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‘Free gas to Ukraine? Sounds a bit strange’ - Eurogas ex-chief

The events in Ukraine have brought to light many issues, including the issue of energy. Authorities in Kiev claim they are not ready to play by the market’s rules and pay full price for gas; the EU is mulling sanctions against Russia and claims it could survive without Russian energy supplies. But is that true? What will happen to Europe if Russia stops the gas transfer? Is American shale gas a viable alternative? Sophie talks to a man who knows all about gas issues: Jean-Marie Devos, former head of Eurogas.

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Sophie Shevardnadze: Jean-Marie Devos, former head of Eurogas, thanks for being with us on a program today. The question of the day is: can Europe survive without Russian gas?

Jean-Marie Devos: You know, mankind can survive a lot of things. But Europe in the current situation, obviously, has developed historically an important link with Russia. And the energy cooperation especially in the gas - but not just gas by the way - fields is a very major part of the European economy. So whatever the political circumstances are, there are economic realities, and I expect this cooperation and importance of Russian gas in the European equation to remain very important. Of course, there are many challenges, I know very well, and possible alternatives but as long as Russian gas will be competitive and perceived as being secure, I feel it will continue to play a major role.

SS:But now we have Ukraine in the European-Russian gas equation. Ukraine is threatening to cut the transit of Russian gas through its territory. Is that something that could really happen? Is that a threat against Europe or Russia?

JD: Look, it will be a threat against everyone including Ukraine. We had, unfortunately, you know, some previous crises. I remember the 2009 situation where all sorts of efforts were made, also by industry by the way, to try to provide answers. So yes of course there are political risks – but we should do everything to prevent them to materialize.

SS: But, like you’ve said, Europe has already dealt with a similar crisis in 2009. And you were head of Eurogas back then. What about now? Can Europe cope with a repeat?

JD: I have a lot of respect for people who are in charge, to the whether political or industrial responsible persons. I think, you know, society and economy has a great merit. It is that it adapts to all sorts of the situations. Whatever happens, I’m sure industry will try to find solutions. But very clearly that would be a good and normal situation.

SS: But if worse comes to worst, how long will Europe’s supplies last?

JD: Again, this is not a very easy question…

SS: Well, approximately. You know, you don’t have to give us the exact number, so just give us an idea.

JD: We do know that there are still huge reserves and there are, of course - and these are also due to security supply policy of the European Union - number of alternative routes and possibilities to provide gas to the market. By the way, the Ukrainian road is not the sole road, as you know, for Russian gas to Europe. So there are several possible alternatives and options. But clearly if something wrong would happen in the transit via Ukraine this would be in the interest of nobody.

SS: So talking about alternative routes, you have said that if the South Stream gas pipeline, which goes around Ukraine to Southern Europe, was ready Europe, energy supplies would be immune to the crisis. But now Europe is reportedly mulling sanctions against the project. Is that a wise move?

JD: Look, again, we have to make a distinction between the immediate political situations. There are obviously all sorts of forces and governments are expressing the wish to take tough measures, etc. In the long term it’s very clear that the cooperation is the answer. And that’s all these projects, not just South Stream, but projects that bring gas to Europe are in principle good things.

Obviously then you have an economic question and the commercial question about the viability of these projects, looking for example and the situation from the capacity point of view, and the real need for capacities. But as a matter of principle I feel all these projects should be supported. With, of course, respect for the legal environment and the regulatory environment of all parties. But again, this now is just call for cooperation.

SS: Yes, sure. But if we talk precisely about South Stream pipeline project, in an effort to punish Russia, wouldn’t Europe be punishing itself in the first place if the project were to be stopped right now?

JD: Very clearly you don’t have just one person punished with that. You have partners. You have people on the receiving side, you have people on the exporting side. I mean everyone might indeed suffer from it. But again. Sometimes political circumstances are dictating the decisions that may be not the best ones.

SS:Well, but then there are, you know, facts. For example in 2009 when you were the head of the Eurogas you said that Russia was a reliable partner. What about now? How has your opinion changed? Do you see any scenario where Russia would be the one to decide to interrupt gas supplies to Europe?

JD: We were in a complex situation. There were arguments in all sorts of directions. But I would say the most general assumption on industry side was that indeed, Russia is a reliable partner for natural gas for very simple reason. It might be of course friendship and sympathy, but it might be also, I would say, cold economic realities. You need to have exchanges between the EU and Russia in the interest of all.

So I think definitely in the middle and long term Russia should remain a reliable partner. That does not prevent, obviously, the EU - and this is a very legitimate position - to try to look at all the options and try to develop other energy sources including renewable. All that is legitimate. But that is not antagonistic with the fact that Russia should remain a very reliable partner and a major one, as long as Russian gas will continue to be competitive.

SS:Sure but everyone is looking for alternative sources and ways around but we are talking about the immediate present right now. US financial experts, cited by Bloomberg, are saying Europe’s complete rejection of Russian gas right now would cost it at least $250 billion in the next five years. Are there means to do so right now?

JD: I think Europe of course can to some extent definitely deal with crisis situation. I think again past situations have demonstrated that. But I would say that in a medium-long term cooperation will remain a must. And in that cooperation by the way we must include Ukraine. Because against all these situations are created by divisions which are highly regrettable and hopefully the political answer will be about maybe in Geneva and in coming days to this difficult situation. But political factors should not jeopardize good economic conditions.

SS:Like you said, because Europe’s gas contracts to Russia are supposed to last for decades. Do you think political factors can actually easily break those contracts?

JD: No I think they should not be broken like that. Definitely not. These matters have to be discussed and are discussed by the way between the industrial partners: Russian exporters and the European energy companies and that will remain the rule. We have together with Russia tried to build a free-market economy. We have the WTO framework. So all that really there to try to apply realistic commercial solutions to this situation; and, political interference…you know, I really don’t want to comment on that you know, that is the proper answer.

SS: Sure. Let’s talk about Ukraine right now. Russia subsidized Ukrainian economy with $34.5 billion since 2009 through lowered gas prices. Now Ukraine does not want to pay off its debts. How long do you think Russia should continue to support Ukraine? I’m asking just your personal opinion. You know, you are not an official anymore, but you are someone who knows a lot about this.

JD: Again. We have an immediate situation which is very difficult. And this is the prime responsibility of diplomats, governments to find the solution. We have too many examples in history and in so long European history where things can go very wrong if diplomats and governments don’t control the process. And clearly, here the situation and the solutions belong to EU, Russia, Ukraine and the US for historical reasons. At this stage it is definitely that political situation where best to find solution on basis of common values, on basis of mutual respect. On the long term we should build a process where the EU, Russia and Ukraine will together find conditions for sound political and economic future.

SS: Ukraine right now is not fulfilling its obligations under the contract it has with Russia. What should Moscow do? What should Moscow's reaction be? What would you advise? What would Brussels do if it were in Moscow's shoes?

JD: We are in a kind of crisis situation. Let’s apply crisis management rules and principles. One thing I remember is that you can solve these things only if you take into consideration the wider context. Again, we have to find solutions on the wider political and economic situation of Ukraine. And then indeed maybe revise it, but again on a dialogue basis on the commercial relations and other contractual matters.

SS: So what you are saying is that Russia should just keep giving Ukraine gas for free right now, because we are in a situation of crisis?

JD: I think of course, as in any kind of commercial relation and political relation there must be something you offer and something you receive. Though that should be re-discussed together with Ukraine. Free gas to Ukraine? Well, that sounds of course a bit strange. And I think every normal commercial person would say: “Well, that sounds a little bit strange.” And we don't see how that could materialize in the future. So again, the situation has to be discussed in depth, in the professional manner, but having in mind that the solution is, firstly, at this stage, a political solution…

SS: Okay, well, one of the crisis management…

JD: I've also pleaded, by the way, since long [ago], for a different European approach where the Europeans at the wider sense: the EU, Russia, Ukraine would work together in the structural manner to bring solutions to all these questions. If not, we will continue to work by reaction to events, and also not in peaceful manner. This is really not very good. We have to reintroduce the rational, positive conditions for the development of all Europe including of course Ukraine.

Of course we understand very well the problems in Ukraine. There were legitimate requests from the people in the so-called west Ukraine. There are also legitimate requests on the east side of the country. All that has to be taken to consideration, discussed. But in a partnership mood and not in this kind of hostile way that things are discussed today.

SS: One of the options that Ukraine is proposing as part of the crisis management is talking about the reverse gas imports to ease the burden of paying full price for Russian gas. How would that work technically? You know so much about that, can you explain that to us?

JD: Yes. Well, look, first, in Europe, I mean in the European Union, it has been a major policy and I think this was supported by industry to develop as much as possible the possibilities for Euro gas flows. And this is not just security of supply, this is also, you know, ensuring competition and ensuring fluidity of the gas market. Ukraine is of course in a bit different situation. Efforts have been made, as you know, to actually increase the reverse flows capacities with Ukraine.

Today, I know very well, some company is actually engaged into this, to provide gas to Ukraine through the reverse gas technologies. It has of course its limits and we know it would probably not respond to the complete challenge that Ukraine might have if there is a complete interruption. But we are not yet there. And I believe, again, we should take a little bit longer-term approach of these things and to say “Well, pan-European infrastructures, do they work well?” And in the package why not to envisage indeed including with Russia, Ukraine, EU the possibilities for more movements of gas from one side to another side including of course possible reverse gas flows. Because, history is there.

SS:But since this gas matter for Ukraine is so pressing that's why everyone’s trying to come up with solutions. So we are just trying to figure out how viable the reverse gas supply would be right now. Because Gazprom is also talking about legal implications in case this scheme is carried out, if supplies are reversed. Is it worth the risk, what do you think?

JD: Well, I can say, again we are working on assumptions here, but what I know is that if real crisis comes, industrialists and [energy experts] can provide answers. In the case of this Ukrainian situation I am not sure and convinced that it could bring full solution to the problem. But of course yes it may help for time to Ukraine to go through a difficult time. But this is definitely not the preferred option if it is dictated by political consideration.

SS:Obviously another huge player in this whole game is America. US officials are calling for export of American natural gas to Europe. Is that a realistic plan as of today?

JD: That's a very interesting question of course. Shale gas...it's very clear that today shale gas gives the United States a major competitive advantage. Shale gas, being produced locally in the United States is an outset not only for economy but also for citizens. If, you know, considering possibility of export to Europe, and I did discuss that by the way with some industrialists, I would say it is definitely possible from a technical point of view.

However the cost structure of shale gas exported to Europe may lead to prices which are maybe above the same as the existing prices in Europe. So there is no demonstration so far that American shale gas would flow to Europe at very cheap price with which it should be beating any other kinds of gas sources in terms of competition. This is not the information I have, especially for technical reasons.

You need of course liquefication installations, you need to transport, you need re-gasification. You know, all that add to the cost. And though, you will have, because I believe, there will be a development, you will have increased competition on the European market… We know also that natural gas is a global market and you have markets in the world: look at Asia, look at Japan where the price structure might be much more attractive for exporters. So we will see movements but I don't think we will see quick, immediate flow of American shale gas to Europe.

SS: Just to summarize, you are saying that except the fact the shale gas transportation from America will be too expensive, Europe also right now does not have terminals to ensure smooth transportation? Do I understand everything correctly?

JD: No, we do have of course in Europe capacities...by the way a lot of capacities are unused or insufficiently used for liquid gas. But in the United States you probably don't have yet all the necessary capacities to liquefy all the natural gas and to export them. So it will take time if it happens. And then of course we have also to consider by the way the needs in the United States itself for cheap gas which may create indeed a de-incentive actually to export natural gas to Europe.

It is clear that industry today benefits from this low price in the United States. But again, I believe all this is a dynamic process and you may see with creative industrialist developments where you will see more exports of natural gas, shale natural gas from the US to Europe. But today there are questions including on prices.

SS:Apart from the prices, do I correctly understand that is also a question of time. How long would it take until it materializes itself? And also will the quantity that America is promising to Europe enough for Europe?

JD: Quantity, you know, is very relative because markets are already served I don't need to tell you, I mean by Russia, Norway, the internal EU production. So it is definitely not unlimited needs, but again the battle, if there is a battle of this kind, will be a price battle and competitiveness battle. Now, from a technical point of view on this very day I don't see, I repeat, the possibility for massive exports of US shale gas. However, this things may develop in some time and maybe very quickly and you could think that in 2016 for example, that you’ll see already more substantial moves.

SS: Shale gas reserves also have been found in Europe. You have France and Bulgaria that are protesting against it, saying that it's really bad for their environment. Poland tapped into it but said they are not going to go ahead with it. Romania were seeing huge protests against Chevron’s plans for shale gas exploration. Is it really that harmful? If it's that harmful, than why is shale gas being trumpeted as the next best thing?

JD: This is a question which is very debated. Having some experience and having talked to industrialist you probably have the possibility to exploit shale gas in an environmentally-friendly manner. At the very same time it is true that there are objective problems and there are also questions of perceptions by public opinion. So it's not an obvious answer. We don't know – that is an honest truth today in Europe. If there is a future for shale gas in Europe.

As you know, some countries are going on, other countries are very restrictive to the point that even prevent the R&D and limiting experiences. But again, these things might change considering for example the economic situation. A real problem for Europe as you know is the competitiveness of its industry. And it is very important for European industry to look that the chemical, cement, others, but also the electricity industry needs to have access to very competitive gas, natural gas. If they want to be indeed successful in their operations. That will dictate I think in a wide way the future of shale gas in Europe – keeping in mind that other gas sources are there and may take this future shale energies for their own advantage.