Thursday, 31 December 2015

Why have EU countries turned out at the junction with a difficult choice of gas transit partners trying to strengthen security of supplies?

In May this year, the European Commission adopted a new European Energy Security Strategy, which was a response to an acute political crisis in Ukraine and emerging threats to security of gas supplies to the EU.

Since then, despite all steps, statements and assurances made by the European Commission, the situation remains complex, not to say that by the end of the year it has worsened. Especially it concerns medium-term prospects for the desirable risk reduction of unstable gas supplies to Europe that are becoming daily less and less optimistic.

It is clear that as we talk about the partners of the EU who are responsible for ensuring supplies, we have to consider countries - gas suppliers as well as countries providing the transit through their territory. They are sharing the responsibility as it takes place within any supply chain. It should be recalled that the European Energy Security Strategy mentioned above completely focused on Russia's role in gas supplies to the EU countries. However, this Security Strategy did not pay necessary attention to responsibility of gas transit countries, especially in the case of Ukraine and those violations of the transit obligations, which has been already committed by that country. However, responsibility of gas transit countries, especially in the case of Ukraine and those violations of transit obligations, which had been already committed by that country, are being ignored in this Security Strategy and it shouldn't.

It is impossible not to recognize that gas transit countries play an equally important role in ensuring the supplies. Transit reliability is similarly essential for maintaining a high level of security of supply. A transit country could be figuratively compared with a drawbridge, which our ancestors were supposed to use often at entrances to medieval castles. They were well aware that even if the road to the castle could be in excellent condition, but such a bridge was out of order or under the control of non-friends, security of supplies to the castle would be a big problem.

The fact that transit countries unreasonably have taken a backseat of the European energy policy regarding security of supply reflects the official position of Brussels encouraged by the transatlantic alliance and some followers among the EU member states. By the way, some of the latter are transit service providers themselves for the EU gas market. As a result, it continues to remain silent on the contribution of transit countries in ensuring security of supply, especially if it is negative.

Supply risks related to gas transit countries in particular Ukraine deserve much greater attention
Ask yourself the question what country is the biggest and the most difficult gas transit service provider to the EU? It would not be easy to find anyone among the active population in our countries, who would not know an answer that it is Ukraine.

A close political association between Kiev and Brussels, constant guardianship of the Ukraine's events under supervision of the Washington Administration, recurrent "winter gas packages", etc., all together it serves the PR-campaign creating an image of Ukraine as an absolutely important and, it might even seem, an irreplaceable transit country for supplying gas from Russia.

There are, probably, those among us who could not at once name another transit country for Russian gas. It is Belarus, through which European consumers, especially in Poland and Germany also receive big volumes of gas from Russia. In 2014, Russian gas transit through the territory of Belarus will amount to 45.4 bcm. What is more, unlike Ukraine, this transit route is surely quiet - there are neither problems, nor PR actions relating to the Yamal–Europe pipeline in Belarus. As the phrase goes, "Good business does not go on amidst the hustle and bustle".

However, this expression is not about Ukraine, where shocking news around economic reality and business relationship appear to be very common. Firstly, one may recall that now Kiev refuses to repay sovereign debt by 3 billion USD to Moscow.

Secondly, three months ago, Ukraine and Russia signed a protocol ensuring supplies of gas to Ukraine at market prices for the entire winter season until the end of the first quarter of 2016. It is very important for the security of supplies of Russian gas via Ukraine to the EU. With that in mind, the European Commission acted as a mediator in the multiple dispute-settlement talks that had started long ago in March 2015. Nevertheless, within only two months of signing this agreement, on November 25 Russian company Gazprom stopped supplying gas because company Naftogaz of Ukraine did not pay in advance for the deliveries as it was envisaged by the winter deal. Although under this trilateral agreement, Russia reduced the price it charged Ukraine to the same level granted to neighboring countries, from 251 USD per 1,000 cubic meters to about 230 USD.

In this regard, news agencies quoted the head of Gazprom A. Miller, as saying that "Ukraine's refusal to buy Russian gas threatens a safe gas transit to Europe through Ukraine and gas supplies to Ukraine consumers in the coming winter."

The incident underscores the fact that now the most significant threat to European consumers is embodied in transit risks via Ukraine, but not in the risks relating to the initial supplier. Obviously, even that may be insufficient just to recognize the important role of the risks associated with the transit of gas. It is necessary to judge accurately transit risk levels equally but not lower than risks associated with initial suppliers of gas. Transit risks should not be ultimately ignored (or substituted for some others) while selecting routes of important energy flows to the EU countries.

This observation has meant the necessity of giving separate consideration to both lines of action directed towards ensuring diversification of gas supplies declared by the European Commission including initial gas suppliers and gas transit service providers or gas transit routes.
The European Commission still has been putting in place quite modest actions to diversify gas supply routes

In fact, there is only one project in the medium-term plans of the European Commission to create outside the EU a new transit route for gas supplies to Europe. It is frequently mentioned TANAP - the Trans-Anatolian Natural Gas Pipeline (Trans-Anadolu Doğalgaz Boru Hattı in Turkish) from Azerbaijan through Georgia and Turkey to Europe planned in 2019 to add to the EU imports 10 bcm of gas, of which 8 bcm will be intended for Italy and one each for Greece and Bulgaria.
A continuing cause of concern is a relatively small capacity of this project in comparison with the volume of gas consumption in the EU. Although TANAP project is considered as a part of the South Gas Corridor, which in the future would be able to provide opportunity of delivering to Europe gas from the Middle East and Central Asia. Nevertheless, it is also admitted that there are still so many interlocking political, economic and technical challenges to be solved achieving these goals. Perhaps it will take even more time to erase most of them than to fulfil the long awaited expedition to the Moon.

It is important that TANAP / the SGC opens a new page in relations between the EU and Turkey, which is going to play the role of one of the leading gas transit service provider to Europe.

Many citizens in the EU countries have recently found out how Turkey has been actively preparing for the role of a transit country when sudden waves of refugees overflowed Europe with the direct Turkish assistance that led many of us here to unpleasant consequences interfering much of a usual way of life.

According to the International Organization for Migration (IOM), this year more than a million migrants and refugees came to Europe. To have a clearer perception of the scope and the depth of this humanitarian crisis it is worth reminding that, in 2014, before the refugee mass exodus into Europe, for example, in Austria number of people with migration background had already accounted for an average of 1,715 million that was 20.4% of the entire population.

Apparently, it is not a proper place to delve into such a dramatic and highly sensitive issue. But, the question that arose consequently: why should not this humanitarian transit have been mutually agreed upon between the EU and the executing country - Turkey?

The practical implication of this was that now almost anyone in Europe hardly would doubt that a poorly controlled transit of migrants and refugee without proper mutual guidance through Turkish territory became a bad prologue to Turkey's introduction as a future gas transit service provider. In other words, this situation reveals that in addition to Ukraine in future the EU may have to include Turkey in the list of difficult gas transit service providers. Indeed, despite some undeniable differences these countries have a great deal in common.

Why does the European Union place itself in a vulnerable situation acting of its sovereign will to make a choice between difficult gas transit service providers?
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Monday, 30 November 2015

Why are investors afraid of losing money in the Ukrainian gas transportation triangle?
Winter is coming and it might aggravate again seasonal energy concerns in Europe. In recent years, such an event as tripartite talks between the EU, Russia, and Ukraine on the security of gas transit through Ukraine's gas transport system became a harbinger of the approaching winter season. In 2014 after seven rounds of difficult negotiations, moderated by Günther Oettinger, the former Vice-President of the European Commission, yielded finally a trilateral protocol, agreed by Russia and Ukraine that secured gas for Ukraine and ultimately also for Europe.
This year, on September 25 after several rounds of negotiations spanning a number of months, once again Brussels, Moscow and Kiev signed the protocol on the terms for gas supplies from Russia to Ukraine in the period from 1 October to 31 March 2016, which should safeguard the security of gas supply to Europe in the coming winter. As the Vice-President of the European Commission responsible for Energy, Maroš Šefčovič commented: "The agreement on the terms of the new Winter Package is a crucial step towards ensuring that Ukraine has sufficient gas supplies in the coming winter and that there is no threat to the continued reliable gas transit from Russia to the EU".

Yet everyone would now seem to agree that conducting multiple round negotiations ending after midnight is becoming a new pre-winter tradition in Brussels, as the trilateral agreement achieved with such complications is temporary, and it will be repeatedly needed to go through these hard times.

Moreover, it may happen even earlier. On November 25, only two months after the two countries reached an EU-sponsored agreement Russia stopped gas shipments to Ukraine because Kiev had not paid in advance for future supplies.
In the meantime, the European Commission is trying to behave as if nothing can happen and it seems resigned to the fact that the problem of Ukrainian transit will continue to hang over Europe in the future. It is also reflected in the report submitted by the European Commission on the Energy Union development in particular stating that "it is in the interest of all parties that Ukraine remains an important transit country".

Thus, Europe should expect new episodes of this long-running diplomatic serial devoted to trilateral gas talks and "seasonal packages." However, the allegation that there are "the interests of all sides" - is an obvious exaggeration. Furthermore, taking into account the real situation in the Ukrainian economy as a whole and in its gas transport sector, in particular, the expression "remains an important transit country" looks like an attempt of no more than wishful thinking.
In fact, there is nothing new in that Brussels would like Ukraine to keep up a role of "an important transit country". The question that arises then, is what the European Commission has actually made in that respect, more importantly, what has been done by Ukraine itself in order to remain in a position of major transiter of gas, which the country obtained in Soviet times?

With regard to the EC actions, they are clearly aimed at hindering Russia's plans to diversify routes of gas deliveries to Europe, which envisaged the construction of new gas pipelines, and at compelling its largest gas supplier to use further the Ukrainian transit route.
"If you look at the construction and plans of gas pipelines, one of the goals is to make the Ukrainian transit system less relevant, or to cut off supplies through Ukraine completely. This would have very negative consequences for energy security in Europe, because the Ukrainian transit is very important, it is the largest, at 140 billion cubic meters per year," said Vice President for Energy Union Maroš Šefčovič speaking to journalists.

Thus, as it is argued in Brussels the rejection of the gas transit through Ukraine would result in a threat to Europe. However, all one has to do today is just to take a look at the overall condition of the Ukrainian transit and to be sure that such political statements motivated by a desire to present the plans of Russia as a threat, but in fact it turns out the other way around - this particular gas transit through Ukraine is becoming a major threat for European energy security. And those who suggest otherwise would much rather to come down from heights of the Brussels political Olympus to the ground and, more specifically, directly to the Ukrainian gas transportation system (GTS).
Try to find an excuse why a very alarming issue concerning current technical condition of the Ukrainian GTS is deliberately left behind the scenes of forward-looking policy of the European Commission, not to mention the need to modernize its management systems.

Let's see if this is indeed the case as the legend about an Austrian soldier Sigismund of Altensteig says: "That's where the Shoe pinches!"
In September 2014 the Institute for Economic Research and Policy Consulting from Berlin published the results of its study "Improving gas transmission network regulation in Ukraine by implementing Energy Community rules - a tailor made proposal", the main conclusions of which begin with the following phrase: "Gas transit through Ukraine … are decreasing. The pipeline system is ageing and the current regulatory framework does not meet the European standards". It is an objective reality that is reflected in long-term decline in the share of Russian gas transit to Europe through Ukraine, represented in the figure below.

In the last five years from 2010 to 2014, the share of Ukrainian transit in Russia's gas deliveries to Europe has fallen by one third from above 60% to a level under 40%.

The physical volumes of gas delivered through Ukraine to Europe have also declined together with the share of Ukrainian transit. In 2014, Ukraine transported to Europe by one third less Russian gas than in 2013 - only 59.4 bcm. In 2013, Russia's gas deliveries through Ukraine to Europe amounted to 83.9 bcm. Before that there was a significant decrease in volume of gas in 2012 - 81.2 bcm, as compared to 104.2 bcm in 2011.
It cannot be overlooked, however, that in the recent decades an annual volume of Ukrainian gas transit has never been even close to the level of 140 bcm, although Vice-President Maroš Šefčovič suggests that Europeans can count on this transit potential. The projected capacity of the Ukrainian GTS at the exit to Europe actually amounted to 142,5 bcm. But in practice according to Ukraine's company Naftogaz, the fluctuations of volumes of gas transit to Europe in 1991-2014 ranged of 92.9 (1992) up to maximum level of 121.5 (2005) bcm.

Ukrtransgaz (subsidiary of Naftohaz) has predicted that gas transit through Ukraine to Europe in 2015 will account for 65-66 bcm. Nevertheless, everybody has to be borne in mind that the consumption of Russian gas in Europe imported via Ukrainian transit will be actually less because of the reverse operations. After crossing the border of the EU, part of the gas is returned back to Ukraine. There are several points facilitating a reverse flow near the border of the EU and Ukraine. For example, in September 2014, Slovakia upgraded a pipeline to supply reverse flows to Ukraine. The link runs from the Vojany compressor station in Slovakia across the border to the western Ukrainian town of Uzhgorod and has a capacity of 14.5 bcm per year.

It would be unnecessarily to say that gas consumers in Europe unlikely noticed a weakening of transit flows through Ukraine shown in the figure above, because gas supplies to Europe were redirected bypassing Ukraine's GTS on other routes particularly via Nord Stream pipeline under the Baltic Sea. The colors on the figure above indicate gas volumes imported by the EU over different transportation routes from Russia. They demonstrate how diversification of gas-supply routes to Europe has been changing during the recent years that, as we know, is of great importance for security of supply.

The position of the Ukrainian GTS is worsened also because, according to various estimates, the sharp decline in the transit volume led to Kiev has already lost about a billion USD of transit revenues. Besides it has long been discussed that if the transit flows to Europe fall less than 60 bcm, the profitability of the Ukrainian GTS will be in question.

The prospect of losing the transit market is more than real and very painful for the Ukraine's economy. The current contract between Gazprom and Naftogaz for gas transit to Europe will expire in December 2019.

In that context, it is appropriate to recall that the contracts on gas supplies to Ukraine and gas transit to Europe for 2009-2019 were signed on January 19, 2009 after the severe gas crisis, which as many still remember, was accompanied by gas cuts in Europe. At the beginning of January 2009, a total of 18 countries experienced a drastic reduction in gas supplies through Ukraine. For example, from January 6 in Austria and Italy deliveries dropped by 90%, and from January 7 in Slovakia and Slovenia by 100%, etc. It would be difficult not to recognize that in this critical situation the existing diversification of gas supply routes from Russia bypassing Ukraine revealed its advantages, when despite gas supplies via Ukrainian transit was shut off in Germany by 100% and in Poland by 90%, imports to these countries continued since it was forwarded on other pipelines through Belarus. The same happened in Turkey where the increase in imports of gas through pipeline Blue Stream under the Black Sea compensated for a reduction of transit deliveries from Ukraine.

The absence of a new contract for the supply of gas to Ukraine in 2009 and Ukraine's debt for gas delivered in 2008, which had reached 2.4 billion USD, was a trigger for that conflict. At the same time, Ukraine was accused of siphoning off gas from its GTS destined to be imported to Europe.

As is known, this year Russia announced that it would not extend the transit contract with Ukraine on disadvantageous terms. Apparently, the European Commission now does not rule out that Russia will fulfill its intention not to renew the transit contract after 2019. There are extensive actions in the EU that can be considered as preparations of the European Commission for such a scenario. The European Commission promotes the TANAP pipeline, has given Project of Common Interest (PCI) status to three other infrastructure projects including Eastring pipeline from Slovakia to Bulgaria, Tesla pipeline from Greece to Austria, and the Bulgaria — Romania — Hungary — Austria bidirectional transmission corridor (currently known as "ROHUAT/BRUA"), not to mention the forthcoming LNG plans. All of these steps taken by the Commission may be considered for certain as the preparation of alternatives in case of closing of the gas transit via Ukraine.

It is not surprising that the European Commission is trying to insure in such a way against uncertainty in the Ukraine crisis. To date, there are no indications that Ukraine itself is able and willing to make constructive efforts for saving the gas transit to Europe after 2019. In fact, the urgency of the problems led to the crisis in the Ukrainian transit has not been alleviated, but on the contrary, it has considerably worsened over the years since the severe winter test in 2009. Ukraine's debt have increased, but the state itself officially declares its persistent insolvency.

At the moment two months after signing the winter package Russian company Gazprom has stopped gas supplies to Ukraine on 25 November since Kiev had yet to pay in advance for future supplies. Ukrainian economy is on the lowest level ever and is experiencing an unprecedented growth of corruption. According to more than optimistic analysis made by Fitch Ratings, in 2016, Ukraine's economy can increase of only 1 percent and in 2017 - up 2.3 percent; given that the factors caused the deep recession in 2014-2015 remain unchanged.

Everything indicates that the attractiveness of Ukraine as a place of investment now is close to zero. Therefore, this country has no any option but to rely on sovereign debt restructuring, as well as the miraculous appearance of foreign investors. It is necessary to mention that the World Bank, the European Investment Bank, or other politically engaged moneylenders far removed from private business and social interests are hardly possible to include.

Since last year, Ukraine has been trying to sell nearly 50 percent in its GTS to EU and U.S. but Western buyers are not willing to rush to take up the offer realizing that the system's value depends on a steady supply of Russian gas. They prefer to keep watching over political twitches and twirls within the gas transportation triangle EU-Russia-Ukraine from outside.

It would be logical to assume, therefore, they do believe that if their business ships fall in that kind of the Triangle right now... as you also know their crews will be at unreasonably high risk of being lost.

So it is no wonder that there are no signs of new private foreign investors in the Ukrainian gas transport system. Nobody would like to be at risk of disappearing in the Ukrainian gas transportation triangle.

Why are our policymakers in Brussels, in spite of everything, still attempting to preserve a worn-out Ukrainian gas transportation system as some sort of political relic?
And that is important, who will ultimately have to bear these expenses?
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Saturday, 31 October 2015

Why do calls for diversification of European gas supplies divert attention from the financial interests of energy consumers?

When you are struggling to pay growing gas and electricity bills, about whom would you first think? Probably most often you are thinking about a rise in prices and your relationship with energy supply companies. It is unlikely that in this case you are more concerned about the changes in the global energy market and the current development of the global energy policy.

Of course, nobody doubts that there is a link between what is happening in these global spheres and the retail price of gas for heating systems in our homes. However, practically such an impact of the processes on a global scale does not look like those, which in our view should be according to the fundamental market laws.

Therefore, it is worth seeing the facts and trying to understand how, figuratively speaking, "messages" from the world market and the sphere of energy geopolitics really reach our energy consumers' finances.
Such an unprecedented strong "message" is the steep fall of oil prices, which became one of major events in the world development. According to “The IEA Oil Market Report”, oil prices sank to six-year lows in August 2015 as a supply overhang grew and concern deepened over the health of the global economy, especially in China. As before, oil prices were affected by high volatility, and the Brent crude oil traded in September slightly above 48 USD per bbl. and NYMEX WTI at 45.20 USD per bbl.
The fall of oil prices carries manifold implications. Low oil prices are said to be the key reason for the financial market instability, outflows from the energy sector and other harmful effects. It is nevertheless obvious that a significant decline in oil prices should bring tangible benefits to end users of energy.

Meanwhile media companies focused on seeking to confirm the existence of those benefits. For example, early this year the BBC News published an article "Oil price falls: Will consumers benefit?" The author noted that, in fact, adequate benefits could be hardly expected. He compares figuratively the price fluctuations in the market with launching missiles and falling feathers. “The cost of petrol and domestic energy are said to rise like a rocket when the oil price goes up”, he wrote. “However, the claim is that they only drift down slowly, like a feather, when the oil price comes down…”

In the EU gas market even the "rocket and feather" criticism is not sufficient to describe actual distortion of pricing in gas supply chain from production to end consumers.

It is well known that gas imports by pipelines strongly prevails in gas supplies in many EU countries. According to "BP Statistical Review of World Energy June 2015", natural gas was imported into Germany in 2014 exclusively by cross-border pipeline amounting to 85.0 bcm. Italy's imports of pipeline gas totaled 46.9 bcm of gas in 2014 and only 4.5 bcm in the form of LNG.

A distinctive feature of the pipeline gas trade is that many gas contracts are long-term covering periods up to 20 years. It is particularly important that prices in these contracts have commonly been linked to oil prices. European contracts use mixes of oil products or crude oil and usually include review clauses, specifying that either side can request a review – typically after three years.

Linkage of long-term contract gas prices to those of oil is based on price competitiveness of two main kinds of fossil fuels that end-users should have a real choice between burning gas and oil products, and would switch to any of them if given a price incentive to do so. An alternative is hub-based prices that have not been so widely used in Europe yet and they are applicable in general to other types of contracts and in other world regions.

There is no doubt that what it is written in the contracts of our European companies and their foreign partners - providers of gas to the EU are strictly observed and as a result due to oil prices decline import prices of natural gas have also moved downward with a certain time lag, usually from 3 to 6 months.

Despite these changes "Eurostat" data of the Figure 1 below shows that the decline in oil prices has not had adequately impact on the retail gas prices for domestic consumers in the EU. Brent has shown long dramatic decline since 2012 while the EU-28 average gas prices for domestic consumers continued to grow with some seasonal fluctuations.

So what is the reason, you may ask, behind the fact that oil prices has been falling, and contractual prices for gas imports follow the trend with a time lag, but average retail prices for gas in the 28 EU member states do not respond properly?

The point is that one of the main reasons for these inconsistencies is reduction of the relative share of gas cost in retail price. So what do citizens of the EU have to pay for?

Actually, besides the cost of gas there are another two components in retail price: one is network costs related transmission and distribution infrastructure costs and the other - taxes and levies. In 2014 the European Commission published a working paper "Energy prices and costs in Europe", which analyzed the changes in the structure of gas retail prices for households and industry in the EU for the period from 2008 to 2012. In particular, it is noted that the energy cost element is generally the largest, though its share is diminishing. At the same time on average for the EU the network component for households has risen within only five years by 17% and taxation went up by 12-14%.

According to "Quarterly report on European gas markets" (vol.8, issue 1; first quarter of 2015) published by the Directorate-General for Energy within the European Commission, the retail price has the following structure: on average, 50% of the price covers the gas itself, while the other half covers distribution/storage costs (25%), energy taxes (9%) and VAT (16%). However, there are significant differences across Member States.

Let's consider the calculation of the Figure 2 below made for 15 EU countries on the basis of data of «Eurostat» and one of main suppliers of gas to Europe, Russia's Gazprom. This calculation shows that the share of gas cost in retail price varies widely by country - from 31% in Italy and the Netherlands to 92% in Romania. Meanwhile, in this case, the average share of gas cost also amounted to about 50% as in the above-mentioned "Quarterly Report on European Gas Markets". As you can see, on average, a half of the retail price is intended for paying for imports of gas and the other half - for services provided by our local gas distribution companies and taxes. Moreover, as the Figure 2 shows, revenues in the EU countries - leading importers of gas have been impressive. In 2014 Germany imported 40.3 bcm of gas from Russia obtaining by those means about 19 billion Euro, while Italy's import of gas accounted for 21.7 bcm and revenues - almost 16 billion Euro
 It is not a random choice of gas supplies from Russia. Сommissioner Arias Cañete emphasized at the European Parliament Plenary in Strasbourg on 7 October 2015, that the EU still imports around a third of its gas from Russia. In his opening remarks Commissioner Arias Cañete also said, “We would like to see Russia as a reliable supplier of natural gas in future; but we would also like to see that the transport of Russian gas fits into our diversification strategy”.

The question that arises then given the facts presented above what do you think Brussels should remain focused on implementing the EU energy policy in favour of end users of gas and their current well-being?
On the one hand, no one denies that the diversification strategy is aimed at protecting the interests of gas consumers in Europe, as it should serve to strengthen the guarantees of security of supply. It should also then be recognized that Russia also is fulfilling, as if in line with the wish of the European Commission, its own strategy of diversification of supply enhancing the existing gas pipeline network to the EU by launching new projects Nord Stream 2 and the Turkish stream.

But on the other hand, we may wonder whether it is impossible at the current diversification of supply, which allows our countries to make good money from gas imports, to maintain reasonably justified level of retail prices, consistent with global trends? In other words, geopolitical aspirations initiated by Brussels and their transatlantic allies should not overshadow and override vital financial interests of the Europeans.

Why is it hard to provide gas consumers with guarantees that the energy policy of the European Commission does not leave aside the issue of an unjustified level of retail prices and does have a positive impact on the financial well-being of EU citizens?
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Thursday, 1 October 2015

Can it happen that the Turkish Stream pipeline will be implemented only by half? Why?

In December last year, Russian President Vladimir Putin and his Turkish counterpart Recep Tayyip Erdogan agreed to build a gas pipeline, known as "Turkish Stream". As is well known, this pipeline should be built in place of the canceled “South Stream” under the Black Sea through Turkey to the border with Greece.
Turkey enthusiastically embraced the initiative of Russia. “Turkey and Europe will be taking as much gas as they need, this means Turkey will serve an energy hub for the entire region”, President Erdogan said at an oil and gas sector workshop in December in Ankara.

After ten months, it becomes clear that there is the frustration of many regarding the negotiation process, as it has gone on for too long. In all that time passed since the official launch of the project “Turkish stream”, the parties have not yet signed an Intergovernmental Agreement (IGA) to formalize what was agreed at the highest level in December. It has already given rise to a wide speculation for mass media and expert community about the prospects of the project implementation and even its inexpedience for Turkey.

Yet logic suggests that the remarks stating that the project is not even profitable for Turkey clearly look false. Obviously, Turkey will be able to obtain from the “Turkish Stream” both economic and political benefits. Apart from meeting the growing demand for gas in the Turkish domestic market, the economic attractiveness of the project is ensured by possibility of obtaining annual payments for gas transit services to the border with Greece. “Turkish Stream” onshore section is 180 km. With a total capacity of gas supplies of 47 bcm, transit payments received by Turkey will amount to about 250 million USD per year.

Along with such revenues, there are political benefits that entails the growth of Turkish influence in both the Balkans and the EU although it is difficult to quantify them.

Of course, multi-billion-euro international projects are not organized "overnight," and haste would not be productive at all, if it is necessary to achieve an acceptable balance between the interests of both parties. However, there is another kind of balance in the basics of business philosophy which is characterized by the expression "time is money", attributed to Benjamin Franklin. It is considered an axiom that the loss of time is equivalent to the loss of money. In other words the attempts to mark time in order to induce more benefits to their advantage, increasing the risk of losing at least part of their interests and capabilities.

Following this logic in relation to the project "Turkish stream," it can be assumed that 2015, especially its first half, in the future will also be called as the time of missed opportunities when the process of decision-making and bilateral agreements on the project has been suspended.

As a result, if you are keeping track of developments, you know that in September Gazprom officially announced about the postponement of the "Turkish stream" launch, as it is not feasible to put into operation the first string in December 2016, as originally planned.

The political crisis in Turkey, where after the elections in June, the ruling party failed to form a new government, is used as a reason of the delay. Under the circumstances, the signing of the IGA will be possible only after the early parliamentary elections in November and the subsequent formation of a new government in Ankara.

Nevertheless, this is not the only reason for the postponement of construction plans, since the IGA could have been inked earlier in the first half of the year before the beginning of the political crisis. Other reasons are caused by the desire of Turkey to use its position in negotiations with Russia, because, as it seemed, Russia had no other alternatives to developing a new route of gas supplies to Europe in replacement of the canceled “South Stream”.

Upon the statements of high-ranking officials in Ankara, Turkey continues to insist on granting with no delay a discount over prices of Russian gas. Initially this discount was part of last year's agreement between Moscow and Ankara over the construction of the “Turkish Stream”. President Putin, during his visit to Turkey on December 1, said that Russia is ready to give a discount of 6% for the supplied gas. In the course of further negotiations, the Turkish side held out for a higher discount, supposing that it should be not less than 10.25%. According to Reuters, the talks between Ankara and Moscow on the construction of the "Turkish Stream" were suspended in late July due to the lack of a key agreement on a discount. Looking back, most likely, if the IGA had been signed before the political crisis, then the discount would also have been approved.
Besides that, Turkish Minister of Energy Taner Yildiz said that Turkey would like to sell itself gas from the Turkish stream. It means that Turkey wants to buy Russian gas at its border and then to carry out its own sales to the EU.

A similar story had already taken place in Ukraine, where Kyiv twice in 2009 and in 2014 declared its desire to buy gas at the border with Russia and sell it on their own to Europe. Russia did not accepted the Ukrainian initiative. There were no enough supporters of the Ukrainian initiative in the EU either, because obviously it is contrary to the European principles of gas trade, aimed at restricting the activities of intermediaries and resellers.

No doubt reselling of gas by Turkey for supplies to Europe would lead to an increase in prices and pose an additional financial burden on our European consumers. So it is unlikely acceptable and it seems to be widely understood in Turkey, especially, in light of Turkish declarations to enter the European Union and to join the European energy legislation.

Alongside with the reasons for changes in the construction schedule of the “Turkish stream”, it is interesting to be aware of its implications.

Turkey's attempts to squeeze more preferences in exchange for further promotion of the "Turkish Stream" project and an indefinite prolongation of talks has led to the fact that Turkey's plans to become one of major transit countries for gas supplies to Europe now are losing a solid ground.

Russia has reacted to such walking of Turkish partners at a tardy pace by means of a new step in collaboration with partners in Europe. Early in September, the Russian gas group Gazprom signed a shareholders' agreement with BASF/Wintershall, E.ON, Engie, OMV and Shell to build “Nord Stream 2” pipeline system to increase gas supplies to the EU. The new project company “New European Pipeline AG” for the construction of the “Nord Stream 2” has already been registered in Switzerland with a share capital of 1 million CHF. The “Nord Stream 2” project envisages the construction of two offshore pipelines with the aggregate annual capacity of 55 bcm of gas to be installed from Russia to Germany through the Baltic Sea and its implementation has been targeted by the end of 2019.

Now, let us recall that under Gazprom's plans, the “Turkish Stream” pipeline will be split into four offshore pipeline strings with a total capacity of 63 bcm a year. The laying of the first string was planned to start in mid-summer this year, and complete the construction of all four strings by the end of 2019.

At the same time with public announcements regarding the project "North Stream 2", there were reports that "Turkish Stream" can be reduced up to two strings. Meanwhile Moscow sent two offers to Ankara relating to the “Turkish Stream” project, apparently showing readiness to untie a negotiations jam regarding the pipeline for gas deliveries to Turkey. Russia’s Energy Minister Alexander Novak said that Moscow is ready to sign an IGA for the construction of one string of “Turkish Stream” that will supply gas for the Turkish market only which is to take about 14 bcm. A separate IGA can be concluded for the construction of pipes 2 to 4, which are projected to carry gas to the EU via Turkish territory. Obviously, the final number of the offshore pipeline strings will depend on the readiness of Turkey as well as demand for gas in the Eastern European countries. It does not clarify how much the new initiative on the “Nord Stream 2” would affect this decision but anyway it occurs.

The whole world witnessed how our European companies once again demonstrated their business acumen, and how Germany is seizing the initiative from Turkey to receive a new powerful stream of Russian gas and new opportunities for transit services.

It is important that significant volumes of gas from the "North Stream 2" can be intended for consumers who expect to receive it through the "Turkish stream." This is especially refers to Italy, since the end point of the "North Stream 2" on the Baltic Sea coast near Greifswald is much closer to Baumgarten where the biggest import and transfer station for natural gas is located in Austria. The currently effective contracts with Italian companies stipulate Baumgarten as the natural gas transfer station. Naturally, a shorter route of gas supplies is more attractive because it allows reducing the transportation costs and favorably affects the utilities prices.
Thus, if the "Turkish Stream" remains only with two instead of four strings of the pipeline, Turkey will have to say goodbye to the expectations of the large transit incomes, which in this case will accrue to Germany and Austria, as well as with a challenging opportunity of being one of major transit countries for gas supplies to the EU.

It is said that a well-known, especially in business circles, proverb "strike while the iron is hot" perhaps came to Europe from the old eastern folklore. Maybe so, because, in fact, this common saying, which sounds as an abstract from an instruction for business, can be found online in Turkish language - «Demir tavında dövülür».

Meanwhile, the question is still open: why this time is Turkey missing to take advantage of their native saying while Europe really makes that?
- ---

Friday, 5 June 2015

Why does Europe need at last to open its eyes to Russia’s intentions and to believe that the Turkish Stream project will be realized?

Global intelligence company Strategic Forecasting Inc. (Stratfor) certainly could not be suspected of loyalty to the Russian initiatives and projects. Stratfor makes economic and geopolitical outlook for large corporations and the US government agencies on the basis of information gathered from official sources and through their own channels. Their analytical information, naturally, intended for the needs of their main customers. So anyone would hardly doubt that Stratfor' work is definitely committed to the interests of the country, in particularly, aimed at restraining Russian energy projects in Europe by any means.

However, recently Stratfor probably has surprised everybody with a degree of objectivity of their analytical article about the Russian-Turkish relations and the Turkish Stream gas pipeline project posted on their website under the title “Russia Carries On With Turkish Stream Pipeline”.

The main arguments of Stratfor analysts lead to the fact that Russia and Turkey will be able to obtain substantial benefits by building a new gas pipeline in spite of all possible political tempests that are likely to be created by Brussels and Washington to prevent further the construction of this gas pipeline.

Stratfor analysts give particular attention to a firm position of the Russian energy company Gazprom, which plans to start constructing the underwater part of the Turkish stream pipeline in June, regardless of whether or not the project will be able to overcome the political obstacles in Europe. In relation to such a prospect, Stratfor notes that Russia has resumed a contract with Germany's company Europipe for 150 thousand tons of pipe for the project. In May, Gazprom  also notified a subsidiary of Italian energy company Saipem, that it could begin laying pipes for the planned pipeline in the Black Sea.

Two giant energy construction vessels Castoro sei and Saipem 7000 passed through Bosphorus to the Black Sea already at the end of last year to take part in the South Stream project, as shown in the photo. It is important that the underwater part of the Turkish Steam will run mostly along the same route as the proposed South Stream project, which was scrapped last December after the EU objected on the Third Energy Package grounds. Thus, the resources attracted by Gazprom for the South Stream with the minor costs are to be redirected to the Turkish stream.

Stratfor analysts also reminded that Gazprom had informed Europe about the plan to cease using its current export route through Ukraine in 2019 and would shift those natural gas supplies to the Turkish Stream pipeline. “But the Europeans – as indicated in the article - believe Russia will not follow through with its plans if Europe does not build the infrastructure necessary to deliver gas from Turkey to the markets currently serviced by the Ukrainian route”.

Actually, it is high time now for Europe at last to believe that the Turkish stream capacities will be in demand even if Brussels is going to continue restrictive policies, and European countries do not build a gas transport infrastructure from the border with Turkey. In this case, Gazprom can rely on the future expansion of the Turkish market, as in the next 10 years the demand for blue fuel in Turkey will rise up to the capacity of two lines of the planned pipeline. It means that demand for the Turkish stream gas will be in any case, even if Brussels keeps the policies hampering access of South Europe countries to Russian gas.

Meanwhile, clearly showing its intentions, Gazprom has presented the Turkish Stream project at the World Gas Conference, held in Paris and declared Reuters its plans to begin construction later in June.
According to the presented information by 2020 the 1,090-kilometre pipeline project, including 180-kilometre of onshore part, is planned to deliver 63 bcm (2.2 tcf) of gas a year to Turkey, of which 47 bcm (1.7 tcf) will be intended for Europe.

Indeed, if Europe does not open its eyes to the obvious situation and does believe that Russia is willing to build the Turkish stream, then unnerving challenges will await Europeans after 2019. Because Brussels's politicians just is restricting access of the Southeast part of our continent to energy, especially if we take into account the Russia's intention to stop the  gas transit through Ukraine in 2019.

Then what are Europeans to do with their future energy needs while, unfortunately, some South East European countries still remain in a state of energy poverty?
Why can it happen that the European consumers will be forced to use more expensive LNG, or even worse, liquefied shale gas from the US?

Sunday, 31 May 2015

Why may the shale gas promised by the US to Europe be non-competitive?

Brussels' hopes on the production of shale gas in Europe as a new alternative source to meet growing needs in energy are weakening before our eyes. Attempts to extend the US shale boom in Europe do fail, demonstrating fiasco of the Washington's intentions to make Central and South East Europe independent of Russian energy.

The Wall Street Journal wrote back in March that Chevron, Exxon Mobil and Shell almost completely stopped exploratory drilling for hydraulic fracking in Europe. Chevron stopped its last European fracking operations in Romania in February. Shell reduced world-wide shale spending by 30% in a number of countries including Turkey, Ukraine and Argentina. Exxon withdrew out of Poland and Hungary, and suspended its German fracking operations.

However, the EU continues to hope, if not for development of shale gas production in Europe, then at least for imports of shale gas from the US in the form of LNG. These high expectations are inspired by the impressive performance of the US shale gas industry.

According to the U.S. Energy Information Administration (EIA), presented in the chart above, currently only four countries in the world - the US, Canada, China and Argentina - have driven the development of shale deposits up to commercial production levels. The absolute leader in the production of shale gas is the United States.

According to Reuters, the total U.S. gas production has increased by 43 percent from 51.9 billion cubic feet per day (bcfd) in 2005 to a record 74.4 bcfd in 2014. The EIA expects gas output to reach 78.4 bcfd in 2015 and 80.0 in 2016.

These optimistic estimates diverge from the views of many experts, who assert that further growth in shale gas production is possible only in case of a stable oil prices rise on the global market. In reality, however, U.S. crude futures CLc1 (Crude Oil Front Month Futures) decreased by 46 % from the level of more than 107 USD in June 2014 down to USD 58 at the end of May 2015.

If such a trend continues further, experts expect that it will hinder the natural gas production growth. This is indicated by the Genscape Inc. data, which predicted a reduction of daily production of shale gas by 1.1 bcfd in the US next year.

Bank of America Merrill Lynch also expects the decline in production of natural gas in 2016 in the US. According to the Bank's forecasts, the reduction will amount to 1.3 bcfd by slowing down the production of shale gas from deposits in Marcellus and Utica under the influence of falling LNG prices by 50%, which in turn are linked to oil prices.

It is obvious that the expected reduction in the production of shale gas will not be conducive to the development of its exports from the United States.

At the same time, the predicted trend in the production of shale gas in the US is not the only problem in the pursuit of shale LNG supplies to Europe. Another problem is the low quality of shale LNG from the US, which calls into question its competitiveness.

Japanese importers highlight in particular the existence of quality problem of shale LNG from the United States. Their attention and concern regarding this issue is caused by the fact that Japan is going to increase significantly the share of LNG from the US in Japanese imports.

Expert opinion in this country is particularly important because Japan is the world's largest importer of LNG. According to a special report of the EIA published in January 2015, Japan's share in global imports of LNG was 31% back in 2010. On March 11, 2011 a tragic earthquake and tsunami hit Japan. The earthquake destroyed all the off-site and almost all the internal power sources in Fukushima-1 nuclear plant. After that terrible disaster LNG demand in the Japanese market has increased significantly, and in 2014 Japan's share in global imports of LNG reached 37%.

Historically, Japan was among the first countries to import LNG. The first shipments of LNG from the United States to Japan took place in 1969 from gas fields in Alaska. Meanwhile, since then the share of US LNG in Japanese imports has remained insignificant. According to the BP Statistical Review of World Energy 2014, the largest supplier of LNG to Japan in 2013 was Australia (21%) followed by Qatar (18%), Malaysia (17%) and Russia (10%).

In recent years Japan, as well as the EU, has looked forward to importing LNG produced from shale deposits in the United States. However the United States is evidently in no hurry to begin LNG exports. It is well known that American exporters had to obtain approvals from the federal Department of Energy to supply gas to countries, which do not have free trade agreements with the United States. Such free trade agreements are in force with 20 countries but there is neither Japan nor the EU among them. The new legislation should simplify the permitting procedure but its adoption is still pending.

More importantly, the prospects of shale LNG supplies to Japan from the US are overshadowed by the fact that the American LNG is of inferior quality, especially heating content, which does not meet the market requirements.

The report of the Institute for Energy Economics in Japan indicated that “LNG from the United States will be leaner than LNG from traditional producers in the Asia-Pacific region with lower heating content, lighter in gravity, less ethane and propane, and mostly comprising of methane. While a vast majority of Japan's city gas has a standard heating value of 45-46 MJ /(m3), natural gas distributed in the US has only 37.3-40.1 MJ/(m3) on average”.

Japanese experts also argue that low characteristics of the US LNG quality besides the weak competitiveness may cause logistical problems associated with its storage and distribution to consumers. As a matter of fact it will require after regasification to mix the leaner LNG from the US with the richer one delivered by other countries or to create a separate capacity for storage and distribution.

Such a pessimistic scenario of LNG supplies from the US to Japan obviously has to be very symbolic for the EU, where the same problems should be expected.

This is actually important taking into account that in spring the European Commission launched an EU Energy Union to bind the 28 countries into a single energy market aimed at tightening competition.

How in case of the newly formed single EU energy market can the politicians in Brussels count on the successful market positioning of shale LNG from the US, less quality, but more expensive considering the cost of shipping across the Atlantic?

Why should European consumers have to pay for these not economically, but clearly politically-motivated plans recklessly focused on replacing Russian gas with the shale LNG from the US having a lower quality to price ratio than its competitors?

Tuesday, 26 May 2015

Why are Greek affairs in the spotlight even at the White House?

Greece is called the cradle of European civilization. In the XXI century the difficult fate of the country led it to the position of the principal debtor within the Eurozone, forced to ask for a massive financial support, especially in countries - its partners in the EU.

In April the German newspaper Handelsblatt cited Vice President of the European Commission Valdis Dombrovskis, responsible for the Euro and Social Dialogue, that the official assumption regarding the Greek economy development in the current year would be reduced affecting conditions of its external lending. Later on the European Commission predicted the Greek economy would grow by only 0.5 per cent of GDP this year, down from an optimistic 2.5 per cent projection made just three months earlier.

There is no doubt that the Greek economy needs a deep rehabilitation and counts on the support and attention from both the EU Member States, and other countries - its traditional partners.

Many Europeans perceive positively that under these circumstances Greece has proved to be a country that is seeking to rely primarily on its own capabilities. The country is really looking for their own independent solutions that can positively impact on its economic status.

In a harsh economic situation the geographic location of Greece becomes an especially valuable gift of fate, since the country is located between the world's largest suppliers of natural gas and the European countries, especially its neighbors in the Balkan region, which need this kind of energy very much. It gives Greece the opportunity to participate in construction and further maintenance of new pipelines to supply gas to Europe.
It is indicative that after Turkey other Balkan countries together with Greece also confirmed their intention to participate in the transit of Russian gas to Europe. They declared about it at the Budapest meeting of foreign ministers from Greece, FYR Macedonia, Serbia, Hungary and Turkey on April 8. The main objective of this meeting was to coordinate efforts for creating a united infrastructure to distribute the gas delivered from third countries.

It is not difficult to see that this objective complies with the problem posed by the European Commission in order to eliminate the so-called "energy islands" existing especially in the countries of South East Europe, where national energy markets are operating separately without a proper technical connection with the energy networks of other EU countries.

However, despite this seemingly worthwhile convergence of the European Commission and the Balkan countries’ intentions regarding the development of the Europe's gas transmission system, in reality there is no consolidation of Brussels and the Balkans on this, of course, the most important task in the energy sector.
The European Union does not support, but rather warns Athens on prospects of participation in the Turkish stream project. In an interview with regional German newspaper Muenchner Merkur European Parliament President Martin Schulz told: “Greece demands and gets a lot of solidarity from the EU. We can therefore also ask for solidarity from Greece and for this solidarity not to be ended unilaterally by pulling out of joint measures".

Obviously, in the energy sector these joint measures meant to follow the requirements of the EU Third Energy Package, according to which it is illegal to own a pipeline and produce the natural gas that flows through it at the same time.

Many Europeans still remember how the European Commission blocked the South Stream project applying the Third Energy Package last year. In fact, a negative role in this story was played by Bulgaria, which did not grant Russia the authorization for construction in its territorial waters and on land. Thus, Gazprom was not able to proceed with the project. It resulted in a dramatic failure of Bulgaria's plans to become a transit country and a major gas hub in South East Europe.

There is a completely different situation now compared to last year because the Turkish Stream project is to be implemented outside the EU and beyond the borders of the EU legislation. However, although such means of pressure on the Russian gas project disappears, there is still the purpose, for which it is done.
Chairman of the Board of Gazprom Alexey Miller at the conference "Europe and Eurasia: Towards a new model of energy security" held in Berlin pointed out that the main purpose of blocking by the European Commission the South Stream project was to preserve the transit of gas through Ukraine.

Actually there is hardly anyone who still doubts that Ukraine has nothing to do with it. As many of you are aware, the United States played a major role in rising the new regime to power in Ukraine and continue to support it by all possible means. That is why after Russian President Vladimir Putin and President of Turkey Recep Tayyip Erdogan agreed to bypass the transit routes through Ukraine last year, the Turkish Stream project became the new target for the White House and, accordingly, Greece too, since the gas pipeline is to be destined for this country.

The US reaction to the interest shown by Greece with regard to new opportunities to develop its energy sector was fairly predictable. Especially after Greek Prime Minister Alexis Tsipras held talks with Vladimir Putin during his visit to Moscow, the US stepped up attempts to influence the prospects for the gas pipeline along Greek territory.

Repeating a familiar scenario of Bulgarian confrontation against the South Stream project, as if a full-time crisis manager, Amos Hochstein, Special Envoy and Coordinator for International Energy Affairs visited Greece on 7 - 8 May. In contrast to the words of politicians from Brussels mentioned above as they sounded more or less like the language of diplomacy, during the talks in Athens with the Greek Minister of industrial Reform, Environmental Protection and Energy Panagiotis Lafazanis the US Special Envoy directly stated that the US most certainly does not want this pipeline. Covering the visit of Amos Hochstein to Greece, The New York Times in an article entitled "U.S. Urges Greece to Reject Russian Energy Project" emphasized “That pipeline would carry Russian gas to Europe through Turkey and Greece, bypassing pipelines that run through Ukraine”.

As indicated in the press release of the US Embassy in Athens following the visit of Amos Hochstein, instead of participating in the Turkish Stream project Greek side was proposed to concentrate on the Trans Adriatic Pipeline (TAP), Greece-Bulgaria Interconnector (IGB), and expanded use of Liquefied Natural Gas (LNG). In the press-release without reference to any economic grounds it is alleged that TAP would result in 1.5 billion Euros in foreign investment in Greece, generate 10,000 jobs during construction, and provide many millions of Euros in revenue annually over 25 years. However, the real situation with the TAP gas pipeline does not correspond with these promises. Although Athens already determined the route of the Greek section of the pipeline, there is no agreement with Baku on the most important financial component of the TAP deal. Even transit tariffs have not been agreed yet.

The US advices regarding LNG seem very vaguely, taking into account that Greece at first will need to build an expensive regasification terminal.

In this regard, the statement made by the US Embassy, which calls for relying on these projects to improve energy security and reduce Greece's dependence on a single gas supplier looks like so much realistic, using the images of the world famous ancient Greek art, as a fig leaf on the ancient statue.

Therefore, it is logical that after talks with Amos Hochstein Greek Minister Panagiotis Lafazanis confirmed: “We want a multilevel and independent energy policy that will be formed exclusively on the basis of our national interest, the interest of the Greek people and, of course, the cooperation and energy security in our region and in Europe”.

How far the consolidation process in favor of national interests will go on further the next meeting of foreign ministers of the Balkan countries and Turkey reveals in July 2015, where imports of gas from Russia will be discussed among other significant issues.

Why wouldn't we wish the countries of South East Europe to withstand these tests of their commitments’ strength to maintain an independent energy policy pursuing its national interests?

p.s. In this situation, the position of the Greek government will continue to be of particular importance for the energy future of the entire region of South East Europe.

Monday, 20 April 2015

Do these facts indicate the fragility of the American shale boom, don’t they?
If so, what does that mean for Europe?

The technology of hydraulic fracturing has been known for many decades. The first experimental hydraulic fracturing treatment took place in the United States in 1947 on the Hugoton gas field in Kansas. However, at the time due to low gas prices this technology was considered too expensive for shale deposits. The situation changed in the 2000s, when gas prices grew significantly arousing interest among mining companies to start fracking of shale formations. It is important to recall that new technologies for drilling long horizontal wells hit the market at the same time. All of these stimulated a rapid development of shale resources in the US and a steep rise in production of shale gas. Exploration and production of oil and gas from shale are conducted currently in many regions of the US.

The largest and most productive shale deposits are the following:

● the Marcellus Shale gas play extends throughout much of the Appalachian Basin primarily in Pennsylvania, West Virginia, New York, and Ohio;
● the Haynesville Shale play underlies large parts of Southwestern Arkansas, Northwest Louisiana, and East Texas. Some experts believe the Haynesville shale could ultimately produce as much as 0.85 to 1.13 tcm of gas;
● the Fayetteville Shale play stretches across Arkansas;
● the Barnett Shale play extends over Northern Texas.

The Marcellus Shale gas play is the largest shale formation in the US occupying a total area of about 95 thousand sq. miles. By early 2015, the Marcellus Shale was yielding about 40.8 mcm of gas per day. At that time, the Marcellus was the source for over 36% of the shale gas produced in the US. According to expert estimates, it is more than enough to supply gas to a half of gas-fired power stations in the US.

The average thickness of the productive layer ranges from 15 to 60 m. and the depth ranges from 1.2 to 2.6 km. Technically recoverable gas resources amount to 7.4 tcm. Over 8,000 wells were drilled for gas extraction from the Marcellus Shale play and about one hundred new wells are added each month.

According to extraction technology after a vertical drilling to a depth of around two-kilometer each well turns for another kilometer inside the shale formation into a horizontal direction.

There are more than 30,000 wells drilled at above-mentioned four major shale plays, which in total produce two-thirds of shale gas in the US.

The volume of shale gas production in the US reached the highest level of about 275 bcm in 2012.
The forecasts of the Energy Information Administration in its Annual Energy Outlook 2014 were based on the expectation that natural gas prices would gradually rise, but remain relatively low, predicted US gas production growing until 2040, driven by large increases in shale gas. It is shown in the graph below.

However, actually expert opinions about the prospects of shale gas production in the US differ dramatically. Official EIA forecasts are criticized that they insufficiently take into consideration the factors capable of undermining the predicted upward trend.

Alternative forecasts of future development of shale gas in the U S developed by a team of geoscientists, petroleum engineers and economists at the University of Texas at Austin had a wide recognition. These forecasts resulted from three-year studies of the major shale plays in the US. The research appeared in some academic journals such as "Proceedings of the National Academy of Sciences". The Texas team predicted that production from the major four plays would peak in 2020 followed by downturn. As shown in the graph below, in 2030 these plays would be producing only about half as much as in the EIA forecast.

Experts indicate much more detailed analysis conducted by the University of Texas. The EIA research breaks up each shale play by county, calculating an average well productivity for that area. But counties often cover more than one thousand sq. km, large enough to hold thousands of horizontal fracked wells. Compared with that of the Texas team splits each play into blocks of one square mile (2.6 sq. km) that is at least 20 times finer than the EIA's.
Experts have noted that the level of detail is of great importance, since the distribution of shale gas over the deposit area is not homogeneous, and accordingly, the performance of the wells may vary significantly. Researchers from the University of Texas found that the major shale plays included into the studies do not have so many spots with really high production potential, which will be sufficiently profitable. Moreover, as it turned out, shale formations are rather rapidly exhausted. Therefore, the life of shale wells usually does not exceed a maximum of 3-4 years.

Under conditions where wells are losing their performance rapidly, companies need to step up drilling activities to support further growth in shale gas production. In comparison the US companies drilled in total 12,000 wells in 2005, but in 2013 the same number of wells were drilled already over a period of less than one month.

It is important that such a dramatic increase in drilling operations leads to the growth of capital and operating costs of shale plays development, which appear significantly higher than with conventional gas production. As a result, shale gas cannot compete on equal terms with the natural gas produced by traditional technologies. It is obvious that due to objective reasons the opportunities for increasing the number of wells are not unlimited.

The results are “bad news”, said Tad Patzek, head of the University of Texas at Austin's department of petroleum and geosystems engineering, and a member of the team that was conducting the studies. With companies trying to extract shale gas as fast as possible and export significant quantities, he argues, “we're setting ourselves up for a major fiasco”.

The United States is still seeking to promote shale gas exploration and development to Europe. However, such diverging opinions regarding the future of the US shale industry now more and more curb the EU enthusiasm for developing these alternative energy technologies.

Recently the new regulation has been adopted by the German government that fracking should be prohibited in so-called sensitive regions such as nature parks or water bore areas, and in depths above 3,000 meters. The measure still needs to be passed by the Bundestag when it goes up for a vote in May.

With all of these going on, why not take the plunge in all countries of the EU and completely bury a utopian idea of shale gas production in Europe?
… .

Monday, 30 March 2015

Why the promises of Energy Union developers to draw lessons from the Nabucco project is not yet convincing?

In an interview with the Turkish publication Hurriyet on March 14 Vice-President of the European Commission Maroš Šefčovič in charge of Energy Union promised to draw lessons from the past and not repeat mistakes of the Nabucco project planned to transport gas from Azerbaijan and Turkmenistan through Turkey to the EU countries.

The story of this project really deserves to be remembered today. Preparations for the Nabucco project started in February 2002 and lasted more than a decade. It was finished on 26 June 2013 when the Austrian company OMV Gas GmbH (Gas Connect Austria GmbH), which had led a consortium for the construction of the Nabucco gas pipeline, officially announced the cancellation of the project.

One of the reasons for the cancellation of the project was that there were different opinions concerning its feasibility. Nevertheless, as it turned out, after almost two years the attitude to this project still widely differ, and there are those who even declare their intention to revive it. During the recent talks in Sofia, President of Azerbaijan Ilham Aliyev and Bulgarian Prime Minister Boyko Borisov agreed on a strategic partnership in order to resume the gas pipeline project Nabucco.

Many of us were greatly surprised by the news. Anyway, it just indicates that the historical lesson on the importance of taking into account the positions of all potential participants in such kind of transcontinental projects is apparently ignored. As it already happened before, complex political and diplomatic maneuvers keep going on and that, sorry for the comparison, does not fit into rigid steel pipelines of gas infrastructure.
Nevertheless reaching the concurrence among the countries participating in such large-scale international projects is important, but it is not the only condition for their successful implementation. The story of Nabucco revealed that the initiators of that project could not sufficiently answer two fundamental questions, which define its viability and therefore attractiveness to investments. First question concerns conditions of the markets, where gas has to be delivered by the planned pipeline. Second one, not less important, is about the availability of the resource base consisting of those gas deposits, which will provide a constant load of pipeline capacity for many decades.

Correction of past mistakes on the Nabucco project promised by the European Commission deals with the Southern Gas Corridor, which the EU prioritized in the European Energy Security Strategy aiming at diversification of natural gas suppliers. It is commonly known that the Southern Gas Corridor highly ranked among prospective gas suppliers to the EU consists of three separate projects: the South Caucasus Pipeline (SCP) via Azerbaijan and Georgia, the Trans Anatolian pipeline through Turkey (TANAP) and its continuation within Europe - the Trans Adriatic Pipeline (TAP) via Greece, Albania and Italy.
Obviously, to take properly into account the lessons of the past, at first the European Commission needs to have full confidence in above mentioned key questions regarding the state of internal gas market and a guaranteed resource base for new pipelines.

Let us consider current information on these issues with regard to TANAP / TAP to understand how much it is possible to avoid project failure next time after Nabucco.

European part of the Southern Gas Corridor - TAP has a route length of 520 km through Greece, Albania and the Adriatic Sea (offshore part) and ends in Italy. TAP's initial capacity of 10 bcm of gas per year is distributed between three countries: the Italian natural gas grid will get 8 bcm, Greece and Albania will share the rest volume of gas by one bcm each. However, it is obvious that TAP will not be able to provide gas to most markets of South-East European countries, which are experiencing particularly high demand for energy.
It refers to the countries that counted on the South Stream pipeline construction, which envisaged deliveries of 63 bcm of gas from Russia to Bulgaria, Hungary, Serbia and Slovenia and some other countries. After the South Stream project had been cancelled last December, all these countries lost opportunities to get access to new gas supplies in the nearer future.

By the way, it is likely that just an awareness of such a loss made Bulgaria propose to revive the Nabucco project. Nevertheless, it is evident that neither future TAP nor Nabucco restored from the past would merely present any realistic prospect for meeting fully market demand in South-East European countries. The situation is coming closer to repeating old mistakes - these markets may be left without new gas supplies at least in the near future if ...

It can happen if the European Commission does not take proper care of the development of the internal gas transport infrastructure connecting South-East European countries' markets within the framework of future Energy Union. Although the European Energy Security Strategy envisages the construction of interconnectors, but its implementation will be dragged on for many years. In addition, Serbia and Macedonia should find their own funds and partners to develop their gas transportation infrastructure.
Therefore, the first key issue of providing the infrastructural integrity of national gas networks can be fulfilled, and it is expected that the European Commission and its future Energy Union will play a significant unifying and stimulating role.

However, there is still the second issue of the resource base - are there enough gas from the Southern Gas Corridor for all European countries concerned but not just for those countries that were originally identified in the TANAP / TAP project?
Let us recall that the TANAP pipeline is designed to transport from Azerbaijan an additional gas from the second stage of the Shah Deniz deposit on the route from the Georgian-Turkish border to the western border of Turkey. Azeri gas will be delivered to Turkey via new pipes laid alongside the South Caucasus Pipeline "Baku - Tbilisi - Erzurum" which was officially opened in 2007.

It is assumed that in parallel to the South Caucasus Pipeline with capacity of 8 bcm accommodating gas from the Shah Deniz Stage 1, there will be another pipeline in the same route. The new pipeline will have a capacity of 17 bcm per year, including 16 bcm reserved for the Shah Deniz Stage 2 and another 1 bcm as a technical reserve.

In turn according to the initial project design, the TANAP pipeline will have the capacity of 16 bcm, of which 10 bcm should be transported to Europe and 6 bcm - to Turkey.

However, in fact it is by no means enough to meet the needs of Europe. There is every indication that here is no way yet of getting away from the problem of gas availability for growing imports to Europe. Moreover, a ghost of Nabucco reminds us about it even more convincingly after the cancellation of the South Stream gas pipeline.

Apparently, to look for new ways of solving this problem in December 2014 the European Commission addressed to Azerbaijan with a request to double the capacity of the TANAP pipeline. In response Azerbaijan promised that the TANAP capacity would be increased to 23 bcm but only by 2023 (and in 2026 it would be increased to 31 bcm).

In the meantime, future implementation of such optimistic promises actually raises reasonable doubts. Actually, an increase in capacity would require significant changes not only in the working design of the TANAP pipeline project, but consequently in the planned new part of the South Caucasus Pipeline. In addition, such project upgrade would result in the necessity to attract new investments.

Even more importantly, there is no objective evidence that now and in the considered future the Caspian region really can provide availability of sufficient gas resources to fill the TANAP pipeline with doubled capacity. It is quite clear, that to fulfil these promises by means of gas from Shah Deniz only will not be enough.

Azerbaijan apparently hopes that additional gas resources can be developed. In December 2014, Company British Petroleum and Azerbaijan’s SOCAR (the State Oil Company of the Republic of Azerbaijan) signed a production sharing agreement (PSA) to jointly explore and develop potential prospects in the shelf area around the Absheron Peninsula in the Azerbaijan sector of the Caspian Sea. However, there are no certain estimates how much time it might take to start a new gas production.

Due to the limits of resource base in Azerbaijan to supply gas via the Southern Transport Corridor, the European Commission included into the short list of potential suppliers presented in the Energy Union strategy two other countries of the Caspian region - Turkmenistan and Iran.

In July 2013, a framework agreement was signed between the governments of Turkmenistan and Turkey on cooperation in deliveries of Turkmen gas to Turkey and to Europe. Turkmenistan's President Gurbanguly Berdimuhamedov paid an official visit to Turkey on March 3, where the discussion of Turkmen gas supplies for TANAP pipeline was continued again. Meanwhile a desire alone cannot lead to success, as well as "a good will" of the parties, even in this case with the active support of the EU. That is why it is too early to talk on any concrete date of commencing Turkmen gas supplies.

In reality, there are problems, which people are trying to ignore. First of all, Turkmenistan's gas resources are currently fully focused on the Chinese market and no radical changes are in sight.

There are issues, which have not been regulated yet, of which the laying of the offshore Trans Caspian pipeline is the main one. As we know, the coastal states have not determined the Caspian Sea's status. At the same time, all the countries have their own interests. For example, Iran demonstratively demands the strict compliance with environmental regulations, which shows that this country is taking advantage of the situation, not wanting any partnerships without its participation.

Tehran seems to be in no hurry to give a "green light" to the development of cooperation between Ashgabat and Baku. Iran is thus promoting its export opportunities, suggesting Azerbaijan and Turkmenistan use its own transport infrastructure for subsequent transit of gas through Turkey to the EU.

However, all this only prolongs time for an indefinite period, since, despite the intentions of the European Commission, Iran is far from ready to draw up concrete plans to supply gas to Europe. In this case, the situation is directly connected with the complex problems of Iran's relations with the US and Israel. Iran's inclusion in the list of prospective gas suppliers to Europe is rightly seen by the world as a political move, which will not be followed yet by real gas projects. As the sanctions against Iran, motived by its nuclear programme, remain in force, and Israel protests sharply against any hint that they may be relaxed.

Thus, the opportunity of Iranian gas imports proposed in the Energy Union strategy raises rather hard political dilemma for Brussels and Washington, which requires to choose what is more important - to maintain the direct and indirect sanctions imposed on Russia including the policy of curbing gas supplies or to continue the sanctions regime against Iran. The intrigue may turn out to be that neither Iran nor Russia have anything crucial to lose in this situation.

Why does the European Commission persist to prove the possibility of replacing Russian gas while at the same time referring to the willingness to take into account the lessons of the past? Why is it less important to keep in mind the mistakes with the South Stream project too that happened after a failure of the Nabucco project? Indeed, history shows that hoping for time will judge everything by itself could cost us too much.
… .

Tuesday, 17 March 2015

Why is it not worth regretting the fact that US companies are terminating its projects to extract shale gas in Europe?

According to the US Energy Information Administration, France has the largest deposits of shale gas in Europe, located mainly in the basin of Paris and the Rhone Valley. Perhaps that is why with this country US companies intended to begin development of European resources of this unconventional energy. However, France became the first country in the world where 13 July 2011 the Senate legally banned a mining method using the so-called "hydraulic fracturing."

Following the ban, US company Schuepbach Energy, which had two exploration licenses cancelled in southern France, appealed on several counts. But the Constitutional Court rejected these complaints and upheld the 2011 law banning the hydraulic fracturing in the country. France's Energy Minister Philippe Martin called the court ruling "a legal victory, but also an environmental and political one".

Meanwhile it was only the first victory. At the same time, it may happen that somewhere such a reasonable opinion can retreat under pressure of shale technologies image actively promoted in society and political circles. Not everywhere in Europe yet people are aware that environmental risks associated with development of shale deposits will be too high. After all, Europe is of particular ecological vulnerability because of a very high population density in most countries, against which a fragile environment, as it is, often barely withstands.

For many of us in Europe it is even difficult to imagine how the horizontal drains are kicked off at the base of a vertical hole at a depth of 1,500 to 3,000 meters and can extend over a distance of 1,000 and 2,000 meters underneath village houses or city blocks. After that, multiple fractures are created by injecting a very high-pressure mixture of water, sand and several hundred different harmful chemical additives. Routinely on existing technologies, the operations of hydraulic fracturing should be repeated in the same production area up to 10 times a year.

How the density of the drilling sites in the fields of shale deposits looks like one can see in the photo made in the Jonah Field - a large natural gas field in the Green River Basin, Wyoming, in the United States. At the sight of this photo, all of us might wonder if there will be anyone in sound mind, who can combine this half-Mars picture with our European landscape?

Staying in one of the first places on the estimated reserves in Europe, particularly Poland has been in a deep conflict regarding shale gas exploration in recent years. Among other problems of shale gas development had arisen in Poland there was the fact that this technology leads to a high consumption of water, which can be a very harmful to the country's agro-industrial sector.

Besides there is always the danger that huge volumes of fracking mixture will uncontrollably be spilled over the ground surface, infecting everything around. According to the evidence of Polish farmer from the village Żurawlów, close to the town Zamość, when the US company Chevron conducted seismic surveys "water looked like the oil slush. And before that it was crystal clear".

Confrontation with Polish farmers in Żurawlów lasted more than a year. During that time, activists of environmental organizations from the United States, Czech Republic and Latvia arrived in Żurawlów sharing their experience in the opposition against fracking in their countries. As a result, Chevron terminated its activities in the Lublin province, and later on in January it completely stopped exploratory drilling in Poland. Before that, within three years the US companies ExxonMobil and Marathon Oil, and the Canadian Talisman Energy Inc. also had left Poland. This year in February Chevron announced that it would give up shale gas exploration plans in Romania.

Huge amount of water mixed with sand and different chemicals that is pumped deep into the earth for fracking poses is a real threat not only because it causes a very dangerous environmental pollution. In the United States, where the development of shale gas production has already reached a very large industrial scale, there is another serious problem. Modern fracking technology provokes artificial earthquakes.

According to the US Geological Survey, published by the Washington Post, an unprecedented increase in the number of earthquakes was recorded in Oklahoma, where a big part of the Caney and Woodford Shales is located occupied by sites of drilling and fracking. As of 2012, there were an estimated 11,000 private and commercial injection and disposal wells in Oklahoma and the number of earthquakes has been accordingly growing. In 2014, the US Geological Survey data showed there had been 585 earthquakes with magnitude 3.0 or greater in Oklahoma that is more than three times the number of earthquakes as in California.

It is important that the greatest impact, causing movements of the earth's crust, resulted not from the fracking process but mostly due to associated deep geological disposal of sludge water, which pumped back into specially drilled wells. According to various estimates, there are about 30 thousand disposal wells in the United States. Numerous facts point at a direct link between the injection of fracking wastewater into the earth and the increase in seismic activity, since the latter more occurs around disposal wells. Thus, according to the Earthworks report released in March 2014 there are more than 1,500 wells for the disposal of wastewater in California. Over a half of these wells is within ten-mile zone of the earthquake epicenter, and 6% or 87 wells - within one-mile radius.

It seems that everybody has already aware of that fracking technology carries various threats such as contamination of groundwater, earthquakes, enormous water consumption, and risks caused by improper disposal of flowback water.

However, despite how much fracking supporters wanted to wave it away European countries should draw attention to the existing experience and make the right conclusions that their plans for a widespread use of fracking technologies in Europe intended for shale gas production do not have any proper environmental as well as economic feasibility. Before everything else such plans are motivated by unreasonable ambitions of policy makers and reckless commercial interests of international oil companies, which are promoting all over the world the shale technology a little worrying about the consequences.


Unfortunately, the doors for the shale gas exploration and production technology are open in most European countries yet. According to the article published on April 5, 2014 in the Economist, as shown in the map above, there is a ban on the production of shale gas only in five European countries, including France, Luxembourg, the Netherlands, the Czech Republic and Bulgaria. Meanwhile in February Germany proposed a draft law that would allow commercial shale gas fracking at depths of over 3,000 meters in this case removing a moratorium that was imposed several years ago
Anyway, the hope is necessary that a careful attitude towards ecology conservation in all European countries will adjust their shale policy and will be reflected in the priorities of the future Energy Union.

When would it be possible to expect that our politicians and lawmakers will definitely say goodbye to a troublemaking dream of inspiring a dangerous shale boom in Europe? Otherwise, do they still need for that real earthquakes and a special smell of oil in a sauna?