Prospects for Sustainable Diversification of the EU’s Gas Supply

This paper is part of the series ‘CIEP Perspectives on EU Gas Market Fundamentals’. This is the result of a comprehensive research project conducted in 2016 with a view    to anticipate possible developments in gas supply and demand in the EU in the run-up  to 2025 and discuss the sustainability of the EU’s diversification efforts.

The current environment of growing geopolitical tensions has given rise to concerns about the EU’s gas import dependency, particularly in connection with its high volume of gas imports from Russia. This paper proposes that for the foreseeable future, this and even larger sales should in fact not be a matter of concern.

While the EU gas market is struggling with the question of what the future role of gas will be, and thereby the corresponding level of demand, it is clear under every scenario that import dependence will grow due to declining indigenous production. The focus among policy makers is therefore to find ways to diversify the gas supply in order to reduce dependency on Russian gas. Diversification in the classical sense, by means of other secure supplies under long-term contracts, is not going to be attainable, at least in the medium term: for one, from the perspective of potential new sources, the EU is not a particularly attractive market for long-term supplies, especially since the EU gas market players have no appetite for committing to purchasing such supplies in the cur- rent business environment; and for two, as long as the role of gas in the energy mix remains unclear it does not make sense to commit to long-term contracts.

However, the EU is finding itself in the midst of an unprecedented buyer’s market, which offers the opportunity for a different type of diversification. This market not only enjoys a significant overhang of pipeline gas, notably from Russia, but also substantial volumes of ‘surplus’ LNG will be looking for a place in the EU market, ready to replace Russian supplies at any time. The considerable unused LNG import capacity now comes in good stead.

This situation could well last until the mid-20s, particularly in a stagnant global gas market. While it lasts, any physical diversification or market share is of no real impor- tance: a higher market share of any source does not mean a greater dependence on that source. In order to benefit from these competitive gas flows, however, it is important that pipeline and processing capacity do not pose a constraint on gas reaching the market. With LNG import capacity abundantly available, construction of additional pipelines to the EU should be welcomed, while any potential restriction of market access or regulatory hindrance of trade should be avoided.

Regular reviews of the global market outlook should nonetheless be conducted to avoid a situation in which the EU would find itself without adequate competitive supplies in the event of a tightening market.