On May 1st, 2014 I appeared before the House of Commons Standing Committee on Natural Resources. Below is my opening statement:
Mr. Chair, Hon Members Thank you for your invitation to contribute to this study.
I am an independent policy analyst and I focus on energy. I’ve been following the energy sector for about 3 decades. The opinions I express today are my own.
The current Political crisis unfolding within the Ukraine and between the Ukraine and Russia has raised the question, ” Can Canada play a role in Europe’s Energy security.”
If you believe this crisis might drive a market opportunity, then it may be fair to ask if that opportunity will actually outlast the political crisis?
Those in Europe with whom I spoke this week, cannot see a future when Russia will be displaced from the energy markets of Europe.
Russia simply has too large a role to play in supplying Europe with energy. Nearly 34% of Europe’s total market for gas and just under 30% of EU oil is shipped from Russia.
Europe and Russia have become entwined in a symbiotic relationship, a web of interlocking business and financial relationships, based primarily on energy.
Of course, we’ve seen disputes that have arisen between Russia and states of the FSU . these have created some collateral damage for Europe, including interruptions to gas supplies in 2009
Security issues aside, the priority need for the Ukraine today is financial help in meeting debts. I fully expect that Europe will assist in this as it is clearly in Western Europe’s interest to resolve the problem.
Is there an ongoing threat to European energy security?
If markets are any indication, the answer is not yet. We see that European gas prices have moved little on the latest Ukrainian troubles.
This is not an indicator that energy security is top of mind or that the intensity of the current political confrontation, is enough to create a willingness by Europeans to pay an annual $35b premium for diversification away from Russia as a supplier of choice.
It is not likely, either, that European consumers will be easily convinced to accept a 50% increase in their gas bills. So the energy security issue may well fade provided the political crisis resolves itself.
After the last crisis in 2009, there was actually increased investment to support trade with Russia, The most notable was the €14b Nordstream project to bring gas directly from Russia to Germany under the Baltic.
Some states have decided to move toward less dependence on Russia, Lithuania, for instance, has commissioned a floating LNG receiving facility And I believe you’ve heard that Poland is also taking steps to tap the world market for LNG with a new marine terminal.
Europe currently imports about 11tcf of gas annually. The Russian share of that would be equivalent to 4 Sable Island gas projects exhausted every year or about the volume of output from 4 or 5 good-sized LNG projects like Sabine Pass.
Given the in-elasticity of global LNG supply, a move from Russian gas would be a lengthy process. Europe cannot afford to have uncertainty over where its energy will come from for even a few months, let alone the decade it would take to transition from Russia. During that decade there would be opportunity for an immense amount of dislocation both economic, social, and political.
As we have seen, the reaction from Europe on the issue of energy security is not uniform. That reflects that individual states assess their own vulnerabilities and these vary widely from the UK with little direct need for Russian Gas to FSU States who are wholly dependent on Russia.
Europe with so much Russian-focused infrastructure, may augment a small portion of Russian energy with a little more gas from Norway a little more LNG from the world market, a switch back to more coal, revisiting Nuclear, ramping up renewables, and redoubling conservation efforts
But in the end, Russia remains a key player.
We should therefore, assess markets realistically with Russia as part of the dynamic, an entrenched player that has a competitive cost base and the infrastructure to deliver its product and one who has demonstrated that it will defend its markets aggressively.
So What can Canada do?
Well Canadian gas is not available on the east coast in sufficient quantities to justify the investment in LNG infrastructure.
That may change with new discoveries or by making the investments in gas pipeline infrastructure required to bring more gas into the region. This is a 5 to 10 year prospect.
Notwithstanding this, LNG will still go where it will fetch the highest price. That is currently Asia.
Interestingly, we are about to repurpose the main west east gas transmission pipeline to move bitumen, which won’t really help the gas situation.
So is there really an opportunity for us to do something here?
Well, considering the points I’ve raised and
The fact there is little interest in the European market demonstrated by the current round of US LNG export projects, whose focus is on Asia,
So if the answer is not gas is there anything else?
It has been estimated that if the Ukraine were as energy-efficient as western European countries, its own domestic gas production would be adequate for its own needs. I see an opportunity if Ukrainians decide to get off the Russian subsidized gas habit.
The real opportunity here, may actually be Canadian Energy efficiency expertise, working in partnership with knowledgeable Ukrainians, not more gas to feed an inefficient energy system.
A short comment on Oil:
Canadian producers have negligible impact on EU oil market. We currently export to the EU about 0.47% of their imports and that’s light sweet crude. Perhaps some room there to move more light sweet from Newfoundland and Labrador as more projects come on stream. I see no barriers to that production; it sells itself, very competitive!
Canadian heavy blends could displace imports to Greece and Turkey. But that would displace Heavier Gulf blends, not Russian Urals. That is also true elsewhere in the Atlantic basin.
Thank You.
