

But you mentioned that some member states were less happy.

I think some member states are more on the fundamental level opposed to this being a regulation because it is directly applicable. And somehow member states have the feeling that the Commission wants to keep control of their energy laws and therefore they want to take the EU directive and transpose it into national law.

Since the member states have very often not done a very good job of doing so, I think there is a good case to have this as a regulation. We’ll see what the Council and the Parliament finally decide.

I think that given the urgency and the natural delay that a directive would result in – this takes basically two years minimum before it is properly implemented everywhere – I think a directly applicable regulation is much better. And I hope that the Commission and the other member states can convince those states opposing that.

I don’t think they have a real factual argument. It’s more this emotional thing, “we don’t want anyone messing around in our national laws or as little as possible, so we want to be able to jiggle around and implement it ourselves”. 

But I think in this case the logic calls for a directly applicable regulation.

What role do you think gas hubs can play in securing gas supplies to Europe?

The problem is that we have a lot of long-term contracts in Europe and they’re really out of money right now, because the long-term contract prices are twice the short-term spot market prices.

That means quite a big revolution for gas companies because we haven’t had a situation with such a huge oversupply and such big price differentials since probably thirty or forty years ago.

I think it does show that the idea of having a very rigid long-term pricing mechanism for gas is not a good idea if you have fluctuating demand. If you have a very stable long-term demand development like we had in the past, then it’s also a credible approach. But if you don’t have that – and now it’s the situation with the economic crisis and other changes – it is very typical that supply and demand are out of balance. 

Normally prices are there to balance supply and demand so if there is oversupply, prices drop and more people use gas, and they soak up gas. Now, if the long-term gas price remains high, then you do not motivate people, power stations and industry to use more gas.

So we have now this split market. In those countries where there is easy access to LNG, spot prices are very low and in those areas where it’s not so easy to get LNG to the market due to transportation problems, contractual congestions and so on, you have a much higher price for gas and therefore you don’t have a tool to increase consumption.

I think today for the first time companies realise that the long-term contracts they have defended for many years could be also averse, because they oblige [them] to buy a lot of gas for a very high price.

But of course the big customers – not the small customers because they don’t know so much about that and it’s not such a liquid and transparent situation – they know very well that the spot prices are extremely low. And I think that those countries that have not set the transport regime in a way that it is easy to get gas to their territory are paying the price for it now because they have to pay more for gas than otherwise.

In the second half of this year, I think we will see quite a number of companies running into problems. Because consumption is low, the storage is full, it is not so easy to offload the gas that they have contracted with Algeria, Russia and Norway.

It remains to be seen how flexible the various producers are in allowing to stretch the delivery of the gas volumes or to what extent they say, “we need the cash and we want it now, we don’t care what you do with the gas”.

Gazprom has just reduced the investment programme quite a bit, but the problem is that the investment in the North, in the Arctic, you cannot stop it, because if you do, all the investment is stranded because the equipment is ruined if you don’t keep it functional, running, warm and so on.

In the desert you can basically turn off a well and in many cases next year it will still run with relatively little new investment, but not in the Arctic. There you need to keep it running before it’s totally spoiled and you need to start from scratch. 

So they cannot reduce it to zero and I think they are struggling to finance these exploration projects. I think it’s an interesting market situation for the next six to twelve months.  

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