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Can Europe wean itself from Russian natural gas?

Can Europe wean itself from Russian natural gas? thumbnail

One of the companies most entwined in the natural gas business in Europe is the Italian oil giant ENI – and that has put it smack in the middle of the crisis between Russia and western nations.

ENI is the biggest seller of natural gas in Europe, providing 22 percent of the market. It is also the biggest customer of the Russian gas monopoly Gazprom, worth about 10 billion euros a year, and it might join with Gazprom to build a new pipeline under the Black Sea. It has a deal with Russia’s biggest oil company, Rosneft, to explore in the Barents Sea. It also has rights to look for shale gas in Ukraine and plans to propose reworking some old neglected oil and gas fields there to boost output. And it is the largest natural gas producer in Libya, a key source of natural gas for Europe. Altogether, ENI operates in about 90 countries.

On Thursday ENI’s chief executive, Paolo Scaroni,  was in Washington to meet with Obama administration officials at the State Department and National Security Council to discuss natural gas, Russia and Ukraine.

Scaroni was visiting on the heels of hearings in Congress where lawmakers were calling on the administration to approve more liquefied natural gas (LNG) export terminals so that LNG from abundant domestic shale gas reserves could ease European dependence on Russia.  But the committees didn’t get to hear from anyone with Scaroni’s background and distinctive points of view.

The CEO took an hour to talk with The Post. Here are some excerpts from the conversation.

On Europe’s need for Russian oil:

This Ukrainian crisis showed finally that the king is naked, that Europe is not independent — because if you’re not independent on energy you’re not independent. People say Russia needs Europe, as well. But we need energy every day, and they can skip a year. It’s a different level of urgency and dependency.

What is relevant is that this dependency is going to go up and not down because domestic European production [including North Africa] is going down. Norwegian production is not going up. Algerian production is going up, but Algerian domestic consumption is going up, too. And Libya is Libya. We are the persons in the world who know Libya best, and we know nothing. I was in Libya last Sunday. We have 3,000 people there and still we don’t know much.

Scaroni takes a dim view of American LNG as a means to liberate Europe from Russian gas, in part because he says that transporting LNG from the United States to Europe is expensive, Russian gas production costs are very low and Russia could always decide to undercut American LNG prices.

Everyone is asking the question: How can Europe live without Russian gas?

American LNG is a slogan. It will take five, six, seven years, not five months. Economically, who’s going to invest this money for exporting into Europe when American shale gas will land at $9 [per thousand cubic feet] at best. [European gas prices are currently about $11 per thousand cubic feet, he said.]

If you take an economic decision, you need to be sure that this $9 will not be uncompetitive because the Russian gas can be sold at $6. We’ve been producing gas in Siberia until a month ago. We sold our Arctic Russia operation for $3 billion, just in time. We had a field and we know the cost. We’ve done it. It is less than half a dollar. If you can export into Europe, and if Gazprom puts the cost at $6, what do you do with your liquifier?

For me the idea of exporting LNG from the U.S. is theoretically possible but…

It could be completely different if there is a sanctions regime ….  If you say buying gas in Russia is illegal, that’s another thing. But are we there? I don’t have that impression. And even if we were there, are sanctions going to stay on forever? I hope not. But your investment [in LNG terminals] needs 20 years not 20 months.

Scaroni fears that European industries, such as the petrochemical industry, cannot compete with U.S. companies that have cheap natural gas at home. He predicts more European companies will move plants to the United States unless Europe starts to drill more aggressively for its own shale gas.

I say embrace shale gas or embrace Russia. The Russian option is no longer an option, so we should pursue shale gas vigorously and then look at whether we should be shutting down nuclear plants in Germany.

But Scaroni said there’s no guarantee Europe has rich shale gas reserves. Like other major companies, ENI drilled in Poland and then abandoned it because the gas was deep and there wasn’t enough of it to make it commercial.

As a businessman, Scaroni also worried about the fate of the proposed South Stream gas pipeline that would go from Russia under the Black Sea to Bulgaria, Romania, Serbia and Austria. The pipeline, a joint venture between Gazprom and ENI, would circumvent Ukraine, currently one of Gazprom’s three main paths to Europe.

The project, from a commercial point of view, I love it. I don’t want to have the Ukraine problem for my clients. But from a political point of view, South Stream will perpetuate the dependence of Europe on Russian gas. That’s one reason I see clouds over the project now. Political clouds, not commercial clouds, because commercially it makes a lot of sense.

There is a lot of talk about the United States using its new oil and gas resources to engage in energy diplomacy. Scaroni was skeptical.

If it were not for the shale gas, the United States would be dependent on foreign gas. So it would be diplomacy for somebody else against the United States. So it is a positive to be freed from this.

ENI has political challenges elsewhere, too. It is the biggest oil company in Egypt, Scaroni says, and it has substantial operations in Venezuela, recently torn by riots and which many other oil companies have left after contract disputes with the leftist government.

What about the political situation in Venezuela? I don’t know, and we don’t care because at the end of the day people will need oil and gas. If I could find oil in Switzerland I would be in Switzerland. But since it’s in Venezuela, what can I do?

Washington post

22 Comments on "Can Europe wean itself from Russian natural gas?"

  1. Plantagenet on Sun, 30th Mar 2014 9:59 pm 

    The US warned the EU not to become dependent on Russian gas, but the EU was too stupid to listen.

    Now they’ll have to pay the price.

  2. J-Gav on Sun, 30th Mar 2014 10:27 pm 

    Answer: Euh, not right away … Europe is stuck and knows it. They’re waving ‘wave power’ but, not only is that expensive technology, it’s still in its infant stages as far as any major contribution to the overall energy mix is concerned.

  3. DC on Sun, 30th Mar 2014 10:48 pm 

    Amerika should worry less about where and how Europe gets it energy, and more about where the uS intends to get IT’s energy from. The corporate overclass in the uS for various reasons, cant stop obsessing about Russia selling energy to Europe. I suggest they get over it. Fantasies about exporting frak gas, or turning Europe into a giant open pit just to undermine Russia(for a second time) are just that-fantasies. Europe is not about to approve wide-scale fraking by uS corporations in the EU. Nor are they about to stop buying Russian energy just because uncle sam wants to undermine Russia economically like it did to the old Soviet Union.

    Thing in Europe will run much more smoothly, and peacefully, once the EU declares its independence from the uS and ejects its banks and troops. The longer they wait though, the more likely the uS will ignite a major, perhaps the final war in Europe.

  4. rockman on Sun, 30th Mar 2014 10:54 pm 

    I’m very impressed with this dago (it’s OK for me to say dago…I was raised by one). But he, like many others, doesn’t seem to understand that the US is currently a net NG importer…we have no excess NG to export. At least not today or for some years to come.

    “He predicts more European companies will move plants to the United States unless Europe starts to drill more aggressively for its own shale gas.” Already happening. Not just steel makers but several EU chem companies. From Rig Zone:

    Lured by the region’s growing port facilities and ready availability of cheap natural gas from the prolific Eagle Ford Shale play, two foreign-owned firms are bringing a newcomer – iron and steel manufacturing – into the Coastal Bend’s economic fold.

    “The addition of iron and steel manufacturing to the regions’ economy will further diversify and strengthen our growing economy,” said Roland Mower, CEO of the Corpus Christi Regional Economic Development Corp. “In fact, this region is experiencing an uptick in interest from international manufacturers interested in leveraging our low-cost, politically stable supply of natural gas as a fuel source for their manufacturing processes and our immediate proximity to the U.S. (Western Hemisphere) markets.”

  5. Kenz300 on Sun, 30th Mar 2014 11:20 pm 

    Every country needs to develop a plan to be more energy self sufficient. Quit looking for large centralized solutions from outside the country.

    Decentralized, local solutions are available.

    Wind, solar, wave energy, geothermal and second generation biofuels made from algae, cellulose and waste can all be produced locally providing local energy and local jobs.

    The old centralized fossil fuel model is dead.

    The sooner they transition away from fossil fuels the more independent they will be.

    The fossil fuel industry only knows one solution and is more fossil fuels. Just like going to a surgeon and expecting him to recommend something other than surgery. Not going to happen. The fossil fuel industry will go kicking and screaming trying to hold on to their old business models. They will wake up as costs continue to rise…………

  6. kervennic on Mon, 31st Mar 2014 12:06 am 

    We are ready and eager to get rid of it.
    Less energy means more bankrupcy of large groups that creates massive unemployment, of large farming entity and thus return to smaller more labour intensive entity.

    Exactly what we need in the current liberal crisis. Please Ukraine, cut the damn pipe and let s get rid of all those corrupt politicians that feed on oil and gas and big money.

    We do not need gaz to survive,not even to make fertilizer. Peeing in a can instead of peeing in drinking water, will do just fine.

  7. Nony on Mon, 31st Mar 2014 12:22 am 

    Rock, this is silly. Of course we’re not a net exporter now. There’s no LNG capacity off the continent! The only reason we are a (small) net importer now is because of free trade with Canada, who has no other market (dumps it in the US). And Canada has been suffering from basically share competition with the Marcellus. Then amount they supply has gone down significantly. (And they’re gonna export LNG also.)

    We have dramatically increased gas production and are doing it with 200 rigs (IOW, a big lowering of the number of rigs). Despite all the Red Queen decline concerns, it’s taking us LESS drilling to get the gas out. The Marcellus wells have very high IPs.

    Foreign markets are at 2-3 times our price–more US gas can be produced based on higher prices drawing them. Both geologists (USGS, various other studies) as well as business leaders in the community say there is a huge US gas resource and it’s achievable at under $6.

  8. Nony on Mon, 31st Mar 2014 12:25 am 

    The benefit to the Italian spokesperson is having another POSSIBLE supplier. Sure, Russia can undercut US gas…but that’s still a benefit to the Euros. And if Putin shuts off the taps, then there’s an alternative.

    BTW, I could care less if we send our LNG to Europe or wherever. IT should go to the highest bidder. But in any case, it starts to globalize the commodity.

  9. rockman on Mon, 31st Mar 2014 1:04 am 

    “Of course we’re not a net exporter now. There’s no LNG capacity off the continent!” And if we had 100 LNG export terminals we could supply the EU one sniff of NG since we consume more NG than we produce.

  10. Nony on Mon, 31st Mar 2014 1:41 am 

    Drill more wells…easy shmeezy. No point to do it now. There’s no market.

    The geology is there, dude. What do you expect us to do…spend the next five years drilling excess gas with no market? Perhaps just burn it to show we have extra? Oh wait…

    I thought you were better than this, really did. I guess there’s a reason you are here.

  11. Makati1 on Mon, 31st Mar 2014 2:07 am 

    Nony, slow down and think. I suspect you have a large investment in one of these fraking fiascoes and are trying to tell yourself that it wasn’t a mistake. The US is never going to export enough NG to make a difference anywhere. If it costs $4 to produce, by the time it is liquified, shipped and re-gassified, the cost has doubled due to loss. Now we are at $8 gas and the Russians can supply it at $6 and make a profit. And, Europe will buy the cheapest NG whereever they can get it.

    Question: If the Russians wait 2-3 years until the new US ports and facilities are in place and then start to sell their gas at half the US cost, what happens to all those US facilities/corporations? By then, Japan and China will probably be buying Canadian NG or Russian NG or both.

    No market. No profits. No corporations.

  12. Nony on Mon, 31st Mar 2014 2:27 am 

    I’m sorry for the personal remark, Rock. You are a nice guy.

  13. Nony on Mon, 31st Mar 2014 2:28 am 

    Maki: There’s a danger of that, sure. You know same danger can exist with doing an expensive oil well. What happens if prices crash. Nothing is guaranteed. It’s business.

  14. Makati1 on Mon, 31st Mar 2014 4:26 am 

    Nony, no, it’s foolishness. The future is unknowable today more than ever. The Market Casino is just suckering in all the fools they can get to keep it afloat a while longer. If you rely on government/industry ‘facts’ and MSM ‘news’ to make your decisions…

  15. Nony on Mon, 31st Mar 2014 4:33 am 

    There was no one on the grassy knoll. These are not the droids you are looking for.

  16. rockman on Mon, 31st Mar 2014 12:24 pm 

    Nony – Ta Da! You win the prize today for the fastest self contradiction: “Drill more wells…easy shmeezy. No point to do it now. There’s no market.” And there you have it: an easy problem to solve even though you can’t solve it.

  17. Nony on Mon, 31st Mar 2014 2:04 pm 

    Yawn, I’m repeating myself, but look at this graphic. Stare at it…think.

    So…rig count is down…while gas production is up. What can explain that? Extremely low decline rates from the fields (no, they really are high decline). Answer, we are kicking the Red Queen’s ass with ginormous IPs in the Marcellus. And some pad drilling efficiency.

    Look at the graph again. This is the opposite of the Rune-esque story of downspacing leading to diminishing returns. Less drilling, more production.

    Now imaging throwing some more rigs at these fields.

    P.s. I’ve also previously linked to several definitive reports (not random comments from a geologist on a peak oil message board). And not gotten any response to them. This is the main stream world, people. The gas situation has been looked at.

  18. Davy, Hermann, MO on Mon, 31st Mar 2014 2:38 pm 

    NOO, diminishing returns are just around the corner so crow all you like. Your crowing days are numbered. It is a retirement party. You being so financial in orientation will you please tell me things are healthy now financially. I am not saying profitable and bullish. I am saying healthy with sound fundamentals and healthy traditional economics. The oil industry is nothing more than a segment in the global economy. If the economy does not have healthy fundamentals and foundation then how does the oil industry transcend this? Boat chastised me the other day for mentioning knife edge profitability of US NatGas. I stand by that statement because an economic correction coupled with a “Red Queen” equals supply pressure not happy profitable growth. So the yawn is on you!

  19. Nony on Mon, 31st Mar 2014 3:10 pm 

    Just read this report and really study it, looking especially at the Haynesville and Marcellus. See the front page and then the breakouts for these two fields, later in report.

    1. First page, look at “new gas” per rig. Both have actually increased slightly in the past year. This is the opposite of a story of downspacing, marginal returns, running out of resource.

    2. Haynesville breakout (page 5): New well production/rig has climbed from 1000 (2008) to 5,000 MCF (late 2013). That’s HUGE.

    Total rigs are down to 50 in the play, from 200 around 2007-2011. Need more gas? Add more rigs.

    Need more rigs? Add more price. Need more price? Add more customers. But that field is not “running out of resource”. The geological assessments show plenty of gas left. And the numbers show rigs can get gas. It’s just not attractive at 4.50.

    3. Marcellus (page 6): New well gas production per rig has increased from below 1000 as recently as 2009 to over 6000 as of 2014. That’s not a story of running out of juice, of sqeezing the drops out of the rag. That’s a story of abundance.

    Rig counts are down from their highest ever of 150, but are staying at ~100 for the last year and a half. This rig count is sufficient to continue the overall growth of Marcellus production.

    What is happening is the gas is trapped on market and the fields (to include Canadian production) are fighting over who should supply the market. Marcellus wells have a combination of very high IP AND relatively cheap cost. So, even with local prices LOWER than Henry Hub, Marcellus is growing. This despite infrastructure issues delivering gas to New England and in some cases gathering it in PA.

  20. Northwest Resident on Mon, 31st Mar 2014 3:27 pm 

    Nony is like an almost totally blind man who is only able to see a really bright shining object held directly in front of his eyes, but nothing else. For Nony, Marcellus is that bright shiny object — he is fascinated by it, obsessed by it and by all appearances, consumed by it. Uncomfortable facts and inconvenient truths swirl around Nony but he can’t see them, or at least, he is unable to assimilate them into a coherent representation of reality. Marcellus is growing. Marcellus has very high IP and cheap cost. Marcellus has low rig count. Marcellus, Marcellus, Marcellus — it is all that Nony can see. But outside of Nony’s field of vision is a torrent of information that is infinitely more relevant and urgent. Marcellus is ultimately a small and insignificant piece of the Big Picture, but to Nony, Marcellus IS the Big Picture.

  21. Mike999 on Mon, 31st Mar 2014 8:13 pm 

    Shock: The Price will Rise to Limit Demand.

    The Market can answer this very easily, and will just bring on more Solar and Wind, esp. in Germany.

  22. Kenz300 on Mon, 31st Mar 2014 9:06 pm 

    Fossil fuels keep getting more expensive and unreliable to obtain………. wind and solar keeps getting cheaper and more wide spread.

    The energy transition tipping point is here – SmartPlanet

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