Jonathan Stern is a distinguished research fellow at the Oxford Institute for Energy Studies, having founded the institute’s Natural Gas Research Programme. He is an expert in the gas industries of Russia and the Soviet Union, and has written about the topic for over thirty years. His book, the Future of Russian Gas and Gazprom, is available to purchase on the OIES website. In our interview with him, we cover the EU's growing dependence on Gazprom, and the timeline for decarbonising the European energy system.
“Nobody wants to import Russian gas because they like President Putin. People are importing Russian gas because it’s competitive, and because there aren’t any other equally competitive sources.”
I’ve heard so many different words today used to describe the market. I’ve heard volatile, exciting, interesting – how would you sum up the market at the moment?
Optimistic after several years of much less optimistic development. So people here are cheerful this year – they were a little bit cheerful last year, but this year they’re seriously cheerful.
I’ve heard a lot of people that are saying that the growth in Asian demand was sort of expected, but a lot more than anyone possibly anticipated.
Well in Asia, certainly in China, we had much more growth than we were expecting, which created a little tiny problem over the winter as prices went up. But this is a much better problem to have than what we had in the early 2010’s which was the opposite and made everybody very, very sad. [laughs]
That’s certainly one way of putting it. Alright, challenges ahead then – because it’s not all plain sailing.
In Europe the big challenge is where are we going to get our supply from? We’ve got two big sources of supply – Russia and LNG. We’ve got a serious situation in the Netherlands where we’re looking at a very rapidly declining supply. We’ve got Norway stable, we’ve got the UK slowly declining, but we were hoping to have new sources from the Southern Gas Corridor, maybe from the Middle East, maybe even from domestic shale gas. That’s not going to happen – or at least, not in any large quantities soon. That’s a disappointment, and so we have to manage a supply situation which could get tricky, particularly over a cold winter.
Okay, so where do you think that supply will come from then? You’ve mentioned LNG – exactly where will Europe be importing it from?
This is not something that we can predict because LNG is becoming a global market. So people talk about “oh LNG will come from the US”. Well maybe it will, but only if that’s the most profitable place for LNG sellers in the US to land their LNG. My feeling is that we’ll probably get quite a lot of our LNG from the Middle East. Maybe some of it will come from Norway, maybe some of it will come from elsewhere. With a global market it actually matters much less where you get your LNG from. It’s not like buying gas where you’ve got a fixed pipeline – you know where it’s coming from. So the key thing is we get enough of it, and we get it when we need it.
So looking at that then, you’re suggesting we’re going to see more short term contracts I’m guessing.
We are going to see more short term contracts, and that means probably short term pricing, and that means more of a liquid market, which will be good. But then we come back again to our friend volatility. And that of course means that when we have very cold weather – like we did for a few days in March – you’ll see that price shoot up. And that’s right, that’s exactly what should happen in a market, but people then get very, very nervous, because they like market pricing when it’s low, but when it’s high they don’t like it so much.
And how do you also make sure that those selling it are getting the decent return that they need to be reinvesting higher up the supply chain as well?
Well that’s really a hard question for people with new projects. Because what we can say to them is “look, there are periods when you’re going to earn quite a lot of money. And there are periods where you may not earn very much money.” And their response is “well, I can’t finance a project on that – you’ve got to give me more certainty.” And in the market we have, we’re not going to be able to give them more certainty - they’re going to have to take more risk. And they and their financiers will not really want to do that.
No indeed. What sort of balance of energy do you see then in Europe?
Well I believe that Europe is moving towards a gas and renewables energy balance. In other words I think that coal is gradually phasing out; in some countries it’s taking longer. I don’t believe that nuclear will have a big renaissance – there’ll be the odd project here and there – oil will remain in the transportation sector until it’s replaced by something else. But I think we’re going to see a gas and renewables energy balance in most countries. And then it will really depend on things like development of battery storage, and whether we can get renewable heat, which is much more complicated than renewable power. So we’re going to move into a much more innovative and technology based energy sector.
Shall we talk about storage? Because particularly when you have all the seasonal differences, when you’re factoring all of that in and you’re trying to keep the prices stable – it’s all about storage.
It is all about storage, and that’s particularly the case where you’re in the Northern Hemisphere, and you have cold, dark winters. You may not have wind blowing, you may not have any sun, and you’ve got to keep people’s homes warm and supplied with electricity. And that’s tricky. It’s much less difficult for the southern hemisphere where you’ve got much more sun, and probably more wind as well. So this is difficult for Europe, and we are really relying on new technology. Many of us believe that we will get that technology, but we won’t get it for a couple of decades.
Is there enough money going into that technology – is that the problem, the actual R&D there?
It may be R&D. But even once we have the R&D, if you think about the millions of homes in most European countries, and how we have to change the technology of energy in each of those homes – we may be talking about having to go into each home and say to people “yes, we’ve got to replace your – whatever you’ve got – with this technology” – and people may not react well to that.
No, indeed. And if you’re talking replacing with some form of gas, maybe then there’s the public perception which also then needs the public education, of actually where that gas is coming from – and just a bit more about the back story.
Gas is in a lot of homes. What we’ll be talking about is replacing gas, probably, with either hydrogen or a heat pump. And the issue there is that people are not familiar with these technologies. With a heat pump, they’re going to have to find more room for it – it’s going to displace maybe something in their garden, maybe something in their house. With hydrogen, they’re not familiar with hydrogen. If you are of a certain age in the UK, like me, you can remember town gas, which was to a large extent hydrogen. And then we switched to natural gas. We may have to switch again to hydrogen. But again, you’re going to have to change boilers, you’re going to have to change burners in appliances, so you’re actually being very intrusive in people’s homes, albeit on a technological level.
It is, but it’s a one-on-one then, isn’t it.
It really is a one-on-one, absolutely one-on-one.
Jonathan, we’ve not mentioned a lot about politics, and the effect that politics can have on this entire industry – the shape of the market – and politics can be very volatile, and very difficult to predict. I just wonder what your thoughts were, and what you’re looking to at the moment there.
Well one of the big problems for gas is the problems between Russia and Europe at the moment. And people tend to associate everything to do with Russia with President Putin. They don’t like President Putin, some are afraid of what he might do post-Crimea, one or two other things. The problem is we are very dependent on Russian gas, and we see us becoming in Europe if anything even more dependent on Russian gas. That is going to create political strains, because the difficulty is politicians want to make speeches about “well, we need to become less dependent on Russian gas,” but they don’t tend to understand the difficulties of supply that we talked about a little bit earlier, and that’s where we’re struggling. Nobody wants to import Russian gas because they like President Putin. People are importing Russian gas because it’s competitive, and because there aren’t any other equally competitive sources. Now if Russian gas gets to a much higher level, that I think is going to create a political problem for gas.
You mean a higher price level?
No, a higher level in terms of percentage dependence of Europe on Russian gas.
Right, right.
I can imagine politicians in the big European countries saying “we are uncomfortable with this level of Russian gas.” And if that was to happen, that would be a significant problem for gas, and might hasten a transition to something else.
Would you then put LNG into the mix – maybe from America, because a lot of that is now going to the Asian market.
Well, LNG is already in the mix. The question is, what should we do if just for competitive reasons, our level of Russian gas imports continues to increase and LNG goes elsewhere. Do we need to do something politically inspired different to that? Our market structure makes that very difficult. So it’s more likely that governments will say no, we probably need to limit the share of gas in our energy balances. And that again will probably – if that was to happen – that would enhance a transition which is already under way, away from fossil fuels. But the key thing is, if that happens in the 2020’s, that would be earlier than we in our institute currently think, which is that most of the big transition will be in the 2030’s and beyond.
Let’s just say we’re standing here next year talking. What do you think will be on our list of things to talk about?
I think top of our list this time next year will be the fact that we’ve got a lot more LNG in the global market, and possibly the share of Russian gas will have gone down because we’ll have more LNG in Europe.
