Friday, 29 September 2017

Why could a new gas import route to EU from Russia face a fork while crossing Turkey?
According to Financial Times, in early September the UK Company Petrofac was awarded an engineering, procurement and construction (EPC) contract by the Gazprom-owned South Stream Transport company to develop a gas-receiving terminal near Kiyikoy in Turkey. Under the contract, Petrofac will provide EPC for the receiving terminal, which will be ready for commercial operations in December 2019. When implemented, it will receive 31.5 bcm from the Turkish Stream offshore pipeline, originating from the compressor station in Anapa on Russia's side of the Black Sea.

The Turkish Stream gas pipeline, it was said, will comprise two lines of 15.75 bcma each. Moscow and Ankara signed an intergovernmental agreement on the construction of the Turkish Stream in October last year. According to this agreement, the first line of the gas pipeline is intended for natural gas supplies directly to Turkey while the second should ensure transit of gas via Turkey’s territory to the neighboring countries of South Eastern Europe.

However, the extension of the second line from the Turkey's border further into Europe is associated with certain conditions. Yet a year ago, the Turkish newspaper Daily Sabah, as well as a number of other media, quoted the Russia's Minister of Foreign Affairs Sergey Lavrov who said, "After the failure of the South Stream, we will be ready to extend Turkish Stream to the territory of the European Union only after we received an unambiguous formal paper that guarantees the implementation of this project."

Offshore pipe-laying for the Turkish Stream across the bottom of the Black Sea began in May this year. According to Natural Gas World, at the 86th Izmir International Fair in August Russia’s energy minister Alexander Novak informed that Gazprom had already laid more than 170 kilometers of the offshore part of the Turkish Stream gas pipeline. By the end of September, the work most likely has progressed far even no less than a hundred kilometers.
Of course, European gas consumers especially in South Eastern countries would be interested in knowing how the preparations are now proceeding to receive gas supplies to the EU by the Turkish Stream pipeline, which, as announced, are planned to commence in December 2019. Gazprom and BOTAS are reportedly negotiating the foundation of a joint venture TurkAkim Gaz Tasima intended for the construction of the onshore part of the Turkish Stream's second line. To ensure transit of gas through Turkey's territory from the receiving terminal on the Black Sea coast near Kiyikoy to the Turkish Greek border, it will be necessary to construct a gas pipeline of 180 kilometers. Meanwhile, Greece, Italy, and now Bulgaria again are in active support of the idea that gas imports should be carried out to their territories.

An infographic above shows how while reaching Turkey this new gas transportation route faces two alternative scenarios, as it should be decided whether to follow by the Greek direction, or take another direction actively supported by Bulgaria.

What is the outlook for extending the Turkish Stream towards Greece and Italy?
Many attentive observers in Europe have already noticed the real progress in creating the conditions for extension of the Turkish Stream gas pipeline to Greece and Italy. This, in particular, is evidenced by the results of First bilateral intergovernmental conference organized by the Greek-Italian Co-operation Council in Corfu. The two prime ministers, Alexis Tsipras and Paolo Gentiloni also attended this event on 14 September. In their presence the ministers of the two countries, Giorgos Stathakis and Carlo Calenda signed a joint declaration. The document notably made a reference to the development of a new diversified route for the transport of Russian gas through the IGI Poseidon pipeline and the extensions of the gas transmission systems of Greece and Italy, named by the Greek side as the Greek Stream.

In fact, this is not the first joint action in support of projects granted a common logo of "Greek Stream". It was made public in June that the CEOs of Gazprom Alexei Miller, Edison, Marc Benayoun, and Depa, Theodoros Kitsakos who is also the chairman of IGI Poseidon, signed a co-operation agreement at the St Petersburg International Economic Forum. The agreement envisages carrying out joint efforts to establish a new route for Russian gas supplies to Europe. Thus, these companies confirmed their desire to co-ordinate the development of a pipeline project, including IGI Onshore of 600 kilometers pipeline with the capacity up to 16 bcma through the Greek territory and IGI Poseidon of 200 kilometers offshore pipeline, 10-12 bcma across the Ionian Sea to Italy. It was made in the presence of Carlo Calenda and George Tsipras, the secretary-general for international economic relations at the Hellenic Ministry of Foreign Affairs.

Before the above-mentioned events, in March Eni concluded a memorandum of understanding (MoU) with Gazprom for the supply of Russian gas through the route providing gas imports by transit via Greece to Italy. It is no secret that Italian energy companies are interested in replacing the current Russian gas route to Italy from Central European Gas Hub AG (CEGH, formerly known as Gas Hub Baumgarten) in Austria with a shorter and more economical southern route. This goal can be achieved by connecting the second line of the Turkish Stream with the IGI Poseidon gas pipeline at the Turkish Greek border. In arguing its position in the European Commission Italy has said more than once that since it would be just a replacement the use of the southern supply route is not expected to result in enlarging Russian presence in this part of European gas market.

Meanwhile, the IGI Poseidon gas pipeline project is only one of the possible options for connecting European consumers to the Turkish Stream pipeline. Although, up to now, this scenario is obviously regarded as a priority, in South Eastern Europe another alternative gas transportation route is being discussed.

How much is it possible returning back supposedly to a new, but partly to not-yet-forgotten old route of gas imports to Europe via Bulgaria?

Probably, many in Europe still remember how in December 2014 Moscow abandoned plans to build the South Stream gas pipeline because of which Bulgaria together with some other countries of South Eastern Europe lost an opportunity for transit-free access to gas supplies directly from Russia through the Black Sea. The irony of the situation is that just when the cooperation on the South Stream project had been stopped Bulgaria actively came up with new initiative to create a gas hub "Balkan" to distribute imported gas to other countries within South-Eastern European region. Insufficient economic rationale of this initiative speaks for itself - after three-year discussion it is still unclear, from where and, most importantly, when Bulgaria will receive the gas necessary for the hub "Balkan" to fulfill its gas distribution functions. It is evident to anyone that one billion cubic meters of natural gas from Azerbaijan, which Bulgaria plans to import by the TANAP pipe line from Shah Deniz 2, will meet only one-thirdŽ of Bulgaria’s annual gas consumption by 2020 that is absolutely not enough for the operation of this regional hub. And the suggestions to expect Iraqi, Israeli, Egyptian, Cypriot, Qatari, US or any other gas could help balance off regional demand are still very far from practical implementation.

Under these circumstances, seeking a chance to catch up Bulgaria apparently prepares at once for two new scenarios of gas supplies from Russia. The first one related to an old route of the South Stream tentatively named Black Sea Stream during the presentation of the gas hub "Balkan", executed by Bulgartransgaz EAD on 5 September 2016; the second is a new route of the Turkish Stream passing by transit throughout Turkey's territory.

As for the latter scenario, "15.7-16 bcm of natural gas could be supplied both to and from Turkey", Prime Minister Boyko Borisov said as he inspected the construction of a transit gas pipeline to Turkey in the Lozenets-Nedyalsko section, Bulgaria’s FOCUS News Agency reported. This pipeline stretching almost 20 kilometers from the Lozenets gas compressor station to the village of Nedyalsko is considered as the initial part of the new gas interconnector Turkey - Bulgaria (ITB). In total, the Bulgarian section of the pipeline will be about 75 kilometers in length - from the Lozenets gas compressor station to the Turkish village of Malkoclar. The Bulgaria’s government is working to secure the delivery of 15.4 bcm of Russian gas directly to a planned gas hub. However, "The Russian gas could come via the pipeline we are now building if we do not reach an agreement between the European Commission and Gazprom for a direct pipeline to the gas hub. We are preparing for both options," Prime Minister Borisov commented.

One should bear in mind the fact that Bulgaria managed to obtain permission from the European Commission for the supplies of Russia’s gas needed for efficient performance of the gas hub "Balkan".

According to an announcement of Premier Minister Borisov on 19 July, he had requested from Brussels for a link to the Turkish Stream, through which Russia’s gas would be delivered directly to Bulgaria. In a letter of reply signed by Miguel Arias Cañete, European Commissioner for Climate Action and Energy, Brussels said it supported the development of the gas hub and reminded that Bulgaria needed to improve its energy infrastructure. The letter, however, did not mentioned the particular project.

Unlike Brussels officials, whose special opinion can be obtained, as in the case of Bulgaria, only through official requests and repeated reminders, in the European gas market all stakeholders and beneficiaries - from energy and utility undertakings to many ordinary citizens - gas consumers in member countries - all of them, most evidently, are monitoring development of gas routes on their own initiative without any outside aided awareness or strong recommendations. Eventually, one does not have to be excessively perspective to realize how it is important to be better prepared for possible changes and new challenges in the certain segments of gas market. Professional organizations provide useful assistance with such efforts. For example, the European Network of Transmission System Operators for Gas (ENTSOG) published a Regional Investment Plan for South East Europe. According to the publication, the report underlines importance of the IGI Poseidon pipeline and refers to the Tesla pipeline. It should be noted that both energy projects are considered as alternative routes for the Turkish Stream’s extension towards Europe.
Why are the diverging paths of gas supplies, at which both the investment projects' developers and future consumers must target, indicate possible directions a lot faster than energy policy strategists in Europe make their principal decisions?

Thursday, 31 August 2017

Why would it be too naïve to expect a mass arrival of LNG tankers labeled "America first" to the Baltics through Danish Channels?
Financial Times creatively described how during the 16-hour trip made by President Donald Trump on July 6 "he was cheered by the crowd to the rooftops" while welcoming US President’s pledge to raise US shale LNG exports in Europe. Two months earlier in the framework of the official visit of Polish delegation to Washington in April Poland’s state-owned PGNiG SA bought a spot LNG cargo from Cheniere Energy Inc.’s Sabine Pass plant. Then as a prelude to the President Donald Trump’s visit, the 162,000-cbm Clean Ocean arrived at the Lech Kaczyński LNG terminal in Świnoujście on June 8.

The total cost of the Poland's LNG terminal is 950 million euros (3.5billion zlotys). The European Energy Programme for Recovery (EEPR) funds supported the engineering, construction and implementation of two LNG storage tanks and the docking area for the LNG infrastructure in Świnoujście. The European Commission and Poland's political leaders believe that the terminal is necessary to foster EU energy security objectives in terms of diversification and to reduce dependence on Russian gas. The terminal's initial regasification capacity is 5 bcm per annum. The vessel with first ever delivery of LNG cargo arrived to the Polish LNG receiving terminal in Świnoujście from Qatar on 11 December 2015.

It was expected that the LNG terminal in Świnoujście would be operating at full capacity by 2018. To date, however, Poland has managed to utilize much less than half of the existing regasification capacity. It would be sufficient to take a look at the data in BP Statistical Review of World Energy 2017 to come to this conclusion. The consumption of natural gas in Poland in 2016 amounted to 17.3 bcm largely come from domestic production of 3.9 bcm and imports of 12.6 bcm including 10.2 bcm of gas supplies from Russia. As Figure below illustrates, the remaining part of natural gas consumed in the country in the volume of less than one bcm accounted for LNG imports.

Despite the fact that the terminal in Świnoujście has operated at less than 20% of its intended capacity, this year Polish gas transmission operator, Gaz-System has decided to upgrade it. With the construction of the third tank, its capacity can be expanded to reach 7.5 bcm per annum satisfying about 50% of Poland's annual gas demand. Such an increase in regasification capacity is expected to provide Poland with opportunities for playing an active role in the changing LNG market in Central and Eastern Europe. In seeking an execution of this plan, Warsaw puts special hopes on a possibility of signing a long-term sales and purchase agreement (SPA) for supplies of US LNG to Poland.

In that regard during the ceremony welcoming the US tanker on June 8, Poland’s Prime Minister Beata Szydlo said it was a historic moment that improves the region's energy security. A month later, the country’s President Andrzej Duda also expressed his enthusiasm after meeting US president Donald Trump in developing a LNG hub for US deliveries for the region. Thus, it would appear that everything is about ready in Poland to promote LNG from the U.S. to the European market. Moreover, the preparatory process has already moved from the political level to the sphere of business, since Polish Gas and Oil Company (PGNiG) opened a trading office for LNG in the Western London district of Mayfair, which is being run by PGNiG Supply and Trading GmbH, a Germany-based subsidiary of PGNiG.
In the meantime one cannot disregard the fact that Even the successful testing of transatlantic route for LNG supplies to Poland is not the only prerequisite for the full load of the LNG infrastructure enterprise in Świnoujście. The major concern is that US LNG has failed to be competitive with other natural gas supplies to Europe, in particular those which come from Russia by pipelines. This is far from saying, however, that current and most likely future underutilization of productive capacity in the Poland's LNG terminal is not the only eye-opener for Europeans regarding the problem with US LNG competitiveness.

In fact, the European gas market is already very familiar with US LNG competitiveness problem that has captured the attention each time when so-called test cargoes arrived from the only LNG exporting facility in the U.S. The geography of US LNG deliveries should be eventually predetermined by the peculiarities of the gas infrastructure in Europe, such as regional accessibility to LNG regasification terminals and gas pipeline networks. At the existing price ratio of LNG compared with pipeline gas it is much more likely that LNG from the U.S. can find and maintain its market niche, where there is an insufficient access in Europe to natural gas supplied by pipelines. This particularly concerns the western part of the continent, especially such European countries as Portugal and Spain.
Poland, of course, is not relevant to the group of countries mentioned above. As the figure indicates, in 2016 about three quarters of gas demand in Poland was met by pipeline imports from Russia and other countries like Germany and only by 5% due to imports of LNG from Norway and Qatar. It should be added that Poland gains benefits from the transit of Russian gas coming from the Belarusian and Ukrainian routes. A new profitable business for gas transport operators and traders appeared in Poland after Ukraine had stopped buying Russian gas in November 2015 opened up opportunities for gas re-exports to this country. According to Reuters, company PGNiG plans to double gas exports to Ukraine to 0.7-0.8 bcm in 2017.

All this may serve as strong economic arguments against attempting to take a sharp swing away from gas imports by pipelines in Poland. At the same time, original causes of such attempts should be sought essentially in the political domain. The reality is that by this way Poland's government demonstrates its special loyalty and devotion to its transatlantic ties with the U.S. What is more remarkable that this is occurring at a time when Europe is experiencing a cooling of relations between Brussels and Washington to such extent that it even led the EU's leadership to question publicly the factual strength of the Atlantic partnership. In a German radio interview broadcast on August 2 the European Commission president Jean-Claude Juncker noted, "I still assume that we are allies of the U.S."

In the meantime, Poland itself apparently does not attach a considerable importance to what the rest of Europe can think about this country, which is ready to deserve a political encouragement from Washington in the form of medium- or long-term SPA for the supplies of US LNG. The irony is that for many years Europeans have been used to hearing how Russia was using its energy resources as a tool to sort out political preferences in partner relationship. Now everyone has a chance to see that providing access to fossil energy has also become one of the central questions in the present political relations between Poland and the U.S.

Article entitled "UAE and Mexico favoured for US LNG while Poles pay much less for their cargo than Dutch", published in LNG Journal 18 July 2017, highlights a new episode in the use of energy as a political instrument. The point is that, according to the detailed data released by the US Department of Energy, the price of LNG dispatched to Poland on May 22 from the Sabine Pass terminal was 30% lower than the price of LNG that was sent to the Netherlands on the day before (May 21). The Dutch buyer paid 2 USD per MMBtu more for a cargo from Sabine Pass than Poland’s importer. Specifically, the Netherlands shipment to Gate LNG in Rotterdam by the "Arctic Discoverer" was priced at 6.10 USD per MMBtu while Poland’s shipment delivered to the Baltic port of Swinoujscie on the Clean Ocean cost 4.10 USD per MMBtu.

An essential distinction between the two prices is that the Polish price refers to a short-term contract for spot cargo delivery aiming at testing and promotion. It is highly unlikely that this price reflects current market conditions because everybody could see a political rather than a commercial motivation behind the agreement signed during the Polish secretary of state and chief of the cabinet of the president, Krzysztof Szczerski‘s visit to Washington on April 26 – 27.

In contrast, the Dutch price was determined under a typical long-term LNG SPA Contracts with a 20-year lifespan. It should be noted that in this case price formation is based on the model applied for all long-term LNG SPA of Cheniere Energy Inc. The Table above contains information on several LNG SPA concluded with European and Asian buyers. According to long-term LNG SPA Contracts, Cheniere Energy Inc. sales LNG on the FOB basis at the tailgate of the plant when the price includes two components: fixed fee of 2 – 3 USD per MMBtu plus 115% of NYMEX Henry Hub. The charge of 15% above Henry Hub mainly accounts for liquefaction and basis differential. It is particularly important than under the terms of long-term LNG SPA Contracts customers must take (or pay) annual contract quantity of LNG.

However, the practice has shown that Cheniere’s long-term LNG SPA Contracts are not always in line with the interests of customers. Such opinions are existing even in the key premium Asian market. For example, this year one of the main buyers of LNG in Asia - the state-owned Indian company GAIL attempts to renegotiate pricing with Cheniere under previously signed long-term LNG SPA Contract. As the Hindustan Times wrote, quoting an unnamed representative of the Indian site: "At current US prices, the landed cost of the LNG (in India) is not very attractive."

And in fact, it is obvious that the transportation of LNG across an ocean to distant European or Asian markets, regasification and storage operations, as well as technological losses of gas in transportation and during processing - all together add a significant value to the US export price FOB that ultimately makes the total landed cost of overseas LNG uncompetitive.

In this context, the S&P report entitled "Can The U.S. Shut Off Russia's Gas Supply to Europe?" has not gone unnoticed. As concluded in the report, "the main problem for US exporters is that European hub prices are currently well below those that would be attractive." the S&P analysts estimated that gas prices would need to increase by about 30% from the current level (of about 5.0 – 5.5 USD per MMBtu) to make exports profitable for US suppliers."

Washington's present policy is unfortunately aimed at imposing by any means on Europe supplies of US uncompetitive LNG although such practices ran counter to the basic market principles. With this in mind, the part of the leadership of the European Commission, Member States and European energy companies that correctly assesses the current situation deserves respect. Probably, many would agree to join the words of Klaus Schäfer, Chief Executive of German utility Uniper who said, "I’m very pleased that the German government and the European Commission have this firmly in view and have stated their position unequivocally. The United States is putting Europe’s supply security at risk for the sole purpose of pursuing its own economic interests and to protect domestic jobs."

As for Poland, truth be told, Europeans might be having doubts, some serious doubts about prospects of awarding a cost-effective medium- or long-term LNG SPA Contract at least while the President Donald Trump keeps his election promise. "’America first’ will be the major and overriding theme of my administration," the President Trump said.

Why would not Poland's leaders dreaming of new advantageous offers from US LNG suppliers prepare a simple projection for estimating a number of LNG carriers sufficient to meet an annual gas demand in domestic market without re-export to neighboring countries?
The result of this estimate would be like that: This question sounds theoretical, because, firstly, there is no terminal infrastructure in Poland, the capacity of which would allow regasifying the volume of gas equivalent to an annual consumption of this country. But, secondly, if even part of the regasification were performed by some other terminals, in this case it would require in total about 180 LNG carriers of the same capacity as the Clean Ocean for delivering 17.3 bcm of natural gas annually to Poland. This is about twice the total number of liquefied gas tankers, according to the US Department of Energy, carrying cargoes since the commissioning of Sabine Pass terminal.


Monday, 31 July 2017

Why is Europe, being so preoccupied with the security of supplies, still tolerating perpetual dependence on gas transit countries?
Czech journalist and analytical expert Jan Schneider in his article entitled "Polish and Ukrainian Gas Schizophrenia" (Polská a ukrajinská plynová schizofrenie) argued that Europe has managed to slip out of the trap set by two gas transit countries, which eager to settle scores against Russia to the detriment of the Europe's interests. However, it would be still premature to conclude that all challenges of ensuring secure and reliable gas transit have been already left behind. The figures and facts show the opposite.

To begin with, lack of confidence in operational reliability of gas transit routes has resulted in greater demand generated by intention of European consumers to replenish more actively gas reserves spent during winter season. This led to considerable rise in gas imports from Russia in Europe and Turkey to 102.9 bcm since the beginning of the year from 1 January until 15 July 2017, marking a 12.3 percent increase from the same period a year ago. In particular, gas imports in Germany are up 16.7 percent. Austria saw a 77.2 percent rise in gas supplies from Russia, while the Czech Republic increased imports of Russian gas by 24.8 percent and Slovakia by 25.8 percent. Russian gas supplies to South and South Eastern Europe and Turkey also increased over the same period of this year. Gas supplies to Hungary rose by 26.6 percent compared to the same period of 2016, to Serbia - by 47.9 percent, to Bulgaria - by 12.6 percent, to Greece - by 10 percent, to Turkey - by 22 percent.

In considering these points, it is important to underline that such a continued strong demand for natural gas is an unusual phenomenon in the spring and early summer. All this indicates that Europe is suffering from the Ukrainian syndrome, being particularly concerned by the persistent deterioration in the economic situation throughout Ukraine, alarmed at the impending energy crisis that is threatening to disrupt gas transit supplies. The chances of that are high because the military escalation in Ukraine has not stopped and the window of opportunities for realizing the Minsk Agreements is becoming increasingly smaller. In addition, weak results in fighting corruption and the thriving informal market continue to discourage further Macro-Financial Assistance that the EU has extended to Ukraine, which since 2014 has reached 2.81 billion euros, the largest amount of Macro-Financial Assistance the EU has disbursed to any non-EU country. No one can doubt now that without external aid this country will go bankrupt. Even the World Bank assessments made in a spirit of strained optimism admitted that Ukraine would require significant external financing to meet repayments of external debt of banks and corporates amounting to about 8 billion dollars per year during 2016-2018.

An acute deficit of coal has further deepened the current energy crisis. Anthracite, a special type of coal, is the key fuel for electricity production used by seven of the existing 14 thermal power plants in Ukraine. All mining of anthracite is carried out only in areas of Donbass beyond Ukraine’s Government control. In the middle of last winter, anthracite supplies were completely blocked. This caused a shutdown of power generation at five of the seven anthracite-fired power plants and Ukraine’s Government had to declare a state of emergency in energy sector that lasted almost half a year from 17 February until 17 July.

After the lifting of the state of emergency, the situation in the Ukraine’s energy sector remains complex. In discussing the state of Ukraine’s energy sector at the Atlantic Council on 12 July, experts acknowledged a high uncertainty of its future development.

Ultimately, now nobody excludes further recurrence of emergency states in the energy sector that seriously undermines the Ukraine’s credibility as a reliable gas transit country. That realization should be considered the underlying reason for European gas consumers to start so much early and actively with preparing for next winter season.

Balancing on the edge of the emergency state in the Ukraine’s energy sector should make it much more difficult for European companies Snam (Italy) and Eustream (Slovakia) to fulfil the Memorandum of Understanding signed with Naftogaz Ukrainy, PJSC Ukrtransgaz that envisages the assessment of cooperation opportunities using and developing Ukraine's gas transportation system (GTS). The question is whether this evaluation can prove that there would be sufficient business benefits from the reverse of Russian gas to Ukraine to constitute convincing arguments in favour of the feasibility of providing financial crutches to decrepit GTS and being bound by closer relations with the futureless gas infrastructure in this country. While this question is also linked to the still uncompleted court case in the Arbitration Institute of the Stockholm Chamber of Commerce between Naftogaz Ukrainy and Russia's Gazprom that threatens to sink the Financial Reverse Titanic together with risky funds likely to be mobilized to keep Ukraine’s GTS afloat.

Meanwhile, the construction of direct, transit-free gas supply routes to the EU continues bypassing Ukraine. On the southern side of Europe Russia's Gazprom has started laying the Turkish Stream gas pipeline in the deep-water across the Black Sea from Russia to Turkey. On the northern side, five European energy companies, Shell, Engie, OMV, Uniper and Wintershall signed financing agreements with Nord Stream 2 that will run from the coast of Russia via the Baltic Sea to Greifswald in Germany, facilitating a direct link between European consumers and natural gas fields.

But in the meantime, according to Reuters, the Russian company expressed its readiness for talks with Ukraine on gas transit to Europe beyond 2019, when the current contract expires. It is assumed that in the future gas transit via Ukraine might be about 15 bcm. It is important to note that most of this volume unlikely will reach European consumers because of needs to ensure gas reverse from Europe to Ukraine. Gas data for 2016 reveal how the gas obtained via Ukraine's transit turns into the gas reversed from Europe. According to company Ukrtransgaz, in 2016 natural gas for the needs of Ukrainian consumers was imported only from Europe: Slovakia supplied 9.1 bcm; Hungary - 1 bcm; Poland - 1 bcm and it is no doubt that all this gas came from Russia.

Ukraine actually is not the only origin of troubles in the implementation of gas transit to EU member states. As shown on the scheme above, Yamal-Europe gas pipeline with annual capacity of 33 bcm connecting natural gas fields in Russia with Germany passes through Poland. Reuters reported on July 6 that Poland had said it does not intend to extend its long-term gas supply deal with Russia's Gazprom after it expires in 2022.

Poland's aggressive stance based on opposing in the development of transit-free supplies of gas to Europe is actively encouraged by the US promises to enable this country to became a hub for the distribution of US shale gas. Such plans for imports, of course, will never be executed unless the price of US LNG is competitive in the European market. Meanwhile, the first cargo of U.S. LNG, carried by the 162,000 cbm-capacity "Clean Ocean", arrived in the Polish port of Swinoujscie. Many people suspected that it was just a promo action to inspire a certain amount of additional publicity to U.S. President Donald Trump's visit to Warsaw on his way to the G20 summit in Germany.
Despite the combined efforts of the EU to develop a resilient Energy Union, Poland and Ukraine have openly seek to assert their narrow political and economic interests contradicting the views of many EU member-states. In December 2016, Ukraine’s President Petro Poroshenko and Poland’s President Andrzej Duda issued a joint statement on the decision of the European Commission to allow Russia’s Gazprom to increase the use of the OPAL gas pipeline that allegedly would create tangible risks for the disruption of gas supplies between Poland and Ukraine.

The gas pipeline OPAL (Ostsee-Pipeline-Anbindungsleitung) with an annual capacity of 36 bcm is an onshore gas pipeline in Germany alongside the German eastern border. The OPAL pipeline is one of two pipelines connecting the Nord Stream pipeline to the existing pipeline grid in Western Europe. Since its completion in 2011 Gazprom has only been allowed to use 50 percent of the OPAL pipeline under an EU ruling to aimed at preventing dominance of the supply infrastructure. However, no one alternative gas supplier has been shown interest in the use of the OPAL.

In October 2016, the European Commission lifted a cap on Gazprom's use of the OPAL and gave the right to bid at auction to pump more gas via another 40 percent of its capacity. In response, Poland appealed to the European Court of Justice over a European Commission decision to give Gazprom more capacity on the OPAL gas pipeline through Germany. In December 2016, several legal challenges from Warsaw were filed at once: one of them from Poland’s Government, two – from Poland’s company PGNiG and one more – to Dusseldorf court from companies PGNiG and PGNiG Supply & Trading. As a result, the Poland’s challenge prompted the EU's General Court to impose curbs on Gazprom's use of the OPAL.
Half a year later in July 2017, the European Court of Justice lifted the interim measure on the claim of Poland on access to the OPAL. This is stated in the court’s decision, published on its website. "The President of the basic court rejects application to suspend the execution of the decision of the European Commission that 50 percent of the transport capacity ОPАL subject transit was no reason to limit Gazprom's access to the pipeline, rejecting a legal challenge from Polish companies PGNiG and PGNiG Supply & Trading."

If most gas consumers in Europe are concerned with energy related costs of living, then it is good news for them because the wider and more powerful supply chain capabilities at our energy market the better terms and conditions for gas purchases. The EU's Court sided openly with economic interests of gas consumers showing a positive sign but unfortunately, that in practice is less common nowadays.

Why does the EU underestimate the challenges to security of supply posed by gas transit countries, which prefer to resolve their own problems without taking into account the interests of the member states?

Thursday, 22 June 2017

Why cannot renewables replace such fossil fuel like natural gas?

Ten years have passed since the European Commission put forward proposals for a reduction in greenhouse-gas emissions in 2007. These proposals, later on, formed the basis for the strategy well known as the EU 20-20-20 strategy, which made it necessary to review different energy resources taking into consideration not only fundamental evaluation criteria for different energies such as efficiency, natural resource base, their availability, security of supplies and energy storage requirements. The EU 20-20-20 strategy attached a particularly great importance to environmental impacts of energy sources. In this regard, one of new environmental targets was to reach 20% of renewable energy in the total energy consumption in the EU by 2020.
The EU Member States have made significant progress in promoting development of renewable energy sources (RES) over the past years. According to the last year's report of the European Environment Agency, the share of gross final energy consumption to come from RES rose to 16.4% in 2015 from 16% in 2014. The Second Report on the State of the Energy Union issued on 1 February 2017 contained the same data and showed that it helped to decouple economic growth from greenhouse gas emissions - during the 1990-2015 period, the EU's combined GDP grew by 50%, while total emissions decreased by 22%.

It is worth recalling however, that apart from alarming climate changes another reason why RES have become a focus of special interest is the declining national potential of primary fossil energy resources in the EU member states. According to Eurostat, in the decade between 2004 and 2014 the production of renewables increased by 73.1%. By contrast, the production levels for the other primary sources of energy generally fell over this period, the largest reductions being recorded for crude oil (-52.0%), natural gas (-42.9%) and solid fuels (-25.5%), with a more modest fall of 13.1% for nuclear energy.
It would seem that the reduction in local production of conventional primary energy should not cause any problems if instead of them consumers in Europe have a possibility to switch to RES. Experience has shown, however, that along with the obvious advantages, RES have revealed some serious weaknesses in operation – it is unstable and fluctuating power supplies. By an unlucky coincidence, those problems became apparent exactly ten years after gaining an official recognition when in January 2017 Europe experienced a sharp fall in output of RES generating capacities.
It is unlikely to find a rational person in Europe, especially in the northern part of the Continent, who would need an explanation of how much stress an unstable energy supply can cause during a winter cold spell. Fortunately, the present generations of European citizens have almost never encountered such problems. Meanwhile, to give everybody an opportunity for imaging such an energy breakdown in winter the German daily "Die Welt" tried to describe the picture of snow-covered solar panels and drooping blades of wind turbines by using an old word Dunkelflaute, which refers to that time of year, when neither sun nor wind occur in necessary abundance.
"Dunkelflaute could be pushing Germany's power supply to its limits," says the title of the article published in Die Welt on 6 February 2017. Let us notice that is what happened in the EU member state with well-advanced energy sector, which in all circumstances is capable not moving beyond that critical boundaries and avoiding unscheduled interruptions in the power supplies. This was possible thanks to the prompt switching over to conventional energy sources to substitute RES when the latter significantly cut their contribution to gross final energy consumption.

According to statistics from the Berlin-based institute Agora Energiewende, by the end of January 2017 as much as 90% of the country's power was provided by coal, gas and nuclear. The chart below illustrates that on 24 January 2017 the generation of electricity by onshore wind power in Germany dropped to its historic minimum 0.486 GW. Later the electricity production by onshore wind returned to the pre-crisis level and after about six months on 7 June exceeded 23 GW.
As Stefan Kapferer, Managing Director of the Federal Association of the Energy and Water Industry (BDEW) told Die Welt, the past January saw a combination of lower-than-average temperatures, a high demand in electricity and extreme fluctuations in input from wind and solar power. "Flexible, conventional power stations are essential if we are to stabilize the electricity network," he said. "We have to be able to cover energy demand regardless of the weather."

Kapferer further noted that all this pointed to the need for flexible gas and coal power stations. Particularly in this case there would be an opportunity to "integrate renewables into the energy provision system," so they become "supporting pillars" of supply.
The January’s green electricity generation crisis requires differently looking at implementation of the Energiewende concept to perform the transition by Germany to a low carbon, environmentally sound, reliable, and affordable energy supply. The target was introduced of a 40–45% share of renewable energy in gross electricity consumption in 2025 and then in ten years achieve 55–60% in 2035. In 2015, as reflected in the figure below, the share of green energy accounted for about 30% mostly produced by wind and solar power.

Meanwhile the increasingly obvious problem of RES insufficient reliability no doubt weakened their position in favour of brining conventional energy sources into sharper focus. In addition, there will now be caps on the amount of green power eligible for subsidies what makes them even more uncompetitive.
It is important to note, however, that although the crisis of wind and solar generation, which had arisen in January, was successfully resolved by increasing the contribution of coal, gas and nuclear stations, in fact only natural gas has clear comparative advantages within this energy triad. As to the future of coal power, it indeed has poor prospects because further decarbonization should expel solid fuel from heat and energy balance in most EU member states. According to the report prepared by experts of the Berlin institute Climate Analytics, the EU will exceed its Paris Agreement-compatible emissions budget for coal based electricity generation by 85% in 2050 if all existing coal-fired power plants continue operating to the end of their full life span. Analysis suggests 25% of currently operating coal-fired power units need to be shut down by 2020, rising to 72% by 2025, before a complete shutdown by 2030.
Nuclear energy will have equally challenging future because its reputation has not been restored after Fukushima and Chernobyl nuclear disasters. According to a recent Greenpeace survey, 85% of Germans over 45 years old believe a disaster similar to Chernobyl could take place in Europe. Now anti-nuclear tensions are arising from the growing number of recent terrorist attacks in Europe that may have made their situation even more difficult.
In this regard, it's not hard to see that RES are going to compete for this emerging market niche, further increasing their share in the energy mix in Germany. However it is evident that this can be done effectively if renewables in Germany pair with natural gas, which, as in the January case, should assist to strengthen resilience of energy system as a whole especially against the vagaries of the weather.

An example of this collaboration between two kinds of energy has already excited in the United Kingdom where energy business are making progress in exploiting the advantages of natural gas in comparison with other primary energy sources. They include flexibility of supplies and responsiveness reflecting fluctuations of actual daily demands in the gas market, all-weather capability, technological opportunity to create significant reserve and emergency stock to overcome current uneven distribution and seasonal variations in demand, much higher environmental safeness incomparable with other fossil energy resources, competitive prices and transportation costs, development of NGV fuel markets, etc.
So guided by the classic SWOT analysis (analysis of strengths, weaknesses, opportunities and threats) it should be noted that natural gas can be considered not only as RES close rival but to a much greater extent as their partner, which can compensate energy consumers for still existing weaknesses of the latter. Of course, partnership conditions can change initiating an impact on the future energy mix.

Meanwhile, those who doubt whether such a partnership between RES and natural gas is possible especially emphasize that EC member states actually do not have their own natural resources of this fossil fuel. In that regard, it is worth pay due attention to the report prepared by the Oxford Institute for Energy Studies in January 2017, which argues that "the European gas industry has reason to panic about its future up to the mid-2020s. Falling domestic production will mean that additional gas will continue to be needed (and will be available) from upstream producers and exporters". Clearly, in the foreseeable future of natural gas imports by the EU member states much will depend on whether RES can be enough competitive and on further development of innovative technologies of storing large volumes of electricity.

Why do not admit any realistic sustainable scenario of economic development, as if shaped by the laws of physics, should have several energy pillars where natural gas shall be deemed to provide one of prospectively vital resources along with RES?

Monday, 29 May 2017

Why do consumer expectations of a higher competition between LNG and pipeline gas in Europe now perceive as even more problematic than before?

A year ago, forecasts for development of the European gas market suggested that expansion of a global gas glut would tend to increase competition between LNG especially the first American shale LNG to arrive in Europe as well as conventional LNG on the one hand, and pipeline gas on the other hand. However, these hopes have not materialized yet. In 2016, there were only four shale LNG cargoes delivered to the EU market from the US, including Portugal, Spain, Italy and Scotland. In the latter case, ethane from US shale gas was shipped to company INEOS' petrochemical plant at Grangemouth. Two more LNG shipments from the US were made to Turkey. In total, the volume of American LNG delivered to Europe in 2016 was about 500 mcm. For comparison, that is approximately 40 times less than the increase in gas imports to Europe via pipelines from Russia reaching almost 20 bcm in 2016.

Despite overall natural gas demand growth in Europe in 2016, in the majority of the European countries LNG had been driven out by the competition of pipeline gas and many of them saw a decline in LNG imports as most of this fuel went to better-priced markets in Asia and the Middle East. As a result, utilization of the total installed capacity at the European LNG import terminals had been declining during 2016 to a very low level. According to the LNG World News, the average rate of LNG terminal utilization in Europe has decreased significantly since 2010 to below 20% of the total send-out capacity last year.
This trend seems to be continuing. For example, LNG FSRU in Lithuania has a particularly low rate of utilization. During the first four months of this year LNG FSRU Independence located in the port of Klaipeda regasified 2,977,000 MWh of LNG, 54% down compared to 6,478,000 MWh for the same period of 2016. It has to be admitted that since the beginning of this LNG project the fundamental rules of market competition and economic feasibility have not played their usual role. Lithuanian company Klaipėdos Naptha has a 10-year lease with Norway’s Hӧegh LNG for use of an old LNG tanker as FSRU at an annual cost of 61.45 million Euros. Installation of the terminal in the port of Klaipeda, and its connection to the gas transportation system cost 101 million Euros. It is not hard to calculate that lease payments for 10 years including other costs will exceed 710 million Euros, which indeed is a heavy burden for the country since, as a comparison, in 2016 the State budget revenue of Lithuania accounted for 9.3 billion Euros only. Thus, regrettably, the Lithuanian LNG project is not fulfilling its mission efficiently, nor did it represent the best use of funds for energy development aimed at competitive retail pricing in the gas market.

Retail prices - an attribute of the "game" on several playgrounds for price formation but common principles of market competition do not apply to all of them.

The formation of prices can be compared with the sports game that reveals an important distinction - this "game" is going on three playgrounds each with different rules to settle the score. Three playgrounds correspond to the three components of the diagram of different colors below. There are those playing on blue color game site that determine cost of the energy component, thereafter, toffee color – cost of the gas network component, and the last one, green color – cost of the taxes and levies component.

It should be clear to everyone that competition occurs just on blue playground. Only there competition is exercising direct influence on formation of the energy component within a retail price in gas market. According to Report on Energy prices and costs in Europe, published by the European Commission on 30 November 2016, due to competition the share of the energy component in the total price decreased by 5 percentage points from 59% to 54% for the period from 2008 to 2015. The average energy component accounted for 3.54 Eurocent per kWh in 2015.

Unlike the above-mentioned, the competition is absent, by definition, on toffee color and green color playgrounds. In this case, the formation of retail price components is governed by state regulations. The share of the network component marginally increased from 21% to 22% and amounted to 1.49 Eurocent per kWh in 2015. The biggest increase by 4 percentage points occurred with the taxes and levies component from 20% to 24% and accounted for 1.56 Eurocent per kWh in 2015. According to the recent Eurostat data, the EU-28 average price of natural gas for household consumers during the second semester of 2016 amounted to 6.4 Eurocent per kWh.

Thus, owing to competition in the gas market the share of the energy component declined although gas consumers could hardly benefit from it because both of the other price components related to the network cost as well as taxes and levies still make up half of retail price for household consumers in the majority of the EU member states.

On these last two price components, it is commonly believed that only they are regulation objects. Meanwhile, non-market administrative and regulatory forces actually interfere in the formation of the energy component, in particular influencing competition through selective imposing certain import barriers and conditionalities on the routes of gas supplies to the market. However, fundamental analysis of commodity markets claims that the greater the supply, the lower the price tends to fall benefiting gas consumers.

In practice the arguments in favour of "concerns about potential disruption of gas supplies" to Europe because of the ongoing conflict in Ukraine, which still remains a major transit route for Russian gas, do not seem convincing any more. Attempts to limit natural gas imports from Russia, for example via pipeline OPAL can negatively affect the supply-demand balance and leads to undesirable changes in competitive prices. Quantitative restrictions imposed on gas supplies are known to contradict the core principles of the WTO, although it seems as if Brussels does not care about it. What is more, for the European Commission it seems to be the normal thing to consider initiatives of some EU member states, particularly Poland, which are standing for limiting of gas supplies from Russia, while European companies fulfilling the Russian gas imports recognize its ability to compete in the European gas market.

"Europe is "dependent on Russia" in terms of a secure and affordable gas supply," Chief Executive of Germany’s largest crude oil and natural gas producer Wintershall, Mario Mehren, said in an interview with Handelsblatt in April, explaining that Europe needs additional gas imports and Russian gas can withstand any competition.

According to Reuters, in 2016 the average gas price was expected to be 167-171 USD per 1,000 cubic meters (1.60 – 1.64 Eurocent per kWh). By way of contrast, Lithuania, for example, was purchasing imported LNG at the price of 2.19 Eurocent per kWh in the first quarter of 2016. Such a high price obviously did not resulted from the market competition but was politically motivated. During a presentation for investors in Singapore in February Gazprom announced that following the trends in the world oil market prices of export gas contracts to Europe would rise in 2017 to 180 -190 USD per 1,000 cubic meters (1.72 -1.80 Eurocent per kWh) remaining competitive.

So why not start considering competition at gas market not only within business environment but also at the policymaking level of the EU member states entirely as means to reduce costs and improve energy services rather than a tool for advancing narrow political interests?

Friday, 28 April 2017

Why would the EU Commission concerns raised about competition in the gas market still hardly helpful to save consumers’ pockets?

It has been over two years since the EU Commission adopted "A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy" on 25 February 2015 as one of major initiatives of the newly elected Commission Team. In short, the main objectives of the Energy Union are to provide EU households and businesses with sustainable, competitive, secure and affordable energy.

In March, this year in Berlin European Commissioner for Climate Action and Energy Miguel Arias Cañete underlined once again the importance of competition in the gas market speaking about completing a competitive, reliable and innovative Energy Union. "In order to make the European energy system more competitive, our objective is to ensure that costs and prices can be gradually aligned towards the most competitive levels," said Commissioner Arias Cañete.

Nevertheless, time has proven that although the EU countries generally share the objectives of the Energy Union and include them into their national energy policy, there remain significant disparities in some of them and even whole regions in in shaping the objectives’ priorities.

On the one hand, all the member states are giving a high priority to sustainable development and climate change mitigation that requires decarbonizing the energy sector. In Central and Southeastern European EU member states, on the other hand, it gives place to competition and security of supplies. This is usually attributed to a high reliance of those countries on the supplies of gas from Russia, which de facto determines the level of competition in the market.

In line with the classical view of gas market development the cornerstone of competition is the assumption that gas buyers should be able to make а well-informed choice based on comparison of prices, terms of delivery and essential qualities of natural gas. Given that the list of the latter begins with the physical state in which gas is supplied to the market. Almost everybody knows that there are a number of options of delivering natural gas from oil and gas fields to market, including pipelines, LNG, CNG and some others. Thus, theoretically, the acceptable level of competitive prices forms in the process of competition between different options for terms of delivery, as well as between supplies of natural gas in a certain physical state and related specific qualities. 

Meanwhile, if after this brief overview of theory our gas consumers return to a current practice to consider the actual presence of competition in the EU gas market they may have the following questions:
- How much are gas buyers and consumers able to be sure that the choice of price formation mechanisms has a significant impact on natural gas import price?
- How has competition between traditional pipe gas and LNG evolved recently in Europe?- Why do gas consumers have to convince themselves that they are paying competitive prices formed by the market but in fact, on average, half of the retail gas price is regulated by the State and local administrations?
Transition from the pricing formula that takes into account inter-fuel competition to market-based pricing principals have not caused noticeable effect yet on retail prices in the EU gas market.Competition between different price formation mechanisms had begun to increase with the development of spot gas trading hubs in northwest Europe from the late 1990s, starting in the UK’s NBP market and then spreading over following decades to Continental European hubs including the Dutch TTF, and Germany’s GASPOOL and NCG.
Since the middle of 2014 less stable and unpredictable oil markets have changed the terms of the competition between price formation mechanisms in favour of growing elements of spot indexation. It would seem that transition to pricing for gas as commodity, independent of oil, will favorably affect the conditions of competition in the market and it will be beneficial for consumers due to lower prices. However, obtaining the independence of gas prices from oil indication has not yet led to their noticeable decrease.
To illustrate this point, we need only compare the charts below displaying retail prices movements (the left side) and the transition to an alternative price formation mechanism (the right side) in Central and Southeastern European EU member states.
As the charts show, in Central European EU member states the linking the price of gas to that of oil for the period from 2005 to 2015 decreased threefold approximately from 87% to 29%. Meanwhile, over the same time period, in the South East Europe countries the extent of the applicability of the price formation mechanism linked to competing fuels remained roughly the same and continued to fluctuate around 40%. In contrast, the price movements in both regions did not reflect the existence of these differences and revealed almost similar picture of retail pricing fluctuations.
Perhaps it suggests that the importance of competition between two price formation mechanisms was exaggerated or at least under the gas market conditions existing in the South East Europe countries, breaking away from oil indexation has not provided yet significant incentives for reducing retail prices for gas.
Don't know why? Obviously, because retail prices for natural gas to a certain extent just have dropped out of traditional competitive market environment to stay under the influence of non-economic motivation at policymaking level that is now dominating in some EU member states.

Friday, 10 March 2017

Why does the EU gas infrastructure development seem to have been following a zigzag course, which is allegedly attributed to the impact of security of supplies?
Greatly curved pipes can be seen in the photos of different parts of the physical facilities through which gas moves in transportation such as transmission pipelines or gas compressor stations. These curved pipes occur where there is nothing that may block to lay the pipes straight. The existence of such curved pipes actually has a reasonable explanation - this design is necessary for technical safety of gas transportation.

Natural gas, while being transported through gas pipelines, needs to be pressurized by means of compressor stations up to a very high pressure, which is required to ensure a specified transportation capacity. The temperature of compressed gas at the exit of compressor station rises to 80-100 °C that creates rather severe operational conditions and may even causes buckling of pipes. Specially curved pipe sections are applied for pipe breakage protection. These zigzag-shaped expansion spools should be capable of compensating for any possible pipeline thermal expansion or contraction throughout the lifetime of the pipelines. As can be seen from the pictures below, expansion pipes are installed at various, sometimes very considerable distance from the compressor stations.

From a technical point of view, it is clear that the requirements regarding safety of gas supplies are the genuine reason for unusual curves of pipelines. The interest in these specific features of pipelines is generated by the fact that somehow such zigzag-shaped gas routes resemble the course of the EU energy policy development aimed at security of gas supplies. However, unlike the technical sphere some zigzag-shaped shifts in the EU’s policy to secure gas supplies virtually have not been provided with a satisfactory explanation.

Brussels energy policy has proven to be particularly elusive, by any means avoiding arguments against the `reasonableness' of the measures for security of gas supplies

In February 2015, the EC published its Framework Strategy for a Resilient Energy Union. One of the most widely discussed projects of the first months in office of the Juncker Commission was the Energy Union package designed specifically to pave a direct way for the creation of an integrated European energy market, which should be built upon the three pillars of security of supply, sustainability and competitiveness.
The proposal to create the EU Energy Union was first made by the former Polish prime minister (now president of the European Council) Donald Tusk in April 2014. He argued that this would prevent "Russia’s energy stranglehold" on Europe. In keeping with this, the security of supplies task in the Energy Union Package has been mainly targeted at reducing EU dependence on Russian gas.

Two years have gone by since then - it is time for summing up some results because now it would be timely to reflect on the Energy Union role and prospects for the future. This is what was discussed in the special press conference of Vice President of the European Commission Maroš Šefčovič held in Brussels in February this year to present the second State of the Energy Union Report.

As regards the results Vice President of the European Commission, in charge of the Energy Union specifically alleged that the EU has taken sufficient steps to reduce import dependency on a single gas supplier - a role generally played by Russia. In general, these measures are already well known. Firstly, according to Vice President Maroš Šefčovič, the Member States are using less electricity and heat energy than before achieving better energy efficiency. Secondly, the volume of renewable types of energy has become more significant and especially in countries dependent on energy imports. Thirdly, another important factor, "we have learnt lessons from recent events, better using interconnectors with their inversion possibilities," Maroš Šefčovič said at a press conference in Brussels.

Energy efficiency improvements, promotion of renewable energy technologies, diversification through embracing LNG exports from alternative suppliers and market integration by building gas interconnections among EU Member States - these things are certainly all contributing to much better provision of primary energy. The current situation on the EU energy market, however, indicates that, the measures mentioned above are still insufficient to meet completely the growing demand for energy. According to the European Network of Transmission System Operators for Gas (ENTSOG) gas provides more than 20% of the EU energy consumption. About half of the energy needs for heat and air conditioning are covered by gas. In recent years, the demand for gas in the EU market has been in a steady state of growth - EU gas demand increased by some 6% in 2016 to around 447 bcm, according to Eurogas, following a rise of around 4% in 2015.

The Eurostat report shows that "natural gas dependency in EU-28 was 69.3 % in 2015, up from 67.4 % in 2014." As to imports from Russia, the EU bought an unprecedented volume of Russian gas in 2016. According to Platts, total volume of Russian gas supplies to Europe including Turkey amounted to 179.3 bcm. As a result, the share of gas from Russia in the energy balance of 28 EU countries in 2016 increased to 33.5% after 31% in 2015.

Meanwhile, the Second Report on the State of the Energy Union presented by the European Commission in February 2017 claimed that "import dependency seems to have stabilized in recent years: since 2005, it has fluctuated between 52 % and 55 %; it was 53.5 % in 2014." Is it valid to use such outdated statistical information in their report? It looks as if Brussels tries by means of such a zigzag-shape survey of key data to interpret the results of its energy policy making deliberately the mistake of confusing the security of gas supplies with reducing European dependence on Russian gas, which actually continued to grow. Whether it is difficult to suppose that a politically motivated maneuvering is aiming at reassuring the EU Member States to step into another level of energy unity where it would be more easily to convince them to escape "Russia’s energy stranglehold", the fatal image of which has been boosted further since Donald Tusk proposal three years ago.

Giving precedence to geopolitical objectives over economic and energy interests of some EU Member States can become a serious risk factor, which would eventually lead to an Energy Union failure

In this case, the first pressing question is whether some EU Member States really want such an Energy Union would oblige them to dodge between deliberate energy policy of Brussels and the economic reality and to call for reducing the dependence on Russian gas. When, to all intents and purposes, a certain number of EU Member States continue actively to increase gas imports from Russia and to benefit from gas transit services or from reverse gas supplies to Ukraine. In January 2017, Europe got 19.1 bcm of gas from Russia, a 26% increase compared with the same period in 2016. At the same time, gas imports from Russia to Germany grew by 23.2%, to Italy by 48.2%, to France - by 68.1%, to Austria - by 123.5%.

Meanwhile, the reserves in the underground gas storage facilities (UGS) in Europe fell to the lowest level – according to Gas Infrastructure Europe (GIE), on 11 February there was only 35.46% working gas volume in storage, as outlined in the diagram below. Last year, by comparison, on 11 February 2016, the UGS in Europe were filled with natural gas by 51.19% and the heating season of 2015-2016 ended in early April when there was 35% working gas volume in storage.

The question that then arises: is not it necessary in the context of the supply of gas security to consider very carefully the historically low winter reserves of natural gas in Europe. That is just what might be a good way to proceed with a joint dialogue of the EU Member States to outline preventive measures to tackle possible difficulties with winter gas reserves.

Zigzagging Polish energy policy - at first Poland had taken initiative for strengthening an energy unity but later this Member State shifted sharply pursuing solely their own interests thereby contravening the very spirit of the Energy Union.
According to Reuters, Russian gas deliveries to Germany via the Opal pipeline fell by around 30 % on 1 February 2017 because Poland despite the fact that this pipeline has nothing to do with its national economy successfully blocked a deal giving company Gazprom a bigger share of the pipeline's capacity. Thus, disregarding the interests of the neighboring Member States Poland just disrupted important additional gas supplies to Germany and Central European countries in the middle of winter. On the side of these countries' citizens, some cannot help but think that if gas supplies via OPAL pipeline in Germany kept going on the same level there would be much less to worry regarding winter gas reserves.

However, unfortunately, it happened otherwise - it turned out that Member States using OPAL pipeline had remaining gas reserve even much below the EU average: on 11 February 2017 there was only 33.71% working gas volume in storage in Germany and 30.12% in Austria. At the same time, Poland kept the remaining UGS reserves almost half full - 47.14%. Therefore, it may be concluded that initiating the blockade of OPAL pipeline, it is Poland, and not someone else can tighten "the Tusk energy stranglehold" on Germans and Austrians.

Nevertheless, time is passing and that it is not favoring the EU. The European Commission led by Jean-Claude Juncker took office on 1 November 2014 to begin serving its five-year term. Before that in his opening statement ahead of the vote, President Juncker presented the new team as the "last chance Commission" pointing out that from the very beginning the Commission would not have any opportunity for wasting time. It was two and a half years ago – now half of a five-year term is already behind.

Why would the European Commission, instead of spending the remaining time on performing often zigzagging political maneuvers around the security of supplies, far better take another path leading to economically justified relations beneficial for all the Member States and for their international partners?

Is this not more short and reasonable path to a sustainable Energy Union?

Tuesday, 28 February 2017

Why it is still not possible to set up completely a road map for lifting Greece out of energy poverty and providing energy services of European level?

Various media sources of Southeastern Europe countries noted that in 2016 gas supplies to Greece from Russia increased by 35% to 2.68 bcm. At the same time, gas imports from Russia also rose in other South and South East Europe countries. Russia’s gas supplies to Italy went up 1.1% in 2016 compared with 2015 to 24.7 bcm, to Bulgaria - by 2.1% to 3.18 bcm, Serbia - by 4.3% to 1.75 bcm, Romania - by 740% to 1.48 bcm, Croatia - by 54.8% to 0.76 bcm and FYR Macedonia - by 56.5% to 0.21 bcm.

In Greece, the remarkable increase in gas consumption presents a concrete evidence of recovery of the national economy. Besides, impact of sharp seasonal climatic fluctuations should also be taken into consideration, which in the beginning of this year led many to talk about energy problems caused by insufficient abilities of national gas suppliers fully and promptly to meet the demand in seasonal peak periods. The newly formed EDA THESS gas distribution company, for example, serving the wider Thessaloniki and Thessaly regions, announced a very high level of retail demand for gas. In early January, daily consumption in these regions increased from 2.5 mcm per day on average to 4.5 mcm per day, including up to 3 mcm in Thessaloniki and up to 1.5 mcm in Thessaly.

Back in December last year it became known that company EDA THESS planned to invest roughly 90.7 million euros over the five-year period covering 2017 to 2021 in order to develop infrastructure facilitating natural gas supply to both regions. Recently the necessity of company EDA THESS plan has been more than demonstrated by an unusually cold winter for the Mediterranean country. Along with that after a stressful experience like this not only energy companies, but the population of Greece also should get used to take more care in advance, according to the words of politicians, about their own energy security. On such occasions, residents of Northern Europe and mountain regions in Central Europe rather often providently remember a well-known saying of Thomas Fuller, one of the first English writers who said, "In fair weather prepare for foul." Apparently, this old advice is not sufficiently known yet to energy end-users in such southern country like Greece because, for example, only after the January sharp cold snap company EDA THESS just within a ten-day period received more than 400 applications for installation of gas heating equipment.

Although gas is in high demand not only for heating in the winter season, but also for a comfortable cooling in the summer heat, which consumes a lot of energy generated also from gas. Ongoing provision of support for the development of the gas distribution infrastructure in the domestic market - it is, of course, an important thing for Greece. At the same time, there is another no less important but even more difficult question: where are these energy goods required throughout the whole year going to come from? Whose gas will Greece get in response to increasing demand?

Greece should pursue its own path leaving energy poverty to access energy services of European level
It is often stated that a household is considered to be energy poor, if it spends more than 10% of its income on energy bills. As noted by the leading EU affairs newspaper New Europe, Bulgaria, Greece and Cyprus are European record-holders as regards this indicator. According to the recent evaluation of this indicator one out of three Greek households in 2016 were faced with energy poverty.
The European Commission has proposed many measures to solve the problem of energy poverty including notably improvements in energy efficiency using various methods, and among them building insulation materials and new windows and doors to reduce heat transfer. However, it is obvious that reduction of households energy use alone would be insufficient to alleviate the problem of energy poverty particularly where energy consumption is already critically low. Consumers in Greece primarily should be provided much wider access to new more powerful and reliable sources of energy supply. Therefore, to lift one third of Greek households from the energy poverty trap special attention should be given to development of energy infrastructure necessary for energy resources imports to the country such as gas pipelines, gas storages, LNG facilities, etc.

Realistically, all of that can be expected in the near future is included in a short list of such projects, which are also well-known in Europe because the countries neighboring Greece share critical interests in their implementation.

First among those project by commencement dates in Greece is the Trans Adriatic Pipeline (TAP). With a total length of 878 km, TAP will connect to the Trans Anatolian Pipeline (TANAP) at the Greek-Turkish border, will cross Greece, Albania and the Adriatic Sea. Once completed, the TAP project will transport gas from the Shah Deniz II gas field in Azerbaijan into Europe. The length of the pipeline in Greece is approximately 550 km. Construction officially began 17 May 2016. Around 10 bcm per year of Azeri gas should reach Europe by 2020 through TAP and after reaching the European market around one bcm will go to gas distribution companies intending to supply to each of Greece and Bulgaria and the rest 8 bcm will supply Italy.

After Greece TAP will run 211 km through Albania to the coast of the Adriatic Sea. Since the TAP capacity is actually divided between three countries, it is as yet uncertain whether Albania is going also to get gas from this transit pipeline for its own growing needs. According to the Energy Ministry of Albania, annual demand for natural gas will be 1.8 bcm by 2020 in the country.

It is unlikely coincidence that many media sources have been silent at all on a certain issue: how TAP capacity will be distributed within European gas market. This may be explained by the fact that the 10 bcm of gas provided by TAP is a rather modest contribution to the energy supply of the EU. Although the pipeline was designed with the option to double capacity to 20 bcm per year, it depends on extra gas volumes to come on stream. However, that can happen only if new sources of supply will be connected to TAP because Azerbaijan alone will not be able to provide so much gas supplies.

Still it has to be admitted that the future gas supplies through the TAP, which have already planned for 2020 actually will not be capable to meet the energy demand in the South Eastern Europe market. Obviously, Greece are becoming more aware of this. According to Greek information agency Energypress, speaking at the forum on energy, economic growth and geopolitical future in December 2016, Theodoros Kitsakos, the CEO of Greece’s DEPA public gas supply corporation noted that the EU had been exploring opportunities to implement small scale energy projects such as TAP. Indeed, there can be little debate that even taking into account a market size in Greece TAP can only be consider as a relatively small-scale project in terms of its supplying capacity. Moreover, so far there is no plan for TAP expansion to supply gas to the neighboring countries in the Balkan region, which are also within the zone of energy poverty in Europe.

Besides, as Reuters has recently reported, there are new ecological problems in Italy's Puglia region concerning the construction of the TAP landfall. Local authorities want the pipeline constructors re-routed away part the grove with very old olive trees. Ensuring these ecological requirements would cause a significant delay in the TAP implementation.

Another project currently close to the implementation stage in Greece is FSRU (Floating, Storage and Regasification Unit) LNG terminal near the northern city of Alexandroupolis, which should be built jointly by Greek natural gas company Gastrade and Bulgarian state energy holding company BEH. LNG tanker fleet operator GasLog has recently closed a deal to take a 20% stake in Greek energy company Gastrade to take part in developing the planned floating LNG facility at Alexandroupolis.

The FSRU will be connected to the Greek gas transmission system through a 28 km pipeline that will allow the transportation of regasified LNG to consumers in the local market and to other countries, in particular Bulgaria via the planned Greece-Bulgaria gas interconnector (IGB). The Alexandroupolis FSRU LNG terminal will cost about 370 million Euros and is expected to be operational at the end of 2018. This new capacity of the FSRU import terminal at Alexandroupolis of 6 bcm per year together with the 5 bcm per year capacity of the exciting Revithoussa terminal that is planned to upgrade to an additional 2 bcm per year will give Greece a total LNG import capacity of as much as 13 bcm per year.

The Alexandroupolis FSRU LNG terminal was included in the list of CESEC Conditional priority projects approved during the meeting of the High Level Group on Central and South Eastern Europe Gas Connectivity (CESEC) in July 2015. The condition of the project implementation is "(location-specific) market demand for regasification capacity in Greece".

In the context of gas supplies prospects to Greece, it is also necessary to mention the Interconnection Greece–Italy project (IGI). The feasibility study for the Greece–Italy pipeline was conducted in 2003 with funds provided by the European Commission. The final part of IGI is the Poseidon project that entails the construction of a new offshore gas interconnection between Greece and Otranto in Italy.

Meanwhile, the future of IGI pipeline project is still unclear due to the competing TAP because both pipeline projects were originally intended to transport the Azeri gas. In 2012 IGI project was postponed since everybody realized that there is not enough gas in the Shah Deniz II gas field in Azerbaijan to keep completely filled both pipelines.

In addition to that new strategic opportunities cannot be ignored, which will arise for IGI to develop further as well as for TAP to maximize its capacity utilization owing to implementation of Turkish Stream pipeline project. According to intergovernmental agreement signed between Turkey and Russia in October 2016 in Istanbul, this offshore pipeline will consist of two parallel branches running through the Black Sea, each with capacity of 15.75 bcm. The pipeline’s offshore section is expected to equal about 910 km and its overland part on the Turkish territory 180 km. The delivery hub would be close to the town of Luleburgaz, while the pipeline would terminate on the Greek border in the area of Ipsila. Turkish stream project is scheduled to be completed by the end of 2019.

The first branch of the pipeline is intended for Turkish market while the second branch is planned to deliver gas to Greece, Italy and the Balkan region countries. Unlike the unsuccessful story of South Stream project canceled by Russia in December 2014 in case of Turkish Stream the decision to designate the entry point for gas deliveries at the Greek-Turkish border seems to be more tempting because it would enable to avoid the impact of the EU Third Energy Package.

In February 2016, Greek firm DEPA signed a memorandum of understanding with Russian company Gazprom and Italy's Edison SpA on supplying Russian natural gas along the bottom of the Black Sea and through third countries into Greece, and then from Greece onto Italy. Thus, the supplier of gas from Russia to the EU joined the project IGI Poseidon. It is planned that the capacity of IGI onshore segment of will be 9-16 bcm per year, and offshore part - Poseidon - 10-12 bcm per year. Poseidon pipeline is mentioned in the latest Italian National Development Plan (NDP) while in the Greek NDP there is no reference to the project, since it constitutes an Independent Natural Gas System (INGS). According to the Ten Year Network Development Plan in the EU (TYNDP 2017) prepared by ENTSOG the commissioning of Poseidon pipeline is stipulated in 2020.

Greece can become a new energy gateway to Europe
In the future as a result of projects reviewed above Greece can not only significantly increase the consumption of gas in the domestic market, but also become the country providing transit of more than 20 bcm of gas to other European countries. All of this can make a significant contribution to the gradual recovery of the Greek economy. A prospect such as the present rarely occurs and Greece should not pass up the chance to benefit from available opportunities. It is, therefore, no coincidence that the media in Greece like Energypress now regard natural gas as the leader of Greece's energy diplomacy.

But it looks like we got used to wait for winter energy shortages and other climate troubles to start making progress in solving the vital issues of energy development, why it is so.

Haven't we gained yet enough experience and prudence in the XXI century to see behind mirages of political ambitions and through an absolutely real snow storm a new energy gateway not counting only on Santa's generosity?