Feature Report: The Geopolitics of Oil and Gas

4 items of content in this feature report

Op-ed articles

Europe-Russia: The Geopolitics of Natural Gas

Marie-Claire Aoun
Marie-Claire AounMarie-Claire Aoun, Director of the Energy Center at Institut Français des Relations Internationales (IFRI)

"Natural Gas: Europe and Russia's Difficult but Unavoidable Relationship"

The Ukrainian crises and changing business conditions in the natural gas markets have taken their toll on the strategic partnership that Europe and Russia laid out in the early 2000s. The European Union is looking to increase its energy security while Moscow continues to search for new outlets. Marie-Claire Aoun, Director of the Energy Center at Institut Français des Relations Internationales (IFRI), a leading French think tank on international issues, talked with Planète Énergies about the challenges created by this interdependence, which remains a key factor in Europe’s energy balanceThe energy balance of an operation or process is the ratio between the energy available at the end of the operation and... .

A High Degree of Interdependence

Europe is heavily dependent on other regions to supply it with fossil fuels. Just as coalCoal is ranked by its degree of transformation or maturity, increasing in carbon content from... output declined in the 20th century, the gradual depletionIn the oil industry, depletion corresponds to the gradual decline in production from an oil or gas well... of the North Sea fields has reduced European production of oil and gas since the beginning of the 2000s. The prospects for developing unconventional oilOil that cannot be extracted using current technology or that entails additional technology or costs to produce... and gas resources, such as shale gasShale gas is found in deeply buried clayey sedimentary rock that is both the source rock and the reservoir for the gas... , are uncertain and will not reverse this trend.

Although global coal and oil markets make it possible to diversify suppliers, dependence on gas is more problematic. Supply still depends on land-based gas pipelines, which are costly and take a long time to build, making it necessary to look for nearby suppliers. To be sure, Western Europe is equipped with liquefied natural gas (LNG)LNG is composed almost entirely of methane. Liquefying the gas reduces its initial volume by a factor of around 600... terminals, enabling it to receive LNG from all around the planet, but LNG is expensive to produce and in recent years carriers have preferred to head for Asia where gas fetches higher prices.

In these circumstances, Russia, the world’s second largest producer of natural gas, remains Europe’s unavoidable partner: 30-35% of European gas comes from Russia, while liquefied gas only accounts for 10%.

Conversely, and due to the same transportation constraints, Russian gas is highly dependent on the European market. Fully 70% of Russian exports go west. Maintaining sales is essential to balancing Russia’s budget, even though the share of gas revenues is significantly smaller than that of oil revenues.

The two great regions of the European continent are therefore clearly linked by energy interdependence. This reality led them to move towards a mutually beneficial strategic partnership in the early 2000s.

A Series of Crises

But several factors have taken their toll on this relationship, starting with the Ukrainian crises of 2006, 2009 and 2014. In contrast to 2009, the 2014 crisis did not disrupt gas deliveries to Europe, as Europe was better prepared for the risks. The construction of the North Stream gas pipelinePipeline used to transport gas over a long distance, either on land or on the seabed. , running under the Baltic Sea to Germany, has reduced the proportion of gas passing through Ukraine from 80% to 50%. Even so, there is always the fear that the gas will stop flowing.

The second source of tension stems from Europe’s drive to deregulate its energy markets. The integration of gas markets and the promotion of competition among different sources of supply have led to the emergence of a spot price for gas. Over the last few years, this price has generally been lower than the price set through long-term (20- or 25-year) contracts between Russia’s Gazprom and the major European incumbent operators. Gazprom has had to renegotiate certain prices downward, much to Moscow’s irritation.

Europe’s Search for Energy Security, Russia’s Quest for New Outlets

These factors have led Europe and Russia to revisit the strategic partnership laid out at the beginning of the century.

In May 2014, the E.U. announced a new strategy for energy security based on enhancing mutual support among its member countries and continuing to improve overall energy efficiencyIn economic terms, energy efficiency refers to the efforts made to reduce the energy consumption of a system... . The new strategy was unintentionally aided by market stagnation, with the result that European gas demand in 2013 was at the same level as 2001. Today, Europe is counting on the Energy Union to strengthen its political hand in relations with outside suppliers.

Faced with a European partner that has imposed the rules of the free market and is no longer growing strongly, Russia is searching for new outlets. This has driven it to look to Asia, particularly China, with which it signed a delivery contract in May 2014 that will require the construction of a gas pipeline known as “PowerIn physics, power is the amount of energy supplied by a system per unit time. In simpler terms, power can be viewed as energy output... of Siberia”. Turkey is another potential sales partner, offering a rapidly expanding market and an alternative to the South Stream pipeline, which Vladimir Putin cancelled, citing the legal constraints on its development imposed by the E.U.

But in the context of Western sanctions against Russia and declining oil prices, financing might well prove to be a major obstacle to implementing this new strategy. 

After obtaining a doctoral degree in economics from Université Paris Dauphine, Marie-Claire Aoun began her career in 2004 at the University’s Center of Geopolitics of Energy and Raw Materials (CGEMP). As an economist on France’s Energy Regulatory Commission, she contributed to work on integrating Europe’s gas markets. Ms. Aoun is also on the faculty of Université Paris-Dauphine’s “Energy-Finance-Carbon” Master’s Program.  

Didier Houssin
Didier HoussinCEO of IFP Energies Nouvelles (IFPEN)

"Since mid-2014, the price of oil has dropped again, falling by as much as 50%"

U.S. Shale OilRefers to liquid hydrocarbons extracted from oil shale (see definition) by heating, pyrolysis or hydrogenation. and Gas, a Revolution full of Surprises

The shale gasShale gas is found in deeply buried clayey sedimentary rock that is both the source rock and the reservoir for the gas... revolution in the United States — it's not too strong of a word given the scope of the transformation — began in 2008 against a backdrop of historically high oil and gas prices ($100 per barrelUnit of volume measurement for crude oil that is equivalent to approximately 159 liters (0.159 cubic meters)... on average and an all-time high of $150). 

The spike in oil prices sparked the boom by allowing producers to reap huge profits. This occurred in tandem with the emergence of new technologies, such as hydraulic fracturingMethod of enhancing the productivity of oil or gas reservoirs with low permeability... and horizontal drillingA type of directional drilling across a formation, at a 90-degree angle... . These technological advances were the first surprises to topple expected scenarios. They were the result of ambitious research programs steadily pursued by American companies and scientists, not only in the oil industry but in many other sectors as well, including new energies.

U.S. oil and gas production, which had been trending downward, suddenly experienced a remarkable rebound. The country reduced its dependence on foreign oil by 50%. As a result of the shale boom, U.S. natural gas prices started to collapse in 2009. In the powerIn physics, power is the amount of energy supplied by a system per unit time. In simpler terms, power can be viewed as energy output... generation sector, a shift began from coalCoal is ranked by its degree of transformation or maturity, increasing in carbon content from... to gas-fired stations. Natural gas-intensive industries, such as refining, chemicals and petrochemicals, all benefited from the low prices. The boom has given the United States a major competitive advantage over Europe and Japan by boosting economic and jobs growth.

Switching from coal to gas and implementing energy policies aimed at reducing fuelFuel is any solid, liquid or gaseous substance or material that can be combined with an oxidant... consumption. The United States, which did not ratify of the Kyoto ProtocolInternational agreement linked to the United Nations Framework Convention on Climate Change... , has lowered its emissions by 8% in ten years.

From Gas to Shale Oil

When natural gas prices fell, everyone thought that shale gas was in danger because it was no longer profitable. But surprise! Production continued. That's because at the same time, from 2011 to 2014, crude prices were permanently stuck in the $100-plus range. Once again, technology played a major role. New techniques made it possible to also extract liquids from the gases — i.e. shale oil — and upgrade them. The price difference between oil and gas was enough to justify continuing shale development.

Since mid-2014, the price of oil has dropped again, falling by as much as 50%. The decision by the Organization of the Petroleum Exporting Countries (OPECCreated in 1960, OPEC currently has 12 members: Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia... ) to maintain production levels and no longer bolster prices is designed to force other world producers, including shale oil and gas operators, to reduce their output. But again things aren't going as planned. The drillingThe process of boring a hole into the ground using special equipment... of new wells in the United States has declined significantly and investment has plummeted, but production is holding steady. That's because drilling techniques are faster and more efficient and fracking methods have improved. With oil prices at a low, producers are tightening the screws by squeezing the margins of oil-service companies. In short, production costs are declining. At $60 per barrel, shale oil production remains extremely resilient. OPEC's gamble hasn't paid off entirely.

Due to their limited reserves and high production costs, fossil fuels are widely considered to be outdated, but technological advances offer these sources a high degree of flexibility. The most important issue is, of course, reconciling fossil fuel development and climate change mitigation. The United States' long-term policy objective is to achieve that goal, while also developing nuclear and renewable energyEnergy sources that are naturally replenished so quickly that they can be considered inexhaustible on a human time scale... within the framework of international climate negotiations.

A graduate of Ecole Nationale d'Administration (1983), Didier Houssin held various positions at the French Ministry of Industry prior to being appointed Managing Director of the French Geological Survey (BRGM). After serving as Director of Energy Markets and Security at the International Energy Agency (IEA)An independent, intergovernmental organization founded within the framework of the OECD... from 2007 to 2012, he was asked to oversee the development of the agency's low-carbon technologies and energy transition policy.   

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