The price for GAS Future started to raise long before winter this year. Why?

According to Bloomberg, gas future for September delivery rose in London at 21% over the past six weeks.

Usually in summer, Russian or Norwegian long-term contract gas is more expensive than spot market gas at average of 100 euros. However, when it gets colder gas price in the spot market begins to grow, and in winter, it is higher than long-term contract price. But this year at least two months before the heating season prices on the spot market have already started to grow. What is the reason?

The fact is that last month there was still a hope that the issue with Ukraine's gas debt to Gazprom would be solved by September. However, ongoing tensions between two countries do not leave us a chance that the gas crisis can be resolved before winter. Fears on gas crisis that can stop gas supplies from Russia to South-Eastern Europe make prices go up. If the gas crisis repeats in winter 2014-2015, spot market gas price can climb to unprecedented heights.

Unfortunately, Ukraine has been destructive in solving gas issue. Recently, Ukrainian parliament adopted a law on sanctions against Russia giving the government a right to stop the transit of Russian gas to Europe at any time.

Instead of taking a step forward to solve the gas crisis, Kiev is committed to escalate the conflict. When the European Commission is trying to develop mutual understanding between Ukraine and Russia, Kiev passes the law about the sanctions that makes ​​it clear that the conflict with Russia is getting even worse. This means that the likelihood of another gas crisis this winter is very high.

In case of gas transit problems Bulgaria and Greece will be seriously hurt. We in Austria, and people from Slovenia, Italy, Croatia and Hungary would also feel gas hunger. Slovakia and Czech Republic, by the way, are on a safer side as the get supply of Russian gas via "Nord Stream". But for countries in South-Eastern Europe there is no other way to get gas, except through Ukraine.

The existing threat of disruption of gas transit will continue to exert upward pressure on prices. Now, Ukraine gas storage facilities are only half filled. A country torn by internal conflicts, in August has already begun to limit the consumption of natural gas. We can only guess what will happen when the heating season starts.

Under these conditions, our European leaders should be more active in convincing all parties to negotiate. It is evident that the consequences of Ukrainian energy crisis are quite dangerous for some European countries. But we still hear our Euro politicians’ statements that repeat statements of US Department of State. It seems that it would be Americans to suffer without gas this winter and not Bulgarians or Greeks, for example.

Why?

Why do we find ourselves in the position of the gas hostages of Ukraine?

Only a short time ago many of us wandered what will happen in Ukraine, if Russia decides to shut off gas supplies to Europe through the Ukrainian gas transportation system, as in 2009. Mostly now the Ukrainian crisis is presented to Europeans as an outcome of the aggressive policy of Russia. So for us before now, there were more or less sound reasons for considering this further possible turn in gas disputes as an unfriendly action from Russia.

But recent events have surpassed my intention to consider how Russia shuts off supplies of the Siberian gas to Europe.
Ukraine turned out to be ahead of what I could expect as well as probably many others who with concern and often with a growing disapproval evaluate the situation related to the supply of gas to Europe.
Although to be obvious, a new move in the gas disputes was directed by the Atlantic patrons of Ukraine. However, it is not always… Instead of cutting off gas supplies Russia had reacted for Western sanctions and imposed a ban for imports of Finnish and Lithuanian milk, as well as vast majority of other agricultural products from the EU for one year. And after that instead of Russia now Ukraine is declaring its readiness to cut off gas transit!

Ukraine's parliament has recently adopted a new law with a package of sanctions that includes about 30 measures. Although the law doesn't mention Russia as its target, the Ukrainian Prime Minister Arseniy Yatsenyuk said earlier it would open the way to impose sanctions against Russia. One of them is intended for legalizing a ban on transit of Russian natural gas and other energy resources through Ukraine territory!
It is noteworthy that this law transfers the right to impose sanctions to the Ukraine's National Security and Defense Council as if the Board of Ministers of Ukraine would not to be willing itself to take a full responsibility for consequences of its future application.

Now, Ladies and Gentlemen, please feel yourselves comfortable near your computers and tablets and prepare for the news that you are being threatened with blackmail and that it will be a racketeering activity of the Ukrainian authorities!

Assuming that your attention to the political crisis in Ukraine and a related war of economic sanctions against Russia largely (sorry for my cynical viewpoint) has been associated with your curiosity as of a detached observer. But now everything has changed dramatically because that the present action of the Ukrainian authorities obviously poses a direct threat to our well-being.

So far, our politicians have argued about a potential threat of stopping supplies on Russia's initiative, reasoning in this regard that it proves a vital need to reduce as soon as possible "dependence on Russian gas." Although I already mentioned previously that Russian share in an annual gas imports to EU actually is not higher than Norwegian.

But as a matter of fact it turns out that now there is a necessity urgently to discuss the problem of how to reduce dependence on a transit monopolist that is Ukraine. Because in accordance with contractual obligations Ukraine has to provide transportation through its territory of more than 60% of Russian gas supplied to Europe.

So ultimately Ukraine does not care of losing confidence of international business that, as a common rule, should be the most important attribute of any country.

Moreover, the Ukrainian government recognized the fact that shutting off Russian gas transit to Europe would result in a huge loss of about three billion dollars which Ukraine annually earns on providing gas transmission services.

However, Mr. Yatsenyuk is quoted as saying that by such a way Ukraine is going to bring to an end gas dependency from Russia. At the same time, he noted that Ukraine expects that financial aid will be granted by international financial institutions, including the World Bank.

Here I would like to remind you that the full name of the World Bank - the International Bank for Reconstruction and Development. For most of us it is very questionable whether this respected international organization established in order to promote global development, would compensate the huge losses caused by conflicting actions of the Ukrainian authorities, thereby recognizing and by certain way encouraging this attempt of Ukrainian state racketeering aimed at Europe.

Ukraine is eager for depriving Russia of income on gas exports but at the same time as a result Ukraine will block gas supplies to consumers in Austria and in all the countries of South and South-East Europe. That looks like a double strike, is not it?

At the moment I would rather not to sink further into geography of deliveries, let's consider later on how it reflects primary reasons of gas confrontation.

Meanwhile I would not be surprised if some our politicians will continue to remind us the main characters from the popular sci-fi thriller "Men in Black" who did not take off their black glasses in process of manipulating a public awareness. In our real situation political leaders first of all in Brussels also are able to release an information flow which brightly blows up in front of our faces and in our minds, erasing memory. And then, as if nothing had happened, they could start arguing that we have to blame Russians for everything and for disrupted gas supplies for sure. In politicians' opinion allegedly the Ukrainian threat of shutting down gas transit to Europe only more confirms that this is Russia - an unreliable supplier…

It's time to remind ourselves that ultimately it is no matter at all what kind of glasses "men in black" wear and what kind of "flashlights" are in use for promoting a contradictory information. Anyway, it is impossible to ignore the fact that since 2008 after signing the relevant international agreements, for six years Russia has been implementing an ambitious in terms of international scope and a technologically advanced gas pipeline project South Stream, bypassing the Ukrainian gas transport system in order to secure a number of European countries from newly appeared Ukrainian gas blackmailers.

It would look as if nobody realizes in Ukraine that they are going to block gas to Europe, and what the implications will be for Europe. Even though Mr. Yatsenyuk is quoted as saying "We understand the price should been paid by Ukraine (but it is not only those 3 billion USD - Ed.). But we are willing to pay for their independence".
Here you are, there are reasonable questions then. What about us, Europeans? Are we, European citizens willing to continue further to pay for the independence of Ukraine? And what do we expect to get in return? Answer with grim humor might be that in upcoming winter it would not be possible to get anything instead of gas from half-collapsed and half-plundered Ukraine, even neither gorilka nor salt pork which according to their habits could facilitate our stay in unheated homes. And before the winter comes, field rations of NATO soldiers sent together with humanitarian aid to Ukraine will be on the wane.

Not long ago in June in Brussels, the Ukrainian heads and leadership of 28 European countries signed the Association Agreement between Ukraine and the European Union. Under the Agreement, Ukraine should move along the path of deepening political, economic and trade relations with the EU Member States as well as develop cooperation in the fields of justice and security. Two months ago, many of us still were sure that Ukraine really want to be a partner of the EU. However, now our expectations have vanished.
Whether is it possible to consider partnership in case, when, instead of efforts for promoting cooperation Ukraine deliberately jeopardizes an energy security of its strategic partner?

There is another strange assumption that by imposing anti-Russian sanctions Ukraine is trying to support the policy of prohibitions against Russia carried out by the EU and Western allies. But it seems that taking part in this political game on the EU side, Ukraine scores a goal against their own — not the opposing — team, in other words plays against our Western European team. Meanwhile, it is not unlikely that Ukrainian politicians allegedly act in favor of our Western European team, but, in fact, they perform what suggested from behind the Atlantic, as it happened more than once.
Moreover, shutdown of transit pipelines obviously would create not less favorable impacts than new problems. So, for instance, it is hardly possible for Europe to get penalties for the gas contracts infringement from Russia in case of violating gas supply, since such disruptions must be classified as results of force majeure.
At the same time such a threatening precedent would raise the conclusion that there is a vital need in seeking gas detours around both technically and also politically unreliable Ukraine. In this context, it is even more convincing what Russia is making now a significant positive input into the problem of diversification of gas supplies by increasing up to a full capacity of the Nord Stream gas pipeline and by constructing a new South Stream gas pipeline.
Besides another consequence of switching gas supplies from Russia to Europe at new directions a commercial value of the Ukrainian GTS estimated by Ukrainians to 25-35 billion USD, will fall by half.
Therefore, open questions with a multi-billion-Euro cost for all taxpayers. How will Ukraine and EU together with the Atlantic allies raise such large financial resources? What countries, what international financial institutions, and of the topmost importance - at whose expense are they going to reimburse a collapse of the Ukrainian GTS and everything else?
In summary, it remains to say that despite all the political turmoil, Ukraine obviously has to solve gas disputes with Russia on a mutually acceptable basis not using GTS as a monopoly tool for suppressing consumers of transit services both in the West and in the East.

Ukraine will face huge challenges painstakingly seeking reasonable ways of modernizing its gas transport system. It will take years and for all that time ultimately European consumers should mostly rely on gas supplies from existing proven suppliers, including Russia too and Russian pipelines - so-called Streams from the north and from the south bypassing Ukraine with its long-running political, economic and technical problems.

And then, in some years, when at last a stable recovery and expected growth of the European economy will require new gas resources, we all look forward to the long-term results of implementation of the European Commission strategy for expanding the sources of energy supply.

Why Ukraine attempts to put us into a corner as gas hostages?

Why is a basic redundancy rule ignored in some managerial and technical systems although it should be of vital importance?

Car drivers all over the world continue a discussion regarding a necessity of keeping a spare wheel in a car. There are many drivers among us who suppose that, if they have a compressor, a tire repair glue as well as a mobile connection and smooth road up to the nearest service station then it is possible to drive without a spare wheel.

However, there are many opponents in this discussion who were unlucky being in pitch without above mentioned technical aid opportunities. As to long-haul trucking professional drivers they don't debate the topic at all - it is out of question for them that there should be a certain number of spare tires en route. Often we are able to see on highways how they are carrying them over.

Therefore, it is common requirement of providing for redundancy solutions to enhance security in different modes of transportation as well as in technical systems of all sorts. The safety of flights of aircrafts is ensured by means of even triple redundant systems well known in engineering as Triple Modular Redundancy (TMR). A main feature of TMR is that if one component fails then its mistake always has to be blocked by two others. In such a triply redundant system, all three components must fail before it entirely fails to function.
It is not difficult to imagine that in fact a redundancy is a basic universal rule of ensuring security widely used in engineering and technology, which has always existed in nature and continue spreading within different spheres of human life.

Now let’s take a look at the context of redundancy rule on the problem of increasing security of energy supplies to the EU, which the European Commission is currently paying a particular attention. European Energy Security Strategy presented by the European Commission in May, points out that "For the winter ahead, the Commission will work together with Member States, regulators, Transmission Systems Operators and operators to improve the Union's immediate preparedness in respect of possible disruptions (supplies)”.
We can see that the European Commission proposed decisions on this important issue taking into account a redundancy rule in general. The Strategy determines in particular that "investments in back-up infrastructure are now obligatory".

As for natural gas the Strategy gives a great deal of attention to diversification of infrastructure - 27 projects in gas were identified as critical for EU's energy security in the short and medium terms. Their implementation ultimately is expected to enhance diversification of supply possibilities. It obviously complies with a basic redundancy rule since that envisages a usage of several gas pipelines acting as back-up transport capacities relative to each other.

However, it raises significant worries and doubts that dozens of the projects listed in the Strategy are very far yet from commencement of operation. While implementation of some part of the projects has only commenced the other part is on even more earlier stage of pre-feasibility, permitting and financing issues yet. It means that the Strategy implementation might contribute to increasing diversification of gas supplies but it could happen only after 2017.

Moreover, there is only one new pipeline within the list presented in the Strategy - Trans-Anatolian Natural Gas Pipe bringing about 10 bcm of Caspian gas to the EU via Turkey and opening the Southern Gas Corridor that is to be put into operation in 2019 at the earliest.

Meanwhile the question is what energy are we going to obtain until then? In addition, what is the state of play in diversification of gas transport infrastructure and fulfilment of redundancy rule now, "for the winter ahead"?
Nevertheless, you could choose your answer yourself from this range: bad, very bad or worse than ever.
We have to return to the problem related to the Russia–Ukraine gas disputes. In 2013 supplies from Russia in the volume of 136, 2 bcm amounted to about one third of EU natural gas imports. 86 bcm of those gas supplies or more than 60% is pumped by transit through pipelines across Ukrainian territory prior to arriving in the EU, especially to the countries of South and South-East Europe.

It is common knowledge that Ukraine has gone into deep political crisis that has a disastrous influence on economic situation within the country. Kiev is in arrears for gas supplied already from Russia more than $ 5 billion and refuses to pay the debt. For this reason on June 16 Russian company Gazprom switched to advance payment from Ukraine's Naftogaz on deliveries of natural gas in accordance with the contract and completely cut  gas to Ukraine. Since then only gas for Europe has been transmitted via Ukraine in volume of 185 mln cm per a day. The talks on the gas dispute probably will be resumed only August 29.
I already wrote a month ago about technical condition of the Ukrainian gas transport system (GTS). Despite current condition of gas pipes and other equipment has deteriorated beyond the limits caused also by lack of proper repairs since Soviet times the Ukrainian parliament now is trying to pass a bill allowing EU and US companies to lease up to 49 percent of GTS, which is totally owned by Naftogaz Ukraine. In the beginning of June the Ukrainian parliament passed the first reading of this bill but further the process come to standstill because a number of Ukrainian MPs demanded to include additional clause regarding approval of structure of shareholders at the company - GTS operator that means a battle for controlling over the Ukrainian GTS is still continuing.

Whether Western companies really would like to take on lease such high risk assets taking into account its technical condition and chaos in Ukrainian economy it is really a doubtful question.
However, in an extended run it does not matter for us what will happen with a new Ukrainian law because all risks of applying the GTS for gas transit from Russia to our countries would still exist since it is impossible shortly to improve dramatically its technical condition. Besides the lack of operating reserves of gas, necessary for the upcoming winter will drag Ukraine to illegally siphoning off gas supplies intended for Europe how it happened in 2009. There are also risks posed by politicians who are interested in enlarging the conflict between Ukraine and Russia and who are willing to use the problem with the Ukrainian GTS and the gas disputes for escalating tension in the region.

However, what will happen if because of these risks Russia shuts off gas valves for supplies to Europe via the Ukrainian GTS?

In accordance with the Strategy, the European Commission is launching energy security stress tests in light of partial or complete disruption of gas supplies via Ukraine in the upcoming winter. This is correct action but obviously, it is not enough!
By analogy to a wheel story above referring to the case of the Ukrainian GTS one would be sure that even a less experienced driver would unlikely take a risk of performing stress tests in order to find out what will happen with his car if an old, many-times-patched tire fails on the road...
According to the redundancy rule, we must use reliable tires ensuring road safety and so the same for security of gas supplies there is a necessity in developing the transport infrastructure including extension of modern fail-safe gas transmission routes.

You could be aware yourself and by reading my previous posts that the international project of South Stream gas pipeline now is one of few realistic opportunities of strengthening security of gas supplies. Siberian gas having been already familiar to a half of Europeans for many years should come via the South Stream to Europe in autumn next year bypassing politically, economically and technically unstable Ukraine.
But actually now there is an intention of getting European companies and indirectly all of us into a mess named the Ukrainian GTS since it is proposed to use it further as an old, rusted wheel instead of replacing it by a new one - by a new gas pipeline, by a new route and by many other "news". They are arguing that substitution for a new modern pipeline will cause an increase in dependency on a certain supplier of gas up to a critical level. Nevertheless, it does admit of doubt why it might happen only because of shifting from one gas transmission route to another.

In fact, we are speaking about the change of transport routes of existing volumes of gas supplies. Originally, under the contracts with Russian Gazprom the Ukrainian GTS was obliged to pump 120 bcm of natural gas. After putting the Nord Stream pipeline into operation and shifting the gas supplies route to Germany via Baltic Sea the transit via Ukraine decreased down to 86 bcm last year. Moreover, it will shrink again by 60 bcm because of the South Stream.

Reportedly, it causes a drastic reduction of the commercial value of the Ukrainian GTS.

Why should we worry? European gas consumers should not care about the commercial value of the Ukrainian GTS, should they?

Ultimately, it doubles troubles for Ukrainian authorities and their foreign principals. Nevertheless, neither in Brussels no in Ukraine they would like to see deeply an economic impact of scenario if Russia really would be pushed for the decision of turning off the gas valves on transit supplies to Europe via Ukraine, as it took place in 2009. However, it would be another story.