Sunday, 21 September 2014

I cannot ignore the remarkable event near Slovakia–Ukraine border. Why?

It is a Grand Opening of gas supplies from Slovakia to Ukraine.
Prime Minister of Ukraine Arseniy Yatsenyuk, Prime Minister of Slovakia Robert Fico and Director for Internal Energy Market of the European Commission Klaus-Dieter Borchardt opened the commercial Vojany-Uzhgorod pipeline in Veľké Kapušany in Slovakia that was really an important event, a very important ... for Ukraine!

It is no wonder that Prime Minister Yatsenyuk was quoted as saying that “we replaced 40% of gas, which we had previously bought in from Russian Gazprom, due to the opening of the reverse from Slovakia and opened opportunities for Ukraine to buy gas in Europe”.

The nominated volume of a reverse supply of gas from the territory of Slovakia to Ukraine amounts to 27 mcm a day, or about 10 bcm per year.

However as far as Europe is concerned, how is this event important for us? From the point of view of solidarity and other political incentives, everything is clear.
And how is it important for us in view of coming winter?

And also what does it matter in view of the dispute between Ukraine and Gazprom?
And especially, how it is important under the conditions when there is not enough gas in the Ukrainian UGS in order technically to provide transit to Europe in winter season?

But particularly interesting question is that whether our gas consumers in Europe understand what the gas reverse really means on the occasion of which this Grand Celebration was arranged?
Sometimes the reverse is called "virtual". Why?

Let's clear up in case of reverse whether the gas from Europe is transported in the direction of Ukrainian consumers physically in the literal sense of the word?
I'll start with the most important - such a reverse can exist only when there are supplies of gas from Russia to Europe. And no other way!

That is because just a part of the Russian gas after crossing the border between Ukraine and Slovakia then is rotated 180 degrees and is transported by the other pipe back to Ukraine. But upon arrival back on the territory of Ukraine, this gas is returned again into the transit pipeline directed to Slovakia. And by such a way this so-called reverse gas is pumped through a relatively small circle made with pipes and other equipment. It should be mentioned that the construction of "gas roundabout" cost 20 million Euro.

It is noteworthy for us that European and Ukrainian policy makers call now these operations of whirling gas from Russia around the boarder as "diversification of supply."
It is important that gas meters measure the volume of gas both on the way from Ukraine to Europe and on return way when it is coming back into the Ukrainian territory.

In this situation the same physically gas can be taken into metering records of volumes of reverse and transit gas many times. But this gas only is circulating around the ring of pipelines and is not sent back to consumers in Ukraine, for whom it is allegedly intended. In fact, the reverse gas is impossible to transport technically in eastern direction further back to Ukraine, because there is no any gas transmittal pipeline in Ukraine running in this direction opposite from Europe. There is only a transit long distance transmittal pipeline delivering gas in one direction - to the west!

You would ask how in this case the reverse gas is reaching consumers in Ukraine? It's very easy to explain since it is no means the same reverse gas. As a matter of fact instead of it another gas is taken out of the volume of TRANSIT GAS (!) in any place in Ukraine convenient to meet local needs.
Thus, the "virtual reverse" in fact turns into legalized SIPHONING OFF transit gas intended for European consumers.

This scheme reminds us how we transfer cash over long distances, for example, using Western Union services. Then it looks like as we put cash in one "pocket" of this company in order to get them back somewhere far away out of "another pocket." We mostly trust such a virtual cash transfer service as reliable but nobody expects to get back remitting cash out of "another pocket" more than a send amount.

In contrast with financial services, the virtual reverse gas scheme in Ukraine causes a great concern. Properly speaking, this is exactly what today all of us are afraid of. Moreover, before now we felt ourselves the same, and there are certain reasons for it. Why?

The point is that at present there are all prerequisites that the dispute between Ukraine and Russian Gazprom will not be solved in the near future. In this case, on the one hand, Gazprom will not resume gas supplies to Ukraine. On the other hand, Ukrainian UGS are not filled with gas at a volume that is necessary for simultaneous support of both domestic consumption, and transit to Europe.
It means that in December Ukraine will proceed siphoning off the transit gas for its own needs deeper and deeper getting into a "virtual pocket" of the transit gas. In previous times it was illegal and was regarded as theft. Now the European Union has legalized this scheme and officially inaugurated a reverse gas supplies from Slovakia!
Of course, the first thought is that we could stop the reverse. Only the question arises whether is it possible?
Let's see what do we know about the contracts?
It was stated by the Slovak company Eustream that "according to Open Season procedure (binding of volume commitments for interstate transportation service of the reverse to Ukraine - Ed.) several European firms have provided binding bids for pumping gas through the pipe ...". However company Eustream refused to name these firms referring to a confidentiality of commercial transactions and only stated that their approximate number was from 5 to 10.
In other words supposedly they did not know anything …

It causes a big concern and a keen disappointment with that at present time, trying to please our Atlantic allies, we are deleting previous great efforts of our European business to establish long term relations with Russian companies, put off indefinitely conclusion of many prospective contracts, impeached the existing contracts in the energy sector, and in addition, as a backward result, created serious problems for our agriculture.

And how much would it cost us to make one more effort in this direction of shutting down relations and to opt out of energy supplies at all?
Why not?

PS. As an epilogue, when this article had been already completed, it was reported that the volume of daily gas supplies from Russia to Europe reduced. Information from different sources is very controversial. Some sources have reported about a decline in gas supplies, and others said that everything is fine. But it is important that just those companies and countries which are dealing with the reverse gas to Ukraine have stated about gas supplies reductions.
I have ventured to suggest that this problem, as mentioned above, is the result of the "legitimate" gas offtake from transit pipeline in Ukraine for their own needs in the volume exceeding the amount of reverse gas circulating at the border.

Thursday, 11 September 2014

Fitch: Europe can’t reduce its dependence on Russian gas. Why? 

Despite frequent statements by European politicians regarding the need of reducing dependence on Russian gas, the chances to do it are few, says Fitch Ratings report "How to live without Russian gas." Gas consumption in the EU will increase and there is no substitute for Russian gas, taking into consideration weak prospects for shale gas production, lack of facilities available to import LNG and the absence of significant non-Russian pipeline projects in Europe.

We could theoretically lower our dependence on Russian gas, reducing consumption, but Fitch's analysis shows that in the long term demand for gas in the EU will only increase - an average of 1.3% per year over the next 15 years. In 2013, the European demand for gas was 530 billion cubic meters and Russia has supplied 145 billion, 27% of this volume.

Gas could be replaced by oil, coal or nuclear power, but all of these alternatives involve "economic, political or environmental costs." In addition, Russia is not only significant supplier of natural gas, but also oil, coal and nuclear fuel. In the past year, Russia has covered 36% of the needs of European nuclear power plants in enriched uranium, and Bulgaria, Czech Republic, Slovakia and Hungary depend on Russian nuclear fuel supplies by 100%. Renewable energy projects are very expensive and without significant government subsidies cannot compete with conventional energy resources, said Fitch.

In the long term, Russia will remain the dominant supplier of gas to Europe, as alternative sources are insufficient, the report said. Conventional gas production in Europe has been steadily declining, and "shale revolution" like in the US is not possible in Europe. Shale gas can only make up the reduction of conventional gas production. Concerning the technology of hydraulic fracturing, overruns of water, use of chemicals,  risk of seismic activity as a result of drilling have led to "social restraint, or even resistance" towards the prospects of shale gas production in Europe, says Fitch report. As for high expectations for LNG imports, the growth of global liquefaction capacity, according to Fitch, will not be enough to compete with Russian gas in Europe.

A similar view on the future of European gas security shares International Energy Agency (IEA). "In the short term, Europe has very few opportunities for diversification of gas supply. In the foreseeable future Russia will be a vital need for Europeans ", - said the director of the IEA Maria van der Hoeven at the energy conference in Norway. Quick change of energy supplier is unlikely for several reasons.

Firstly, the gas consumption in Europe is growing steadily and domestic production is decreasing. According to 2013 IEA report, the annual gas import to the EU will rise by a third and will be 450 billion cubic meters by 2035. "Diversification takes time, - said Maria van der Hoeven. - It is necessary to invest in infrastructure and improve relations with potential suppliers".

The IEA report also predicts that LNG export from the US will be about 50 billion cubic meters by 2035. Therefore, US supplies cannot fully meet European market demand. "Billions of cubic meters of LNG won’t solve the issue as European gas production falls to similar volumes," - stated Maria van der Hoeven. She also noted that now the center of gas consumption is shifting to Asia where gas prices are higher, and Brussels should not count on the entire volume of American LNG export.

Thus, we have to pursue very smart and balanced energy policy with sustaining strong relationships with current suppliers and developing new opportunities to secure energy supplies for the future.

Monday, 1 September 2014

Why Brussels and Washington boost pressures on Bulgaria to halt construction of the pipeline South Stream attempting to create near Ukraine another Bulgarian bastion against energy supplies to a number of countries in South and South East Europe?

And this "why" is a particularly acute issue amid the civil war- struck "Ukrainian Energy bastion", which threatens not only to default of Europe's energy security, but also causes a significant profits loss for national economy of several countries in South and South East Europe.
Maybe there is no more need to remind you that Ukraine is standing in the midst of events extremely aggravating the problems of European energy security. However, regardless of the public opinion of Europe's majority with the political support from Brussels and our Atlantic allies there was a change of political administration in Ukraine, which recently resulted in erection of like-kind the "Ukrainian energy bastion" in this country. Its goal is a gas-blackmail by threatening to block the channels of Russian gas supplies to Europe that have been properly functioning for many decades.

It stands to mention about the negotiations between the Ukrainian authorities and potential western investors, which, according to the law adopted by the Verkhovna Rada, can join a newly created company - a gas transport operator to be established for managing the Ukrainian gas transportation system. There is American company Chevron among these potential investors, so you can expect to see the star-spangled American banner above the "Ukrainian gas bastion" soon.

What is the Europe's reaction on obtaining control over the transit of Russian gas by an American company? Most of all, obviously, it should raise discontent of Europeans… But in Brussels politicians are still telling us about a monopoly position of Russian gas supplies to Europe and apparently underestimate the consequences of the Ukrainian crisis.

The Ukrainian crisis has provoked an interchange of European economic sanctions against Russia and the Russian counter sanctions. Many European companies has already suffered from these responses of Russia.
Furthermore any of us has to think hard finding out that in Ukraine the law on sanctions also was adopted providing Kiev for a possibility to stop transit of Russian gas to Europe. A great deal of people do not believe that Ukraine will apply anti-gas sanctions in practice. But taking into account the current political situation in Ukraine we cannot exclude any even the most unexpected and inappropriate actions. After all, if the current Ukrainian government unleashed an internecine civil war to assassinate their own people, it is unlikely possible to hope they will take care of people in other countries.

There is a high probability of upcoming severe scenarios of deterioration in Ukraine and expanding scales of heavy consequences too, which are unlikely anyone can adequately anticipate or much less take an effective control over them. Moreover, even if gas transit via Ukraine is not blocked all the same nobody gives assurances of preventing an illegal uptake of Russian gas intended for Europe in winter season.
It seems to be like a natural disaster with almost unpredictable scenario, like the one that is brewing in Iceland, where about thousand recorded recently episodes of earthquake denotes that an eruption is maturing in depths of Bardarbunga volcano. The principal point is the same - if it can happen, how to limit the effects.

There is a discussion about paradox of the Ukrainian crisis, which, on the one hand, overflows with horror of huge economic and human losses, but on the other, although it sounds cynical, the crisis could also result in a beneficial effect. It means that the crisis in Ukraine gives an important signal to our politicians about the threats related with the "Ukrainian gas bastion", is not it? In fact this signal would have to convince our politicians that at least in the current decade, while a real alternative to Russian gas is still absent, it is necessary to use the opportunity to diversify gas supply routes through the construction of the gas pipeline South Stream bypassing half-demolished and soon sinking into a bitter cold Ukraine.

However, our hopes of even such a partly positive outcome are not really justified. There is nothing that can encourage our optimism, since actually we see that a real direction of policy makers in Brussels and Washington has almost nothing to do with our expectations of rational choice, the choice in favor of Europeans! On the contrary, there is an urge over there to use along all possible excuses to prevent the implementation of the South Stream project, despite the fact that its construction was agreed on the level of bilateral intergovernmental agreements a long time ago in 2008.

Bulgaria happens to be in the center of the Brussels-Moscow confrontation over Ukraine. Representatives of the European Commission and even rare visitors - US Senators have repeatedly visited Bulgaria to make Bulgarian government freeze construction of the South Stream gas pipeline, thereby creating another "Bulgarian energy bastion" in the way of gas supplies from Russia.

It's disappointing to see that political pressure from outside is put upon the country - one of equal members of our overall economically powerful European Union, but which, meanwhile, is still very much inferior to other member states in economic development. According to Eurostat figures published in July the level of GDP per capita in Bulgaria is 45% below the average at 28 countries of the EU, while, for example, in Austria it is by 29% higher than the average. And in terms of actual individual consumption per capita in 2013, Bulgaria was in last place behind all 28 EU states.

Appealing to common sense there should be a double larger economic aid for Bulgaria instead of attempts to push this country under even more difficult economic situation.
Besides other countries where alongside with Bulgaria the South Stream gas pipeline is to be laid are not distinct from Bulgaria in economic development and also remain at the level below the average with the exception of Austria and Italy.

Let's imagine for a moment how much all of these countries are interested in gas supplies and new gas infrastructure development and how they worry and with what concern and sympathy they look at political disputes in Bulgaria against the construction of the South Stream pipeline, triggered by the efforts of politicians from Brussels and Washington. It turns out that Bulgaria and all these countries happen to be on the edge of losses of these future economic and social benefits. Initially Brussels dictates their terms to South and South East countries, but there is nothing adequate offered by Brussels politicians to them as a reasonable reimbursement. I doubt that it is a surprise for European business especially working in agricultural sector because they have already tried to get reimbursements to cover the consequences resulted from Russian counter-sanctions.

In the long term, without importing Russian gas ultimately some European countries will have either to start production of shale gas, or to buy LNG or pipe gas from other sources at higher prices. And the coming months unfortunately rather many Europeans may spend in uncomfortable cold homes and offices under the conditions of tightening electricity savings.

Of course not the whole Europe will freeze. Most of the EU will continue getting electricity, gas and heat. These problems will affect the population in South and South East Europe, by other words in countries beyond the "Bulgarian gas bastion", including countries outside the EU. The situation might turn up a real disaster for the region located "beyond the bastion".
The current Ukrainian route provides 60-70% of the needs of the South and South-Eastern region of Europe in gas. In 2013 the EU obtained 69 bcm of gas via Ukraine, including Bulgaria - 2.5 bcm. Turkey imported 13 bcm, Serbia and other Balkan countries outside the EU - about 2 bcm of gas, Moldova together with the Transnistria - about 2 bcm.

Russia covers via the Ukrainian route 84% of Bulgaria's requirements in gas, 34% of Turkey and 100% of Serbia and Moldova. Slovakia and Slovenia is 100% dependent on Russian gas transit via Ukraine. Austria, Greece, Czech Republic and Croatia - on 50%, Italy - on more than 40%.

As you can see, Bulgaria is one of the most dependent on Ukrainian transit countries in the EU and currently consumes 3.4 million cubic meters per day. In case of deteriorating of the situation caused by transit shutdown Bulgaria would be forced to start a gas withdrawal from the only one in the country UGSF "Chiren". But it is filled with gas only by 75%, and these stocks are not enough for the whole winter season. It would be also difficult to ensure the gas supplies to Greece. Therefore, Bulgaria, Turkey and Greece could face with the most severe gas shortages even before Christmas.
It doesn't take too much time to see what will happen.

Feeling better when see that so many people in so many European countries look forward to the results of the negotiations of the European Union, Russia and Ukraine to be commenced again for searching a way out of these "gas bastions." Then why not?