Ukraine and Turkey: the European energy coup

The AGRI project is hoping to transport natural gas from the Caspian region (primarily Turkmenistan) to Europe designed as a part of the Southern Corridor and as the shortest direct route for Caspian gas to European markets. If realized, AGRI would transport Azerbaijani LNG from Georgia, across the Black Sea, to an LNG terminal planned for construction on the Romanian Black Sea coast, then piped through to Hungary through the interconnector with Romania and then further into Europe.

Azerbaijan, Romania and Georgia signed the Memorandum of Understanding for this project in April 2010, but not much has happened since then. The project requires the construction not only of a regasification terminal in Romania, but also a liquefaction plant in Georgia.

Competition for this strategic positioning will come from the development of Mediterranean LNG projects, which could also be a game-changer for Europe. Potential projects here (Cyprus and Israel, first and foremost) remain uncertain, but if realized they would offer gas to high-demand Southeastern European markets with attractive pricing. In the absence of an LNG agreement between Ukraine and Turkey, Cyprus and Israel have the potential to capture the European market from the Mediterranean side. Timing is critical and the advantage will go to the players who recognize the opportunity to fill the long-term LNG supply gap that has been created by the diversion of cargo to Asia. Ukraine, has the potential to fill this gap and control the market.

LNG'S Role in European Energy Security

The European Market for LNG at a Glance:

• Relative to 2011, LNG deliveries to the EU fell 31% in 2012, with imports from Qatar down 35%, Nigeria 31% and Algeria 18%, while imports to Asia have grown by up to 70%
• So far for 2013, LNG deliveries are in line with this downward trend
• For the first quarter of 2013, gas flowing out of LNG terminals into pipelines (LNG send-out to grids) in the UK, Netherlands and Belgium was down by 60% over the same period in 2012, and down 40% in France and 30% in Spain, Italy and Portugal
• The average price of spot pipeline gas in Europe is around $10 per MMBtu, while the average spot LNG price is $11.40/MMBtu (there is a wide range of LNG pricing across Europe)
• In Japan, LNG prices are about 40% higher (as of Q1 2013) than spot prices in the UK, for example

LNG in Europe, Present and Future

At the close of 2012, LNG accounted for 19% of Europe's gas supply, while 81% was natural gas transported via pipeline.

The Fukushima disaster in Japan forced European countries to reconsider their nuclear policies, and this has forced a stronger focus on coal, natural gas and LNG. Before Fukushima, LNG was favored over natural gas because supplies were greater at that time and prices were cheaper than piped-in gas. As a result of the Fukushima disaster and Japan's resultant eschewing of nuclear power reliance, is a run on LNG by Japan and other Asian nations who are willing to pay higher prices. This has driven LNG prices up and diverted supplies to the Asian market. In addition, it has caused fewer LNG development projects to be pursued in Europe. This translates into future gas shortages when LNG supplies can no longer meet growing Asian demand and when there is a lack of long-term LNG commitment in Europe. This is the critical window of opportunity in the market for Ukraine and Turkey. (There is a certain counter-intuitive momentum to be grasped here.)

Because Asia signs on to long-term LNG agreements with high, oil-linked prices, there are predictions that Europe will find itself with extremely restricted access to LNG in the near- to medium-term future, with a recovery in demand and a growing reluctance to rely on dirty coal for power generation.

This past decade has seen global LNG supplies double and regasification and shipping capacity triple. The exception is Europe, where Ukraine and Turkey are singularly positioned to take advantage of this LNG gap before demand picks up and the opportunity for strategic positioning is weakened.

The LNG market is set to expand globally over the next decade, and demand for LNG in Europe is most likely set to rise even without affecting natural gas supplies. Thus, TANAP and a Ukrainian-Turkish LNG agreement would work in tandem, not in competition, to control an even greater market share.