Why does Russia terminate construction of the pipeline "South Stream"?

This breaking news has appeared in the heart of Europe at a press conference in Stuttgart, where meetings of representatives of the German business community with the Minister of Economic Development of Russia Alexey Ulyukayev took place a few days ago.

Answering journalists' questions at a press conference Alexey Ulyukayev said that he admits the possibility of terminating construction of the pipeline "South Stream".

"South Stream — is a way to remove transit risks for the European consumers if the European consumers have a demand for decrease in risks, we will construct South Stream if this demand isn't present, we won't build it" — Alexay Ulyukaev declared.

Thus, Europe is offered to decide upon whether to assume or, on the contrary, thanks to the pipeline "South Stream", to absolve themselves of transit risks related to gas supplies of 63 bcm, taking into account that this volume of gas is about 75 percent of the gas transit carried out at the high risk via very unstable Ukraine.

Talking about the press conference in Stuttgart, it is possible to expect that upon the Russian initiative, but in this case not upon Brussels, there will be a need once again to count resources necessary for replacing the gas imports from Russia.

As it happened before, in addition to traditional gas supplies from Norway, Algeria and some others, obviously, future gas supplies from Azerbaijan, Israel, and even Iran would be included into the list of potential gas resources. It would seem that there are many of such promising projects, but unfortunately, it will take quite a long time to get gas from them. No doubt, these projects have a future, but they are able only partially compensate for the gas share of Russia, and that will have to wait for many years.

Specific features and expected results for Europe from implement of these Caspian as well as Mediterranean gas projects deserve special attention and it is worth to highlight them closely in future blog posts.

However, now it is important that news from Stuttgart would be heard by Europe and, in particular, would be clearly known in Bulgaria becoming the first European country that will host the pipeline "South Stream" on its way to the EU and participate in determining fates of the project. That is why our special attention is turned now to this Balkan country and to the newly elected government of Bulgaria, which today really creates the future of the European energy security.

Why do you still doubt that there is a connection between the paintings of old European artists and the Ukrainian underground gas storages?

Typical distinguishing features of classic winter landscape pictures by old European artists such as Hendrick Avercamp and Andreas Schelfhout are an icy expanse, frosty atmosphere and a lot of people on skates. It seems that all of that is far back in the past, and now our Europe is seriously concerned about global warming. Moreover, as if confirming this peculiarity of modern North Europe flocks of wild tropical parrots are flying everywhere in Belgium, the Netherlands, Germany and other countries for a whole year but no one is surprised with that any more. According to the ornithologists' research, the population of parrots only in Brussels consists of 5 to 6 thousand birds.

The irony of it is that in accordance with a study of Japanese researchers from the University of Tokyo published in Nature Geoscience just a global warming could cause severe winters in Europe and Asia. In fact melting of ice in the Arctic Ocean area since 2004 has made more than twice as likely atmospheric circulations that suck cold Arctic air to European continent.

However, as you might imagine, I am primarily interested in how such changes can affect a "circulation" of natural gas streams at global energy market necessary to compensate for cold winters.
Although most of us in Europe do not like it, so long as ice in Greenland and other parts of the Polar world is melting, there is a high probability that soon we will  get an opportunity to see winter landscapes of old European artists in reality.

Apparently, our politicians in Brussels have not disregarded such an unpleasant climate change as well. The European Commission took into account the influence of "cold winter" as one of key risk factors in conducting stress tests on the resilience of the European gas system Preparedness for a possible disruption of supplies from Russia during the fall and winter of 2014/2015.

The results of stress tests published on October 16 indicate that Europe may face harsh challenges. Especially it concerns energy weakest countries of South East Europe. In particular, these documents revealed what can happen in case of a 6-month disruption of gas supplies from Russia. According to ENTSOG modelling, gas shortage by February 2015 in five EC member countries of South East Europe, including Bulgaria, Croatia, Greece, Hungary and Romania in the worst scenario - especially in the coldest spell and in the absence of cooperation between these countries - will range from the highest in Bulgaria (66%) to the lowest in Croatia (12%).

Thus, in relative terms, there will be the most negative impact on Bulgaria, whose position in provision of gas will be more precarious.

Nevertheless, it is obvious that in the present situation with regard to gas supplies the cold winter predicted for Europe is not the only one and, what is more, a major risk factor. For those familiar with my previous posts it should not be a hard task to identify actually a major factor or source of risk to our energy well-being in the coming winter. Now we are talking about a neighboring country, which itself is already on verge of energy collapse, when the authorities are urging citizens to gather firewood and straw on the eve of winter. It happens, unfortunately, not in old artists' themes of paintings, but in real life of Ukraine, which, by the way, declared its desire to acquire associate membership in the EU!

While here in Europe despite of lack of time there are attempts to implement recommendations based on stress tests in order somehow to overcome the threat of gas hunger, early in November Ukrainian state company "Naftogaz" announced that a major supplier of gas to Ukraine would remain ... Europe?

So what should we do in Europe: either to supply gas to Ukraine protecting them against winter cold and their huge economic failures or to search for additional energy resources for themselves not to freeze up in this winter season?

In response, dear readers, I must say that in Ukraine let this gas be called European or anyhow else, even Chilean ... But everybody has to understand that there is no other gas instead of Russian gas on the Slovak-Ukrainian or on the Polish-Ukrainian border!

That is why, for example, Ukraine refuses to reveal the conditions of the contract concluded recently with Norwegian gas supplier Statoil, because otherwise they would have to admit that there is no technical possibility for supplying gas from Scandinavia to the Ukrainian border, and it would be much more expansive. Actually, this Ukrainian-Norwegian transaction, as all in other cases, envisages reversing the gas delivered from Russia.

Realizing this, we need to recognize that the most thorough stress test should be performed particularly in Ukraine, since this country is responsible for ensuring transit of about 50 per cent of total volume of EC gas imports from Russia.

Of course, everybody in Brussels should be aware of it and our respected policy makers had been negotiating for many months in a trilateral format, encouraging at least a temporary agreement between Ukraine, which did not pay the debt for gas, including delivered in November and December 2013 and Russia, which in response shut off gas in June this year.

After seven rounds of gas talks the EU, Russia and Ukraine finally signed an agreement on October 30, which regulates gas deliveries until March 2015. Meanwhile the signing of this so-called "winter package" of trilateral documents is unlikely can cover a looming energy gap in Ukraine in the coming winter. The country has no money for gas. But what is much worse that termination of coal supplies from Donbass significantly aggravates the current energy recession.

In such a critical situation instead of purchasing gas in Russia Kiev has actively started using gas from underground gas storages (UGS) to meet significantly growing internal demand. It is very important that UGS are primarily intended for providing peak volumes of transit to Europe. Therefore, their main goal is to ensure a prompt technical support in case of increase in gas demand in EC countries caused by fall of temperature in winter. This means that in fact Ukraine does not observe key conditions for reliable transit without which the gas agreements signed by Russia and Ukraine with the mediation of the European Commission will not guarantee us an adequate energy security in Europe.

As you can see on the threshold of the predicted harsh winter these Ukrainian underground storages have become a subject of special concern and attention for Europeans. It is hardly possible to imagine paintings illustrating how these UGS look like.

Deteriorating capacities of these UGS and a total connivance of Ukrainian authorities trying to solve their problems at the expense of Europe and at the expense of Russia can result in an unpleasant surprise for all of us in the coming winter when frost-bound landscapes of the old European artists after two hundred years will occur again in reality.

Would you like to speculate still further who and how much will feel cold this winter, why?

Why should Slovakian Gas Transmission System Operator care so much about Ukraine?

Several days ago, Reuters quoted a statement made by the head of Slovakia's pipeline operator Eustream Tomas Marecek with regard to a construction of the South Stream Pipeline through the Black Sea. This statement attracted attention because for the first time one of the major managers of the Slovakia's business officially stressed his support for the Brussels policy blocking the implementation of this pipeline. As the main argument, Tomas Marecek indicated his concern for Ukraine and its ability for reaching, as they say, their "European choice". In particular, he said that approval of Russia's South Stream pipeline would send a message to Ukraine that the European Union is not ready to support its ambitions to lean toward the West and does not see it as a reliable gas transporter.

Obviously, Tomas Marecek have not read blogs like mine, where we are considering verifiable information about the problems of gas transit to Europe and are raising questions, most of which are often simply ignored in our countries. Alternatively, I would say that probably there is no need for him to be acquainted with this information if he is already aware of a real situation, but does not show it because of some specific reasons.

We have already clarified the circumstances influencing the reliability of Ukraine as a transit country. Usually a public opinion on such kind of reliability can depend on subjective assessments of experts and statements of politicians and businessmen. As to a public opinion on such kind of reliability usually it depends on subjective assessments of experts and statements of politicians and businessmen. And the Ukraine's actual ability of ensuring reliable gas transit from the Russian border to the EU borders are determined mainly by the existing level of management and technical condition of Ukraine's gas transportation system (GTS).

It is important pointed out that present management of Ukraine's GTS conducted by the state administration is now publicly characterized as much by unfair practices of agreements implementation  and manipulation of commitments already signed contracts. Present Kiev authorities adduce an illegal offtake from transit gas envisaged for Europe as allegedly one of possible ways in their public policy making. Only now, they just officially become calling it as "impossibility to guarantee a trouble-free transit."

The situation appears from bad to worse for the reliability of Ukraine as a transit country in terms of technical condition of its GTS. This system was built in the Soviet Union times and since then has already exhausted its resources and according to current standards requires a thorough renovation of the main equipment. But there is no finance for these purposes in the country under conditions of economic collapse as well as unjustified hopes for prompt foreign investments for the same reasons.
Therefore, the transit capacity of Ukraine's GTS has been objectively falling for long time. The nominal capacity of the Ukraine’s gas transportation system had been kept stable for a certain period after its commissioning in the last century and on the border with the EU countries it amounted to about 140 bcm per year. However, in 2007 through Ukrainian pipelines to Europe it was already transported only 115 bcm of Russian gas, and in 2012 the volume of gas transit through Ukrainian pipelines to Europe went down to 81 bcm of Russian gas.

It is important that, despite the downfall, consumers in our European countries have received gas from Russia in full due to the diversification of routes of Russian gas supplies particularly by means of putting into operation the Nord Stream gas pipeline.

Gas industry professionals in Slovakia, which is also a close neighbor and a partner of Ukraine, are most likely familiar with the given facts. Then what goals does the head of the Slovak pipeline operator Eustream pursue defending the role of Ukraine as a transit country for Russian gas to Europe?
There is an answer in the same statement of Tomas Marecek for Reuters, in which he emphasized that no objection to South Stream would be needed if the project represented an additional transit route that did not replace the Ukrainian system and was justified by demand for new gas in Europe.
This phrase openly indicates that the Slovakian pipeline operator really bothers not the situation in Ukraine, but a probability of cancelling Russian gas transit through Slovakia, or in other words, it is a reaction against an appearing threat of losing this lucrative business.

And here is a big deal to lose since the total volume of Russian gas transit through the territory of Slovakia amounts to 35 bcm a year as well as the contracts stipulating the terms of gas transit were signed in 2008 for a period of 20 years.

Moreover, as it is already mentioned in previous posts, a reverse gas from Slovakia in fact is Russian gas circulating around an annular pipeline system created at the Slovak-Ukrainian border. In this case, a reverse gas from the Slovak side is recycled back to the transit pipeline system directed to Slovakia and Ukraine siphons gas out the transit pipelines basing on mutual offset of liabilities at a distance of thousands of kilometers away from the border. As a matter of fact it is physically impossible to deliver gas from Europe to Ukraine, because all gas flows are streaming in West direction with the exception of the short cross-border gas pipeline Vojany-Uzhgorod near Veľké Kapušany in Slovakia specially constructed for reverse operations on which I wrote in September.
Executing such a "reverse carousel" is another profitable business project for Slovakia. Meanwhile Slovakia's main concern in this case is reliable payments especially taking into consideration that actually Ukraine is a bankrupt up to its neck in debt. That is why even before commencing the reverse project in September Slovakia had demanded financial guarantees from the European Commission confirming that its reverse gas deliveries to Ukraine would be paid properly.

The payment issue, obviously, still is a matter of concern for Slovakia. At the highest level Prime Minister Robert Fico reaffirmed Slovakia's opposition to chip in for the Ukrainian debts. And at the same time he pointed out that any financial assistance for Kiev with gas supplies should be performed only on a commercial basis.

That way, both Slovakia's government and its pipeline operator Eustream reasonably care about their economic and business interests. However, they are apparently well aware that this business indeed requires gas supplies from Russia, without which there would be neither transit to Europe nor reverse to Ukraine.

It would be extremely important that our Europe as a whole understands the same and especially countries importing Russian gas for their social and economic needs as well as other countries that are just getting ready for that debating the prospects and opportunities for South Stream gas pipeline.
The Slovak experience eventually reveals that such a reverse technology by means of a circular pumping of the same gas on the border and mutual offset of liabilities only creates an illusion of enhancing energy security if there are no stable supplies of gas to the European market.

Why not to cool down a real reverse euphoria that invaded in minds of our politicians dealing with the EU energy strategy? And why not to suggest them to stop so persistently reversing from our countries the existing streams of gas supplies as well as the international relations that have been developed step by step for a long time in previous decades to ensure gas supplies from Russia to our European market ?