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Black Sea Energy and Economic Forum 2009
Speakers:
- Katsumi Kuroda, Senior Vice President, Energy Business, Mitsubishi Corporation
- Naske Afezolli, Head of Gas and Power, EGL
- Lucian Stancu, Deputy General Manager, Romgaz
- Aleksander Kovacevic, Senior Visiting Research Fellow, Oxford Institute for Energy Studies
October 1, 2009
KATSUMI KORUDA: Okay. Good afternoon, ladies and gentlemen. My name is Katsumi Kuroda, of Mitsubishi Corporation U.K., based in London. I’m looking after all the energy business in this area. And we are happy to chair the discussion from now. Maybe everybody can introduce?
NASKE AFEZOLLI: Sure. My name is Naske Afezolli. Good evening, everybody. I’m working for EGL Laufenburg. It’s Electricity of Laufenburg. We are a pan-European energy asset-based trader. And we have developed, since the year 2003, also a gas business. And we have also developed a project, and we will speak later about it. Thank you.
ALEKSANDER KOVACEVIC: Well, my name is Aleksander Kovacevic. I wrote a couple of papers for the Institute for Energy Studies. And working as a fellow to the institute – visiting fellow. Also writing mostly on Balkans’ gas, electricity, district heating.
LUCIAN STANCU: And my name is Lucian Stancu. I’m a deputy general manager of Romgaz – it’s the national gas company. We are dealing with exploration, production and gas storage in Romania – mainly in Romania.
MR. KORUDA: Okay, thank you. As we have been asked by the organizer, we’d like to proceed with this conversation in that way. Let me just direct a couple of agenda, or some questions, so that, maybe, we can discuss our first (shot ?). Then we can involve the people – everybody – to participate with questions or comments. And maybe I’d like to start with the geopolitics – or, rather, pipeline gas type of issue, to start with. And I’d like to address a couple of agenda. And then, maybe, down the road, we could enter into the energy-related discussions – the kind of future way forward. Okay?
Let me just read the three issues, just to start with, and also to activate the conversations. All right, number one: How should international energy companies cope with the fact that the Russian national-security policy explicitly cites using gas as a geopolitical tool, or power? That’s number one.
And number two: How can NOC, IOC, as well as the consuming countries, can cooperate with each other, to ensure both supply security and market security?
And the third one is: What is the best way to deliver Central Asian or Caspian gas to consuming countries? And how can those gas sources be monetized?
Of course, you know, we don’t have to discuss one by one. But, maybe, of course, naturally, we could combine all these three points.
MR. AFEZOLLI: So I would like, first of all, to express my thanks to the organizers for inviting me here today, and to be one of the speakers. We will go through some information to you. First of all, I would like to make aware that, as the chairman, the head of the Romanian parliament said today, we are here. And he mentioned the three seas – not the three oceans but the three seas. So we come from Caspian; we have, after Caspian, the Black Sea; and then we have the Adriatic, or Ionian Sea.
So what I would like to say here is that EGL has developed – we are relatively a very small company, comparing with the big national champions, and comparing with other companies here, also in this room. However, we are a new entrant in the gas business. And for the first time we developed our new concept for building a pipeline, which we considered as a niche – a small pipeline which connect – which will bring Caspian and Middle East sources towards Southeast Europe and Italy.
So our concept was based exactly on diversification of the gas supplies for the EU, particularly for the Italian market. And, at the very beginning, we had a fallback project, which was an LNG – in case the top wouldn’t have been constructed. Or in case that we would have faced a lot of resistance from other companies or from suppliers to be the LNG close to Italy. Not exactly in Italy, but to Albania.
And so, among all these geopolitical puzzles, somehow we have been successful to bring onboard the second-biggest gas supplier of Europe, which is StatoilHydro from Norway. So you can see that a small company, fully unknown in the gas business, was able to bring a very strong partner onboard. And we are 50-50 in the so-called Trans Adriatic Pipeline.
At the beginning we had a lot of discussions, a lot of question, and many of the – because of geopolitical difficulties, some countries, and some of the powers, they were asking us: Are you going to bring Russian gas through this pipeline? In case you bring Russian gas, maybe you don’t have a lot of support. So this is the puzzle – let’s say, go to question number one.
But I want to stop now here to leave a little bit other colleagues to speak, and then we can come back again to these ideas. Because we want to be a little bit provocative, and also that you ask us some questions. Thank you.
MR. STANCU: Well, I start from the third question, probably, because you already started with it: how to deliver Caspian gas to market, in short. Basically, it seems that crossing Balkans and crossing Black Sea becomes an issue. And I think that reasoning – you know, bypassing Ukraine, in order to avoid Ukrainian transit problems, actually acquiring transit problems in other countries, that could be even more difficult, and that have already proven to be more difficult than actually crossing Ukraine. So knowing the energy policies of Balkans, I could say that: Yes, crossing a number of countries in Balkans could be quite an exercise – quite difficult, quite difficult problem.
And, also, there is a solution for that problem. And it seems that Gazprom pursued a solution – that, by controlling the energy in a particular country, you can make sure that your pipeline is going through that particular country. I don’t think that solution is sustainable. So if you look at countries like Serbia, Bosnia, Croatia, Macedonia, you’ll find out that, yeah, you can – these are small countries. You can control, to a certain extent, a lot of energy supplied to those countries: oil; gas; electricity, in cases. But is it sufficient to make sure that there will not be political problems around a particular pipeline crossing your country? So there is a question. And I don’t think this is a really sustainable solution to the problem.
What we understood is a sustainable solution is a kind of diverse infrastructure, capable to support the kind of regional energy market – in particular, regional gas market – with some kind of sequential development. And it turns out that during this crisis in January of this year, people actually turned to exactly that approach. They came up with practical solutions: building a short pipeline interconnection here; building a short pipeline interconnection there; enlarging this underground storage; building a relatively small gas terminal here. And people start thinking about sequential development, and about more market-oriented development of the infrastructure. So that seems, to me, the way to go. And if we can engage countries in the region in such kind of cooperqtion with them maybe we can move somewhere.
At this moment, the whole package of energy supply – including, of course, all these risks from supply of Russian gas – is really not sustainable in the region. So that’s the – maybe more sustainable in Romania than elsewhere.
MR. AFEZOLLI: Yeah. Romania maybe has an advantage, because we still have some oil and gas reserves. And talking about reserves, I would like to have another – let’s say, another approach to these geopolitical problem arise, by our chairperson.
Maybe, first of all, we should look at the – because what we want to discuss today, it’s about resources and technologies. And if we look at the resources, the resources are, let’s say, an academic notion. It’s hard to be defined. Everybody can make evaluation. It comes with higher and higher resources.
If you speak about conventional gas resources, there are some figures which show us that we have today about 440 trillion cubic meter of gas in place. But this is only conventional. If we look at unconventional, we’ll see that the figure is much higher. And we can talk about 900 TCM. And if we go farther – because it was mentioned in the morning session, the gas hydrates. The gas-hydrates resources are somewhere between 2,500 and 520,000 trillion cubic meter. These are huge amounts of gas. Of course, as I mentioned, reserve resources are something which it’s not economically viable.
If we come now to reserves, I think that the main asset of an oil company, of a gas company, are the reserves. And the reserves depend on the access; of the price; cost; the regulations. And, probably, the figures which I mentioned regarding the resources will come down. And, for example, for conventional, we can talk about 180 trillion cubic meter of gas, which are available now on the market. And the production up to now represent only 13 percent of these resources, and the reserves. So we produce, up to now, only a small amount of all the gas which is available in the world.
Maybe the first things we should do is to try to increase the actual production – the actual reserves. And the higher potential, I consider that is in unconventional gas. The U.S., as an example, shows us that it’s possible that technology is available. And we can apply, probably, this technology in Europe, and to increase the production, the gas available on the market.
Of course, this extra gas – it’s possible to not cover fully the consumption on the market. But I think that the first step we should take is to try to increase the production – to increase the production, the recovery in conventional fields, and also to try to develop unconventional gas. And when we talk about unconventional gas, we talk about tight gas, shale gas and coal bed methane. All unconventional gas reserve globally are around 900 trillion cubic meters. Out of these, about half is shale gas, it’s considered now. Also, tight gas represents maybe 30 percent of this.
There still is a potential to produce more gas. And the technology – because the oil and gas industry now, it’s, I think, the most technologically advanced industry. The technology is there, and can be used to produce more. And if we come back to what happened last winter – yes, there was small things – small interconnections; small cooperation between the countries – which help us to pass that point.
But, also, the storages has a big importance in passing this kind of crisis. And not only storages developed at the national level, but, probably, we should think about some storages which can be developed across the nation – across the borders – which can be used by many more countries than one. Probably, it’s true – in the EU all the companies have their own policy. Maybe in the EU, all the countries and the companies should try to have a common point of view, to try to optimize the infrastructure; the storage capacity; the interconnection. And I think that it’s a lot of place for better dealing with these kinds of issues.
MR. KORUDA: Thank you very much. As a matter of fact, I was going to talk about the possibility for unconventional gas in Europe. But now, since Mr. Stancu just picked up, maybe you could just talk about that. Because, as everybody knows, availability or emergence of the unconventional gas has totally changed the U.S. market, or North American market. In December last year, at one conference, one of the LNG players said: Up until two years ago, U.S. market needed LNG. But now, LNG needs the U.S. market. But unless, you know, LNG players do not have anywhere else to bring their cargoes in, nobody is bringing in the energy into U.S. market. It is simply because of the not favorable price; because of the unconventional gas.
But then the question always comes, as to whether the same or similar kind of unconventional now gas development can be made here in Europe, from the viewpoint of the size of the land, or scale, and also technology and environmental concerns. And we’ve been hearing that there should be a lot of unconventional gas reserves in Poland, for instance.
MR. AFEZOLLI: Yes.
MR. KORUDA: Do you have any idea on how, you know, unconventional gas could be developed in Europe?
MR. AFEZOLLI: Yes. There is a difference between U.S. and Europe. And the main – I consider that the main difference is the taxation regime for this kind of gas. From what I know in Europe, there are not any incentives for developing this kind of gas. Maybe Hungary? I heard that they prepared something now – because, also, they start to develop tight gas reservoirs. I don’t know in Germany and Poland – because, also, there, there are some basins where tight gas, it’s start to be produced. But, also, it’s a difference between the price of the gas – the price between U.S. and Europe. And these kinds of reserves, unconventional reserves, are very sensitive to the price.
For example, for a price of US$ 6 for a million BTU, that means around $220, 25 per thousand cubic meter, the reserves of unconventional, or tight gas – let’s tight gas – will be around 200 trillion cubic meter. If the price is $6 per million BTU, that means only $2 less for – no. First was 6 –
MR. KORUDA: Four.
MR. AFEZOLLI: Four. The reserves are only 2.8 trillion cubic meter. Almost 10 times more for $2 difference in the price. Now there is a difference between the gas price in U.S. and the gas price in Europe. The difference is quite tight. In U.S., if I am not wrong, it’s 3 point –
MR. KORUDA: Seven?
MR. AFEZOLLI: – eight. Seven –
MR. KORUDA: Yeah, yeah.
MR. AFEZOLLI: – dollar per million BTU. In Europe it’s almost 5 – 5 and something. There is a difference. Also, the technology – I think that it’s cheaper in U.S. than in Europe. Probably, mainly, because, mainly, this technology was developed there – after the ‘80s, when the state tried to encourage the domestic production of gas. And when the small independents start to develop the first coal bed methane, and after that tight gas, there are almost 30 years in which the technology was improved continuously. And I don’t know. From our experience – at least in Romania – the technology is available. It’s not a problem to reach that technology, but it’s more expensive than in the U.S.
Probably it is – I consider that the tight gas, the unconventional coal bed methane and shale gas has a potential in Europe. And more and more U.S. companies start to try to start projects in Europe.
MR. KORUDA: I see.
MR. KOVACEVIC: I have one question to this. The U.S. gas market is much more transparent – more open. It existed as market.
MR. AFEZOLLI: Yeah.
MR. KOVACEVIC: In Europe I would say there is no gas market because our only gas – excuse me, Gazprom formalized. So that’s why decoupling of price formula that Gazprom is imposing all over Europe doesn’t allow to decouple the price of the gas from the price of the oil. However, if you see the big difference of the barrel price in the U.S., the price, for sure, should have been also in the U.S. maybe $6 per million BTU right now. So we see a big difference. That’s why this proves that in a real market, which is not controlled from a monopolistic suppliers, you have possibilities. And you are decoupling – you are creating exactly another market. And that’s what Europe should look for.
And one of the things that we shouldn’t forget, what happened during the Ukrainian crisis. It was just not only because nobody had time to create some new interconnection. No, it was the reverse flow. It was the fantastic work done from Bulgarians and the Greeks, from Revythoussa. So it was in LNG – big contribution for LNG; was a contribution, for sure, of gas storages. But the secret – that Bulgaria, for a couple of days, was able, at least, to cover a lot of the shortage, was exactly coming from Revythoussa. And another possibility was also some gas flow from Turkey.
So you see the taboo – the taboo, which was in many countries that we have seen, was the taboo that there is only one direction. Is the final destination close? These taboo, during those days of the crisis, were somehow broken. And these gave the idea that now there are a lot of studies. Also, Eurogas is involved. And there are a lot of ideas that every project should be foreseen, also, for reverse flow. This is the secret.
MR. KORUDA: Yeah. In that respect, let me give you a good example –
MR. KOVACEVIC: Yes.
MR. KORUDA: – of a new concept being studied in Japan and Korea. As you know, in Japan and Korea, we are 100-percent relying on LNG – basically, oil-linked. And now there are some, you know, new concepts being studied in Japan and Korea. Whereby the Japanese or Korean player will develop the upstream shale or tight gas in Northwest Canada, and will pick up somewhere to liquefy it. And it is not simply because currently U.S. or North American price is lower, but simply – and, also, but, because that we could have some of the new pricing formula. Not, you know, just bound by JCC or oil-linked.
And, of course, the other part of the beauty that this kind of shale or tight-gas development, depending on the price, you could also deliver the gas down to the lower 48 type of things. So therefore, by the same token, this is one of the good examples that LNG – especially with the new price infrastructure – might play a relatively bigger role.
MR. KOVACEVIC: And there is another issue that I wanted to emphasize in this room, is that we have seven countries, contracting parties, that we should not neglect. Which are the so-called “Balkans,” but now we call Southeast European Community. And European Union and United States are supporting very much this so-called energy community. Members of energy community are Serbia; Albania; UNMIK, Kosovo, EULEX, whatever you want to call it; is Croatia; Macedonia; is also –
MR. : Albania?
MR. KOVACEVIC: Albania, yes.
MR. : And Montenegro.
MR. KOVACEVIC: And Montenegro. Seven countries. So all these countries – also, Serbia was facing the – was also a victim of the Ukrainian crisis. Serbia was supported with deliveries from Hungary. But these other countries – Montenegro, Albania – they have no gas at all. So we have to look – we have two NATO allies, which are Croatia and Albania – and, in the future, we’ll have also Serbia, for sure, in the foreseen future. And all this group of countries, they are going to become also a member of the EU.
So looking at those countries, and looking at – let’s say, when we mentioned exactly – because we are discussing here not to go far from the topic. We are discussing: How can we avoid to be under control of only one supplier?
So we have the options. For example, our project, Trans Adriatic Pipeline, gives the options to bring diversification of gas. And one of the issues that I don’t see very much in the cooperation between the EU and Russia are possibilities of swapping.
For example, from the interconnecter from Isakcha, which passes Romania, the potential is 31 BCM, if I’m not wrong, to bring south – north-south. So Nabucco is another project which brings another 31 BCM up north. As a matter of fact, (algebraically ?), what we are building – we are building another pipeline, and we are making the balance zero. Anyway, it’s not exactly – just to provoke a little bit discussion.
So also, swapping. In Europe we have to look, also, for swapping – because swapping, we release a lot of capacity. But swapping is also related with reverse flow.
MR. STANCU: That could happen between Croatia and Italy during a crisis.
MR. KOVACEVIC: Exactly. But these are issues that, for sure – so this means that in Europe we are still – we have only spot market of gas, only in Central Europe, in West Europe, and in U.K. But not yet in this part of the world. That’s what I wanted to also emphasize. Thank you.
MR. KORUDA: Yeah, thank you. And, also, if we can just summarize. Let’s say Russian gas policy.
MR. KOVACEVIC: Yes.
MR. KORUDA: I could summarize into four points. Number one, bypass policy – like North Stream, South Stream. Number two – try to source, aggressively, Central Asian gas. Number three – market security, both for pipeline and energy. And number four – to try to, how to replenish, or replace, the decreasing West Siberian gas, right, and new sources.
And last week Mr. Putin invited the CEO of 12, let’s say, gas players – and Mitsubishi was one of them. Then he emphasized they were developing Yamal. But then, well, Shtokman; well, Sakhalin III: What about the Yamal? And, I think, still, Russia has a big issue as to how to develop the new sources – from the viewpoint of finance, technology, and also whether – how they can, you know, incentivize the international gas players.
MR. STANCU: Sorry. But these four policies are coming with a great cost.
MR. KORUDA: Yes, that’s true.
MR. STANCU: And some – which means that consumers have to agree to bear that cost.
MR. KORUDA: That’s exactly right.
MR. STANCU: And, eventually, consumers could have another options.
MR. KORUDA: Yes.
MR. STANCU: I’m just guessing – they could have another options.
MR. KORUDA: That’s true, that’s true.
MR. AFEZOLLI: I think that we should not forget that if the 6 percent of the world gas reserves are only in three countries: it’s Russia, with 30 percent; Iran and Qatar, both with 30 percent. We can talk a lot about the infrastructure, terminals and so on, but the reserves are there. And the next or more potential – I mentioned the hydrates – it’s in the Arctic, or in the deep ocean. It’s very far from the consumer. So in a way, or in another way, the consumers are captive to only a few supplies.
MR. STANCU: In the distant future.
MR. AFEZOLLI: The distant future, and even today. Because today we talk about Russia, and about their price policies in Europe. But –
MR. KOVACEVIC: But that’s why, when we see the balance of projects that we have – we have a Nabucco White Stream; we have ITGI; we have TAP, trans-Atlantic pipeline. So these are the main projects. And, for sure, we have North Stream, which we are not mentioning here. But, at least, in the context of Southern Corridor, we have four projects. And, definitely, we know that Shah-Deniz phase 2 is going to be in operation. It’s postponed a little bit, and the capacity of Shah-Deniz phase 2, it’s maybe 13 BCM? And out of it, 7 BCM will remain in Turkey, up to 8. So Shah-Deniz phase 2 can bring maximum 5 BCM for all these projects.
Turkmenistan is still far away from the other pipelines there. So at the end of the day, I would say there are some niche. We have to move to at least not to be under – also, not only under the monopoly of one supplier, but the high risk is to be under monopoly of only one, also, not only producer, but only one transmitter. Which is also very dangerous. So we have to avoid – and European Union should negotiate in a fair way, and not just keep always sort of – I wouldn’t like to say it, but only slogans, you know? They are not complementary. We have to be very clear – there is no complementary in Nabucco and South Stream. Europe should be very precise – should say the truth.
MR. KORUDA: But does this mean that each pipeline owners will have to bear some of the idle capacity?
MR. STANCU: Well, it’s four or five – you forgot the White Stream and so on.
MR. KOVACEVIC: But I didn’t want – anyway, White Stream – for sure, White Stream might be also possible.
MR. STANCU: It doesn’t matter.
MR. KOVACEVIC: Yeah.
MR. STANCU: Four or five pipeline projects, and 13 countries who desire to receive transit – permits.
MR. KOVACEVIC: Yeah, true.
MR. STANCU: So you see, you have a conflict here. You have companies looking to avoid transit fees; countries looking to earn transit fees.
MR. KOVACEVIC: True.
MR. STANCU: Okay? You have a conflict.
MR. KOVACEVIC: True.
MR. STANCU: And you have another desire, to have a kind of gas market – which will bring a kind of, let’s say, security to everybody and resolve the pricing issues. So all this is in conflict. We are not speaking about solution yet.
MR. KOVACEVIC: True. But the EU representative said today that we, EU, is supporting: Let market forces to decide. And which –
MR. STANCU: To decide upon what?
MR. KOVACEVIC: About which project will run the new pipeline.
MR. AFEZOLLI: I think that the first which will be built will be the most economical and most feasible project.
MR. STANCU: No, just first.
MR. AFEZOLLI: Just first, yes. The first one will be most important.
MR. STANCU: And that first will –
MR. KOVACEVIC: Will be –
MR. AFEZOLLI: I don’t know. (Laughter.)
MR. STANCU: That first will be based on the long-term contracts –
MR. KOVACEVIC: True.
MR. STANCU: – indexed to something.
MR. KOVACEVIC: True. Yeah, for sure – it should be indexed to something.
MR. STANCU: Well, and that first – whatever it is, it doesn’t matter. That first will bring to Europe, let’s say, 30 BCM, for example.
MR. KOVACEVIC: The first could be also 10. Let’s start.
MR. STANCU: Or 10.
MR. AFEZOLLI: Ten.
MR. KOVACEVIC: Let’s start.
MR. STANCU: Which is not going to be enough to increase, significantly, security of supply in Europe.
MR. KOVACEVIC: Sure.
MR. STANCU: But quite enough to cause a price spike, in the case of problem –
MR. KOVACEVIC: Absolutely.
MR. STANCU: – on the entire European market.
MR. KOVACEVIC: True. And another thing is that each project should be evaluated from the economics – the one which brings the lowest transit cost. But, also, should be evaluated from how much storage has in the value chain of the project. And to which country is bringing gas – to which country is diversifying gas. And –
MR. STANCU: Sorry to interrupt. But what is how you are pricing transit risk today? What is the price of transit risk attached to, for example, transit through Ukraine? Or through Byelorussia?
MR. KOVACEVIC: I wouldn’t insist so much to the transit risk by Ukraine and Byelorussia, because we are not –
MR. STANCU: It doesn’t matter. To any transit risk in this case.
MR. KOVACEVIC: But all four projects we are discussing, including South Stream, I don’t see any real transit risk – because all the countries we are passing are either members of the EU – I’m speaking not for Turkey, but I’m speaking for the others – or member of NATO. So we are facing NATO and EU members, in all transit countries – at least, either/or. And this is a certain security that we have Anatolized there, and we have EU also partnership.
This means that the only – that’s why I say transit the Arctic pipeline goes from Greece, Albania to Italy. Albania and Croatia are members of NATO. Croatia also is very much interested to create the so-called “Adriatic Ring.” And Adriatic Ring would also increase the security of supply, because then we can have also gas from North Africa coming also to Southeast Europe.
I think really looking at big projects – and I’m not against. We say that projects are complementary – Europe needs all. But EU should decide, as soon as possible, at least to start with one of them. And, as the other gentleman said there, a small – even 5 BCMU new pipeline will bring a difference, exactly because we’ll avoid this crisis.
MR. KORUDA: Okay –
MR. KOVACEVIC: We’ll leave some question, maybe.
MR. KORUDA: Yeah. And, also, maybe can we invite some questions? And, maybe, also, we should touch a little bit about energy, as well.
MR. KOVACEVIC: Yes.
MR. KORUDA: Yeah, please.
QUESTION: About LNG. My name is Diana Demutreskos from Orlay Parsons . We have discussed – and somebody mentioned, I think – Mr. Tudor Sharbana , about a big project in Romania. We intend to build an LNG. And I think two feasibility studies have done already. Can you tell us more about this? I think Mr. Stancu is more involved in this, because Romgaz is playing in this area. We have discussed about Poland and Hungary, but what about Romania? Thank you.
MR. AFEZOLLI: About Romania and LNG, Romgaz is involved now in elaborating a feasibility study. The study is not ready yet. It’s only at the first step, let’s say, of develop this feasibility study. This study will tell us about the optimum capacity and the feasibility of such a project.
We should take into consideration that in Romania the price of the gas, it’s quite low. Domestic price is quite low, related to the price in EU. Some of you are not agree. But I told you that in Romania the domestic gas price, it’s around $140 per thousand cubic meter. That means $4 per million BTU. And in Europe we talk about 5, 5.5 –
MR. KOVACEVIC: Is this basket price, or is –
MR. AFEZOLLI: No. I talk about domestic –
MR. KOVACEVIC: Mixed, mixed?
MR. AFEZOLLI: No, domestic –
MR. KOVACEVIC: Ah, domestic – okay.
MR. AFEZOLLI: Domestic –
QUESTION: Consumer price?
MR. AFEZOLLI: Consumer price, it’s another issue.
MR. KOVACEVIC: Okay.
MR. AFEZOLLI: I mention now only the producer price, because we are a producer, and these are the money which we get. And with this money, we should develop new project; we should develop new reserves. And this is what we have in the pocket.
MR. KORUDA: Yeah, that’s a very important issue. Let me just touch about the new trend of LNG. First of all, in the conventional LNG business model, almost entire volume has to be contracted on the take-or-pay basis. And that is how, you know, project finance is mobilized. So you know, that’s what we have been doing in Japan and Korea.
But, nowadays, we have seen some new projects, let’s say, half of which is state project financed. But half of that is, let’s say, corporate-financed by the equity holders. And then the kind of new project have been able to offer the flexible energy supplies. But, still, to be perfectly honest with you, the price of $4 per BTU might not be good enough to attract the suppliers.
And, also, once you have the receiving terminal of LNG, you’ll be exposed to the bigger risk for the idle capacity than the case of pipelines. So therefore, we at Mitsubishi are relatively big energy player, and in that respect we have been – always wondering as to whether the Black Sea receiving terminals will have a fairly good chance in terms of the stability of receiving cargoes, and also cost-related.
Q: I just want to, perhaps, challenge a few things. One of the questions here is about the assumption that we’re going to remain in any way substantially unliberalized. And I think one of the effects here – which, I think, is being significantly underplayed – is the prospect of very substantial energy-market liberalization. I know you talk about it happening in the U.K. – and, okay, Britain is a liberalized gas market. But what’s going to happen, I think, now is, it’s not just a third energy package, which will help liberalize the European gas market.
I think what often is underestimated, by most of the European energy specialists, and people in the energy industry, is the effect of DG Competition – this is the competition unit of the European Commission – forcing open markets; forcing ownership and bundling and liberalization, by the threat of antitrust competition prosecution. And you’ve already seen Aeon or AWE breaking open their electricity and gas markets, on the threat of antitrust settlement. And the commission have got lots of information about this now, and they’re prosecuting about 20 companies at the moment. There is more on the way.
I was talking to one official in DG Competition, and he said: Frankly, Alan, we have so much evidence of illegal behavior, we could spend the rest of the 21st century prosecuting energy companies.
Now, the point about this is that, you know, if DG Competition has not come knocking at your door as yet, they will be shortly. And the point of all of this is that that, I think, will force liberalization. Almost the third package is almost – it’s the icing on the cake; it’s the little legislative trimmings. The substance – the reason why it’s going to happen – is, I think, substantially because of the competition prosecutions.
And what I would say about this is that that leads to my second point, which is that that will change the dynamic, in terms of the gas problem in any way being able to dominate the market. Because it will allow new supplies to come in.
And one of the particular points about this is that you have this kind of flood of LNG, which will certainly help, and that’s been reinforced by the unconventional gas revolution in the States. Because whether or not there’s unconventional gas in Europe, the point is, is that all the gas which was going to go to the United States from the Atlantic Basin is now going to come here. Europe is, pretty much, its only other market.
So we have alternative supplies. And to the extent there is unconventional gas, they will be able to use new liberalization rules to provide an alternative source of supply. My suspicion is that that will, across the whole of Europe, put significant pressure on the gas problem. So I am kind of challenging you all on that. Thank you.
Q: It’s a slightly linked question, in a way, in the sense that we’ve talked a little bit about U.S. LNG import needs being quite dramatically lower over the next, say, five to 10 years, than previously projected. But you also have projects, also. You know, there’s Barents Sea, or, potentially even Yamal projects – LNG projects that were conceived, amongst other things, as a way to export to the U.S. market.
And I was wondering if you could comment – and, perhaps, this is more a question to Mr. Chairman – on, in a sense, the viability, or the strategic rationale, of Russia’s LNG ambitions.
MR. KORUDA: You said Russian?
Q: Yeah, for Shtokman or Yamal because LNG was mentioned also.
MR. KORUDA: Can I just reply to the second question. I think, first of all, we should pick up some certain time frame – let’s say 2015 or 2002. And in our opinion, being an LNG player, we still believe, or strongly opine, that the energy market may tend to be a little tighter than it is now sometime around 2015, because of a couple reasons. One is the sharp decline of the European indigenous supplies, like you can all see, and also either delay, or cancellation, of the new FID’s. Especially in the Atlantic Basin. I’m talking of the LNG’s, like new Nigerian projects; some of the additional LNG trends in Egypt. It is partly because of their inclination to supply more gas to domestic, and also some uncertainty – or, you know, confusion – in those countries.
But then we have two wild cards – one is Qatar. Whether Qatar will still be inclined to keep delivering their gas to their original destinations, or they keep trying to pick up anybody new – like they did for Poland or China.
And the second, you know, wild card is Russia. But this is my personal opinion, that it is quite unlikely that Russia will have new energy in the time frame of 2015. So when it comes to 2020, I don’t know.
But as far as we are talking about the time frame of 2015 to 20, there is no LNG from Russia, probably, and the wild card is Qatar. And then what kind of new supplies will come up from Atlantic Basin? Especially from Africa. So with all of these, we will believe the energy market will be relatively tight in that time frame.
MR. STANCU: In response to the first question, we are aware of the competition. And in Energy Community Treaty, probably the main provisions are actually applying the EU competition law to energy field in Balkans. I just returned Friday from a discussion in Bosnia between all local power-plant managers. Nobody of them realized that there is competition at all. So practically Energy Community Treaty is already there, for a number of years.
But going to bottom line of the industry, people who are actually generating and selling energy, they still don’t feel it. So the only occasion was this January, during the crisis. So that’s one direction. Yes, there is understanding now, that, yes, there is provision. But until application starts, it’s not going to happen. People are still not realizing how far that could go, if this provision is really applied.
On the other side, I see this as, you know, decreasing barriers to entry: LNG development; competition arrangements; et cetera. So if you look position of these three seas – you know, Adriatic, and Ionian – this is a place where the Russian pipeline gas approaches the closest potential competition against LNG. LNG is close, and pipeline is close.
MR. KOVACEVIC: You mean South Stream.
MR. STANCU: I mean if you look at Croatia, for example.
MR. KOVACEVIC: Yes.
MR. STANCU: Croatians – right between. They have Russian pipeline gas a couple of kilometers from Zagreb – in Hungary or in Slovenia, in Austria. They also have LNG a couple of kilometers from their shores.
MR. KOVACEVIC: True.
MR. STANCU: So if Croatia pursued the market-oriented way, that’s the place where, you know, Russian-pipeline gas meets LNG. And that’s, you know, quite with the lowest cost on both sides.
MR. KOVACEVIC: However, Croatia also is looking for diversification. And Croatia has also a small contract with Sonitrak . They receive, through Italy, a reverse flow.
MR. STANCU: Exactly.
MR. KOVACEVIC: Which might be swapping – it’s not really real.
MR. STANCU: That’s a swap of their local production.
MR. KOVACEVIC: But, again, at least Croatia is trying very much – and also in the last meeting of Lublijanov we had a meeting of Energy Community of this, of all seven countries. Croatia is also very much trying to also create this Adriatic pipeline, to extend from Croatia up to Albania. And the problem is that we are speaking for an Energy Community gathering. And EU is speaking in theory, but there is not real tangible support.
So the question is, definitely the policy of pipelines – the policy of gas, of LNG – cannot be left in an orphanage. It should be taken care of. And the question is: Where is the support of the EU for those seven countries which are suffering mostly during the crisis, including Bulgaria? And many of those countries don’t have still gas.
So in case they remain under the dependence of Russian gas, at the end of the day, yeah, that’s another issue – that LNG suppliers should also take a look and think what can be the best, the cost versus the price, that they can be active, and they can invest – maybe in LNG in Croatia.
MR. STANCU: Just to underline my point. Next year negotiation between Croatia and Gazprom, about new, longer-term gas contract.
MR. KOVACEVIC: Will be referred to them.
MR. STANCU: Will be completely different than negotiations a couple of years ago.
MR. KOVACEVIC: Okay, that’s good.
MR. STANCU: So you know, LNG is there.
MR. KOVACEVIC: Okay.
MR. STANCU: Trade with Italy is there.
MR. KOVACEVIC: True.
MR. STANCU: A couple of opportunities, like new LNG terminals; Adriatic pipeline.
MR. KOVACEVIC: Yeah, exactly.
MR. STANCU: Balkan Gas Ring – whatever. A couple of opportunities are there. And, actually, access to Russian gas in Hungary is also there.
MR. KOVACEVIC: True. But there is not yet money to finance it – that’s the problem.
MR. STANCU: Yeah, okay, okay. But it’s –
MR. KOVACEVIC: LNG.
MR. STANCU: Gas through Italy actually arrived to Croatia during the crisis.
MR. KOVACEVIC: Yeah, true – that’s true.
MR. STANCU: So it’s – the negotiating position today is entirely different than it used to be.
MR. KOVACEVIC: Ah, yeah.
MR. KORUDA: And just from the LNG perspective, the EU competition law – EU deregulation – concerns us a little bit.
Q: Price-cutting mechanisms – yes.
MR. KORUDA: Yeah. And especially, you know, for those who try to do arbitrage business.
Q: I told you they are talking nonsense.
MR. KORUDA: Because what we like to do – the commercial player – is to try to have the even small-scaled equity volume of LNG, with the supply flexibility. Because once, you know, we have a big earthquake again in Japan, we do need more LNG.
Q: The regulators don’t understand – DG Competition regulators don’t understand that this is the problem.
MR. KORUDA: Yeah, that’s right. That’s the problem. Because, in that case, you know, basically, default destination, under this market condition, is Europe. And we might want to team up some European utility who can offer the flexibility or liquidity. But then it, you know, restricts us very much for us to do arbitrage business within Europe.
Yeah, please.
Q: Sorry. I’m every time fascinating about the discussion of the politicians, economists and financial people about energy. I’m a simple geologist, and I work – I’m a former petro consultant in Geneva. And I’m the founder of the International Oil and Gas Field Records – if that’s been something.
Finally, I believe that before to discuss anything about transportation, economics and others, first we can establish: Where are the reserves? The reserves are to be exploited – to be produced. And, unfortunately, dear colleagues, I want to inform you – but I’m sure that you know – that if we want or not, the main resources for the future supply of Europe are almost exclusively situated in Russia.
I don’t want to make any lobby for the South Stream or for the Nabucco. Nabucco is a dream – it’s a very nice dream. I know that a lot of people speak about the Caspian resources, and I’m one of the specialists of the Caspian region. I worked years and years in the Caspian: in Azerbaijan; in Kazakhstan; in Turkmenistan. The Caspian is an oil-prone area. The only major gas discovery Shah-Deniz in 2001, which very small P&P – proven and probable reserves.
Central Asia. Central Asia owes, like Romania, owes a very gas-prone area, and a major producer in the former USSR, but is a mature explored area. We can nothing expect from Central Asia. And the last major field, it’s now in the final stage of production, is Soviet Abat former – no, former Soviet Abat, now Dowlet Abatdonez .
The only, the only possible giant, supergiant, gas field in the area is South Pass in Iran. But due to the political situation, I don’t believe that South Pass will be developed in the near future. Don’t speak about that nobody can say: What are exactly the reserves of such fields? Because they are estimated at about 500 trillion cubic feet. This compared with Rangold , for example, with 341; or with Zhanazhol (?), which is 221 trillion cubic feet. Or with other fields in the area which have never been developed, like Bovanenkovo; like Russkinskoye; and others in the area.
And I want, and I – certainly as a European and as a Romanian – I want that Nabucco can be reliable. But I don’t believe in the near – it’s a dream, in my opinion. And, secondly, I am sure that one of the first priorities in the near future must be developing and research for unconventional gas resources. And there are a lot of other possibilities for developing such new resources in the near future. My name is Fyodor Rajavian. I’m from Bucharest.
MR. KORUDA: Thank you very much. And last question?
Q: I have a Japan-related question – Julia Non , APFC Energy. You have a new prime minister in Japan, and so this kind of takes me to your area of the world. And he’s very, I guess, friendly towards Russia – he has an experience with Russia. How does that impact, potentially, Mitsubishi, and your relationships with Russia? And maybe Sakhalin? And I know this takes us to another region, but I know there’s a lot of potentially more gas in Sakhalin. And does Japan see this as an opportunity now, potentially, to do more business with the Russians?
MR. KORUDA: Yeah, thank you. First of all, I don’t think Sakhalin development possibility will have something to do with our new government. Yeah, our new prime minister has pleased everybody involved, having committed 25 percent reduction. But I’m not really sure, personally, as to whether we can do that or not. But he puts condition, that all other countries do the same manner.
Anyway, getting back to the Sakhalin possibility. I think Gazprom has been studying that positively. And the existing partner – Shell, Mitsui and Mitsubishi – are also trying to study. But, to be honest, you know, we do not know, yet, as to how soon, and to what extent, a new development can be achieved.
Okay. I think we are just, you know, about to wrap up. And thank you very much for the participation. And I think we discussed, mainly, what the Russian thoughts are; what the Russian possibilities are. And then we’ve discussed the logistic options. And especially in terms of the swap, or reverse flow, and how LNG could contribute. And then we touched about the unconventional gas development possibility in Europe.
I think, of course, you know, due to this limited time, we cannot, you know, exploit the exact detail or clear direction. But I think it is at least a worthwhile and good opportunity for us to sit and discuss this. And I’d like to, again, thank you much for your participation. (Applause.)
Transcript by Federal News Service, Washington, D.C.
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