Here comes the energy Cold War

Gazprom is set to buy out its South Stream Partners
Gazprom is set to buy out its South Stream Partners
Opinion by Energy Voice

I have to be honest. I don’t trust what passes for the Russian Government.

Nobody anticipated Putin would order the seizure of Crimea and if Russia was the democratic nation it pretends to be then of course it wouldn’t have even considered the idea.

But then we also didn’t anticipate Putin would invade Georgia in 2008, did we?

However, what’s done is done. We now know where we stand with Russia and regretfully – especially for the Russian people – East/West relations are going to be fragile for the foreseeable future.

Of course, if Putin decides to go into Eastern Ukraine then we’re into a whole new ball game with potentially disastrous consequences.

Could be a Cuban crisis all over again.

However, even assuming that Crimea is as far as Putin goes, the onset of proposed financial and other economic sanctions on Russia could easily prompt the Russians to decide to use their gas resources as an economic weapon.

The consequence of that for the UK and Europe is potentially – and I stress the word “potentially” – dire.

That said, in terms of direct gas supply from Russia to the UK it’s only really just kicking off following a deal between Centrica and Gazprom signed in 2012 for 2.4billion cu.m of gas over a period of three years starting in October this year.

Interestingly though, Gazprom claims that it already exports 11-12billion cu.m to the UK each year because we call on EU supplies via the Zeebrugge-Bacton Interconnector during peak demand from storage sites in Germany which hold Russian gas.

How accurate that claim is we don’t really know but it does seem likely that at least some of that “peak demand” gas actually comes indirectly from Russian sources.

So, if relations between the West and Russia worsened and Gazprom – which is a state-owned company – was ordered to either reduce or even cut off supplies to Europe how could we deal with the loss of that much gas?

Although Norway is the largest UK supplier at well over 50%, nearly 30% is now coming in as liquefied natural gas (LNG) from Qatar.

However, in the event of a crisis in Russian relations the UK should be prepared for the possibility for a fall in Norwegian supplies as demand from Europe for Norwegian gas increases.

More than likely that increase in demand would also lead to the price going up.

As an aside, in 2012 Norway actually sold more gas to Europe than Gazprom did although that doesn’t mean Norwegian supplies could be increased enough to offset a loss of Russian supplies.

In addition to Norwegian gas, it is possible LNG supplies from Qatar might be supplemented by new supplies from Iraq or other sources.

But LNG is expensive because demand for it is already high, in part because the Japanese are using it to fill the gap caused by the loss of their Fukushima nuclear plants.

And while politically attractive, it’s also been pointed out by analysts that the EU’s LNG terminals are mainly sited in the West.

So more terminals need to be built to supply the East which is the area most likely to be impacted more heavily if Russia shut off or limited its gas supply. But that would take time and that’s something that the industry may not have.

Of course, there are some who believe that gas imports can be supplanted or at least dramatically reduced by UK-sourced shale gas.

Given we still have no idea how large the UK resource might actually be, even if it is significant it could take five years or more for it to reach a level of production that could be classed as “significant”. So really not an option yet.

A faster route to a shale gas supply would be to import liquefied US shale gas. Ineos has proved that’s possible but the “Transatlantic Trade and Investment Partnership” being negotiated between the US and the EU could well facilitate more useable quantities.

What else might be done?

Well, very obviously Westminster could and should consider fiscal incentives to explore for more gas on the UKCS.

It might like to consider initiating that process by scrapping the ill thought out bareboat tax rules which are likely to cause drillers to move rigs out of the UKCS to parts of the world that actually understand what the oil and gas industry is all about.

Government should also encourage and support so-called unconventional gas exploration.

One source of this was explained recently to Energy’s editor Jeremy Cresswell on our Energy Voice web service by Dr Harry Bradbury of Five-Quarter Energy.

He has a plan to exploit the UK’s very extensive offshore coal deposits to produce methane, hydrogen and carbon monoxide.

Methane could go straight into the gas grid, the hydrogen could be used as a feedstock for other industries, a transport energy source or heat source and the carbon monoxide can be used as industrial feedstock as well.

This could be an important way forward, and it would be based on proven technologies. Therefore it deserves support.

But on the subject of coal few may realise that in 2013 the UK imported 45% of all the coal we used for power generation from – yes, you guessed it – good old Russia.

So how do we replace that? Could we reopen UK coal mines? Could we use remote mining technologies to get coal out of mines flooded because they had to be abandoned? Could we gasify the coal or recover coal bed methane from both existing and new mines?

Well the answer to all these questions is “Yes” but, of course, we also know that the chances of funding such ideas in this country are extremely low.

What about renewables as a means of displacing gas and coal imports?

Well, at the moment, given threats to break up the energy companies, the tinkering with the carbon price and other mindless policies from the Treasury, I would rate the chances of growing renewable generation fast enough to achieve that as on a par with me winning the lottery jackpot!

No doubt that if Putin turns nasty – or nastier than he has already – then from an energy security standpoint we are totally unprepared.

Decades of underinvestment in technology and playing the free market game rather than concentrating on the provision of long-term and secure energy leaves us vulnerable. We should be very worried about that.