Ref. Ares(2018)2178116 - 24/04/2018 Final Report Options for Gas Supply Diversification for the EU and Germany in the next Two Decades Cologne and London, October 2016 www.ewi.research-scenarios.de www.eucers.eu ewi Energy Research & Scenarios gGmbH European Centre for Energy and Resource (ewi ER&S) Security (EUCERS) Alte Wagenfabrik Department of War Studies Vogelsanger Straße 321a King's College London 50827 Cologne London WC2R 2LS Germany United Kingdom Tel.: +49 (0)221 277 29-100 Tel.: +44 (0)20 7848 1912 Fax: +49 (0)221 277 29-400 www.ewi.research-scenarios.de www.eucers.eu ewi Energy Research & Scenarios (ewi ER&S) is a non-profit organisation that is dedicated to applied research and conducts consulting projects for industry, politics and associations. Scientific services are financed through proceeds from research projects, analyses and reports for private and public clients as well as through contributions from a Society of Benefactors, currently consisting of more than forty members including energy suppliers, industries, banks, consulting firms and organisations. Sponsors and their contributions do not interfere with the scientific work or advisory activities of ewi ER&S. The European Centre for Energy and Resource Security (EUCERS) promotes an understanding of how our use of energy and resources affects International Relations, since energy security is not just a matter of economics, supply and technological change. In an era of globalization energy security is more than ever dependent on political conditions and strategies. Economic competition over energy resources, raw materials and water intensifies and an increasing number of questions and problems have to be solved using holistic approaches and wider national and international political frameworks. PRINCIPAL AUTHOR EWI PRINCIPAL AUTHOR EUCERS Dr. Harald Hecking Dr. Adnan Vatansever AUTHOR EWI AUTHOR EUCERS Simon Schulte Dr. Slawomir Raszewski STUDY Options for Gas Supply Diversification for the EU and Germany in the next Two Decades SUBMITTED BY ewi Energy Research & Scenarios gGmbH (ewi ER&S) European Centre for Energy and Resource Security (EUCERS) HANDED OVER TO Federal Foreign Office (Germany) I Table Of Contents TABLE OF CONTENTS Acknowledgements .................................................................................... IV Executive Summary ................................................................................... V Policy Implications ................................................................................... XX 1 Introduction ......................................................................................... 1 2 Part A: Gas Demand and Supply Options for the EU and Germany .......................... 3 2.1 Current Gas Demand and Supply of the EU and Germany .............................. 3 Demand ................................................................................. 3 Supply ................................................................................... 6 2.2 Future Projections of EU Gas Demand ................................................... 11 2.3 Future Options of EU Gas Supply ......................................................... 14 European Gas Production .......................................................... 17 Non-European Pipeline Gas ........................................................ 23 Liquefied Natural Gas (LNG) ....................................................... 39 3 Part B: Political Factors and Implications for European Gas ............................... 46 3.1 Structure, Rationale and Methodology .................................................. 46 3.2 The European Union ........................................................................ 47 Energy Union ......................................................................... 48 EU’s Drive towards Decarbonisation .............................................. 49 EU’s Drive for Gas Diversification................................................. 51 3.3 EU-Russian Energy Relations .............................................................. 53 Historical Background .............................................................. 53 Key Areas of Tensions in EU-Russian Gas Relations ............................ 54 3.4 Russia 56 Russia’s Resource-driven Economy and Its Economic Challenges ............ 56 Russia’s Domestic Political Context and Implications ......................... 58 Russia’s Foreign Policy and Its Implications ..................................... 60 Russia’s Evolving Approach to the Gas Sector .................................. 61 3.5 Turkey ........................................................................................ 63 Turkey’s Energy Diplomacy and Its Role in EU’s Gas Diversification ........ 63 Turkey’s Domestic Political Context and Implications for EU’s Gas Diversification ....................................................................... 65 Turkey’s Foreign Policy and Its Implications .................................... 66 Turkey’s Gas Sector—Opportunities and Constraints........................... 71 II Table Of Contents 4 Part C: Scenarios—the Political Context ...................................................... 73 4.1 Main Assumptions and Results ............................................................ 73 4.2 The Gas on Sale Scenario .................................................................. 74 The European Union ................................................................ 74 Russia ................................................................................. 75 Turkey ................................................................................ 76 Implications for Gas Diversification in the EU .................................. 77 4.3 The Nord Dream Scenario ................................................................. 78 4.4 The Southern Setback Scenario ........................................................... 79 5 Part D: Market Simulation of Future EU Gas Supply Scenarios ............................. 80 5.1 Design of the Market Simulation .......................................................... 80 Methodology: Economic Analysis with the COLUMBUS Simulation Model ... 80 Main Data Assumptions ............................................................. 81 Modelling Scenarios of Future EU Gas Supply ................................... 83 5.2 Overview of the Scenario Results ........................................................ 84 5.3 Scenario 1 - Gas on Sale ................................................................... 87 5.4 Scenario 2 - Nord Dream ................................................................... 95 5.5 Scenario 3 - Southern Setback ........................................................... 100 5.6 Economics of Nord Stream 2 ............................................................. 104 5.7 Risk Analysis ................................................................................ 111 Demand Sensitivity................................................................. 111 Global LNG Market Interdependencies .......................................... 113 List of Figures ........................................................................................XXII List of Tables ........................................................................................ XXIV List of Abbreviations ............................................................................... XXV Bibliography ........................................................................................ XXVII Appendix .............................................................................................. XLV III ACKNOWLEDGEMENTS The authors would like to thank the German Federal Foreign Office for the generous grant supporting this study. Special thanks go to Professor Dr. Marc Oliver Bettzüge, Director of the Institute of Energy Economics at the University of Cologne (EWI) and Professor Dr. Friedbert Pflüger, the Director of the European Centre for Energy and Resource Security (EUCERS), for their insights and support. The authors would also like to thank the participants at the roundtable discussion organized in January 2016 at King’s College, and Carola Gegenbauer from EUCERS for her coordination of the event. Furthermore, the authors would like to thank Alice Galenkamp from ewi ER&S for her excellent and substantial work on drafting and researching part A and D. As well, we would like to thank Anna-Sophia Fuss from ewi ER&S for her excellent support of the authors concerning facts and data research. IV Executive Summary EXECUTIVE SUMMARY The study assesses future options for gas supply diversification of the EU and Germany until 2035. It provides comprehensive research on the economic and political fundamentals that are likely to shape Europe’s gas future. These fundamentals allow developing several potential scenarios, which could shed light on the key directions European supply may take in the next two decades. Based on a set of assumptions, the study presents three scenarios: “Gas on Sale” (GoS) which is the reference scenario, “Nord Dream” (NoD), and “Southern Setback” (SoS). The scenarios are distinguished by two principal factors. One factor is the pricing strategy adopted by Gazprom and its competitors in Europe. The pricing strategy could be “competitive”, whereby dominant gas suppliers compete for market share via undercutting their price, or “oligopolistic”, where the principal priority is ensuring higher