by Florina Vevera

Natural gas prices are linked to oil prices.

No one anticipated such a fall in oil prices, though it was known they would go down as a result of the slow-down in Europe and even China: this is simply the economics of supply and demand. The times during which a handful of Arab countries plus Iran controlled the world oil market is over: more than half the world’s oil production now comes from non-OPEC members. The decision by major oil companies in the past few days to seriously curb investment plans may well play into the hands of the KSA.

But, the KSA has nothing to do with the fall in oil prices, which is due to a fall in demand and lower US imports thanks to shale oil. But US imports are rising again because imports are now significantly cheaper. The fall in demand is essentially due to Europe’s economic woes. The KSA made the decision not to support an OPEC move to reduce production. In other words, to do nothing.

The first reason for that is that the KSA knows very well the move would be of temporary effectiveness, non-OPEC members like Russia not being prepared to reduce production (Moscow just can’t afford it) and Iran, if a comprehensive nuclear agreement is signed, being anyway allowed to increase her production substantially from today’s low levels. Iraq also can ill-afford to curb her production.

The second reason is that the KSA wants to preserve market share. Once you lose some of your market share, it is extremely difficult to win it back. The KSA is also quite happy to keep US shale oil out of international markets, as US producers cannot match prices under around $85 (same with Canada’s). Prior to the steep fall in oil prices, the US was on course to become the world’s biggest oil producer by 2017 and biggest exporter by 2020, displacing the KSA. This is now not going to happen, at least within that timeframe. There was controversy in Saudi Arabia about the threat of shale oil competition, minister Naimi being cautiously optimistic that this would not happen in the near future, but others like Prince Waleed bin Talal disagreeing and calling on the King to take steps to diversify the Saudi economy at a faster rate.

The theory to be far-fetched stands, even if towards the end of last year Saudi Arabia offered some economic enticements to Russia – to no avail. The Saudi non-move, ie not to support production curbs, was mainly driven by market share considerations, including by pricing shale oil out of the market. This weakens Iran and Russia at the same time.

The fall in prices cannot be all smooth and there are inevitably rebounds in the process. With winter prices may stabilize or even increase somewhat, spurred by announcements by major oil companies that they were cutting on investment. But the overall the slump could last almost a year – barring a strong unforeseen EU recovery-, and when the prices rise again, they will stabilize at $80-85 a barrel, which is not good news for US shale oil with current fracking technology.

Unfortunately as concerns natural gas, Europe made a major mistake not by purchasing Russian gas, but by allowing Gazprom to meet a quasi-monopoly place as natural gas supplier to the EU. The availability of American shale gas and if and when it happens a settlement of the Iranian nuclear issue, of the Israeli-Palestinian conflict and Turkey’s (the most convenient point of transit) entry into the EU would of course change the situation, however the prospect of supplies of American shale gas is the only one to be almost immediate. Yes, there is a question of costs, but the infrastructure could have been developed, not to replace Russian gas, but to avoid Gazprom to be build a quasi-monopoly.

US shale gas will be transported to Europe by gas tankers, a technology that was developed long ago and allowed Algeria to sell large quantities of LNG to the US and France, which is also used by Qatar. Though some countries like France have prohibited shale gas and oil exploration, their companies, like GDF Suez of France (GDF Suez is Europe’s largest LNG importer and the world’s third-largest seller of LNG with a portfolio of 16m tones a year), are busy exploring for shale gas in the US and have already prepared plans for the port infrastructure in France and at least another European country. The US is expected by the International Energy Agency to be the world’s largest natural gas exporter by 2020 (and the largest oil exporter too), though it expects these exports to plateau soon after.

Shale-rock formations of oil and natural gas have fueled a comeback for the US that was unimaginable a decade ago. Russia meanwhile has struggled to maintain its energy output and has yet to embrace the technologies such as hydraulic fracturing that have boosted US reserves.

The US ascendance comes as Russia has struggled to maintain its energy output and has yet to embrace technologies such as hydraulic fracturing that have boosted American reserves. Since May, 2013 the Department of Energy of the US authorized the Freeport LNG project in Texas to export to countries that do not have a trade agreement with the US, including Japan and the members of the EU. The US energy department said it would work through the remaining applications in order. Japan is already the world’s largest importer of LNG, and the crippling of its nuclear industry by the 2011 meltdown at Fukushima Daiichi atomic power station has only increased its demand.

Freeport has signed deals to sell its gas to Osaka Gas and Chubu Electric of Japan, and BP of the UK. The export project is owned by a consortium including Osaka Gas and Michael Smith, Freeport’s founder and chief executive. Separately, Japanese and European companies said they would invest billions of dollars in another proposed gas export project, the $10bn Cameron LNG plant in Louisiana. Mitsui, Mitsubishi and Nippon Yusen of Japan, and GDF Suez of France which had already agreed to buy LNG from Cameron, will offer construction financing in return for equity stakes totaling 49.8 per cent.

In June, 2013 representatives from the Azerbaijan-based consortium, Shah Deniz II, approved the Trans-Adriatic Pipeline (TAP). The 870-kilometer TAP will connect with the previously approved Trans-Anatolian pipeline (TANAP), crossing Greece, Albania, and the Adriatic Sea to deliver 10 billion cubic meters (extendable to 20 billion cubic meters) of Azerbaijani natural gas to Italy, and subsequently, other countries in the European Union. In light of American and European policy goals to diversify the sources of natural gas to Europe, TANAP and TAP must be seen as successes.

Europe’s and other countries’ dependence on Russian gas are about to be reduced, though there is no doubt the Gasprom will remain a major player. Poland could also become an important producer of shale gas without running afoul of EU environmental legislation. Countries like France which has been importing LNG for 40 years (from Algeria) have an advantage in this respect, though they will have to expand and overhaul their facilities.

The US lags far behind Europe in terms of LNG use, but European LNG prices are still aligned with oil there – which is of course in the interest of Qatar, Russia, Algeria, etc, as long term oil prices can only rise (even though they might go down temporarily as a result of the economic slowdown in Europe, China, India, etc).

One wouldn’t bet so much on shale gas developments in Europe, at least in the short term, as environmental concerns are an impediment. Europe should accelerate the diversification of her natural gas sources towards US, Canadian and even when available Ukrainian and Polish shale gas, LNG from Qatar and Algeria, perhaps more from Norway, etc., but that won’t be achieved overnight even with the new sense of urgency – the crisis in Ukraine. The share of natural gas in the manufacturing industry’s energy purchases is significantly higher in Europe than in the US. Algeria has significant traditional LNG supplier to certain south European countries. Algeria has been exporting LNG to Europe for decades but exports to the US floundered after a dispute on prices. The latest good news is that Algeria’s probable natural gas reserves have almost doubled since the beginning of last year. Ukraine herself has a potential major shale gas producer.

While a country like France is adamantly opposed to fracking – even shale oil and gas exploration is banned – nuclear power electricity plays a larger role than in any other country in the world, with the nuclear power industry providing over 80 percent of the country’s total electricity consumption. Last but not least, reversing the flow of gas from Germany and other countries to Ukraine is easier said than done, as the pipelines and their compression stations have not been designed for a reversal of the flow – but it is of course possible.

On the issue of dependence on Russian gas, everyone knows that the US won’t be able to export LNG from shale gas in large quantities before 2016.

The turmoil in Ukraine has cast unprecedented uncertainty over Europe’s energy future and not only.