GRM 2010 GRM 2011

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In the coming decades, the Gulf region is expected to play an increasingly important role in global energy trade. One main component of these growing energy flows is the gas exchange between Europe and the Gulf, especially the six member countries of the Gulf Cooperation Council (GCC), namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE).

In Europe, and especially the member countries of the European Union (EU), medium and long-term energy outlook show an increase in natural gas demand, although this growth would be much lower than that seen in the region during the past three decades.

There is little doubt that the main existing external gas suppliers to the EU countries, namely Russia, Norway and Algeria, will continue to meet most of the incremental European demand, and to remain the main pillars of natural gas supply to the region. Indeed, these gas exporters are already tied to the European market by transportation infrastructure, notably pipelines, which are currently in the process of being expanded. They therefore enjoy a very significant advantage for satisfying additional European demand. It is in fact much easier to increase the capacity of an existing pipeline than to build one from scratch. And it is much easier for an established supplier that already has sales in a market to decide to build an entirely new pipeline, than it is for a new supplier that has no market share at all to build its first pipeline. New gas suppliers will then have substantial barriers to overcome before acquiring weight in the EU gas market.

Nevertheless, the EU is well decided to diversify its sources of gas supply. A recent communication by the European Commission (EC) on the security of gas supply underscores the political will that exists to enhance the prospects for gas trade with new suppliers. In this communication, the EC clearly declared that the EU has a common interest in continuing and deepening the development of strategic relations with external suppliers and transit countries in order to mitigate both political and technical risks associated with future supplies to the EU and to ensure multiple import pipelines supplying Europe.

EU efforts to diversify its energy supplies and reduce reliance upon Russia have compelled the EU to strengthen relations with the Gulf. EU energy policy is driven by “energy security” and climate concerns. Over the next 20-30 years, it is forecast that up to 70% of EU energy needs will have to be met externally. However, the uncertainty about the continued accessibility of reliable gas imports led the EU to promote interregional relations with the GCC. However, the most important development for Europe has been the growing availability of LNG. The diversification strategies of the EU and the massive gas reserves in the Gulf lead to a natural “fit” for the two regions.

This clear European desire to diversify from what is perceived as an excessive dependence on natural gas from the main existing suppliers, in addition to the liberalisation of the internal EU gas market, and the expected decrease in gas export from the existing gas suppliers to the region, would all play in the hands of Gulf exporters of liquefied natural gas (LNG), among others. Prospective pipelines linking the Gulf to Europe would notably strengthen their gas ties.

Global gas exporters face the threat that the deepening euro zone crisis could drag industrial demand down again in one of the world’s biggest gas consuming markets, with knock-on effects for gas sellers around the world. Qatar, by far the world’s largest liquefied natural gas (LNG) exporter, has benefited from a surge in Japanese gas demand over the last few months. Germany’s decision to shut its nuclear power plants will drive rising European demand for liquefied natural gas.

In fact, while increasing Gulf LNG exports to Europe may well contribute to the diversification of EU gas supplies, a more competitive European gas market requires the establishment of physical pipeline links with the region, either directly or through connections with the various existing and planned gas pipelines, such as the Arab Gas Pipeline (AGP) and Nabucco. Indeed, it is extremely important for the holders of large gas reserves in the Gulf to build strong physical links with one of the main markets for natural gas in the world.