Tuesday, 30 December 2014

Another Pyrrhic victory for EU: forcing Russia to abandon the South Stream project.
Can empty gas pipes become a reality for Europe? Why?

It is known that a Pyrrhic victory achieved at too high a price is tantamount to defeat.
This old saying is fully consistent with the events taking place now in the European energy market. Unfortunately, persistent political confrontation between the EU and Russia strongly encouraged from another side of the Atlantic, has overwhelmed Europe's traditional abilities of prudently aiming for our own economic benefit, which is being more often replaced by unassured expectations of the fulfilment of predictions and promises.

Now you can hear and read a lot of enthusiastic reports that Europe had demonstrated firm principles insisting that the pipeline "South Stream" should meet the requirements of the Third Energy Package that made Russia retreat from its plans. Although our media tries to ignore the fact that, first of all, it was Brussels and Washington victory over Bulgaria, which was forced not to give a bureaucratic permission for the construction of the pipeline "South Stream".

The biting irony of the situation in Bulgaria is that this country known as one of the most economically underdeveloped countries of the EU already has got a list of such "victories" over projects. Despite the fact that Bulgaria needs much more than many other members of the EU to develop its energy industry this country experienced freezing such energy megaprojects as the Burgas–Alexandroupoli oil pipeline for transportation of Russian and Caspian oil from the Bulgarian Black Sea port of Burgas to the Greek Aegean port of Alexandroupoli and a nuclear power plant "Belene". It happened again when gas pipeline "South Stream" was being added to this list.

However not only Bulgaria but also other countries of the EU would have to pay a high price for this "victory". Before that other South-Eastern European countries as well as Bulgaria actively prepared for the possibility to pour into their economy a powerful flow of Russian gas. But now they are expecting real actions of Brussels to implement the European Energy Security Strategy released as far back as in May.
Just a week after an unexpected statement of the Russian President Vladimir Putin on termination of the project "South Stream" the European Commission held an emergency meeting of energy ministers of the EU countries, where it was announced that allegedly there are alternatives to Russian gas. These alternatives have been published on December 9 in the joint statement of the European Commission and the EU member states whose interests are affected to varying degrees by cancellation of the project "South Stream".

Ultimately such a statement is important for the European Commission in order to demonstrate an outward unity. As to the EU countries participating in the meeting this statement was aimed at somehow diverting public attention from the problems around the project "South Stream" and also showing for their citizens that they would be willing to seek a replacement of the former energy development plans. Together with other countries Romania hastened to join to the statement in order not to miss an expectable funding from Brussels on this occasion, although this country long ago had refused to participate in the project "South Stream". At the same time Hungary that was always in the first row of the project supporters, declined to sign the statement obviously realizing a hypocritical nature of the situation.

In fact what the European Commission proposes now as alternatives to mitigate and in some countries even as means of outliving the "victory" over the project "South Stream" raises a lot of doubts both experts and anyone else who is familiar in general with present realities of the energy market.

The proposals of the European Commission put forward for compensation of abandoned gas deliveries by "South Stream" previously scheduled to begin in the fall of 2015 are especially unrealistic regarding the use of oil and gas resources of the Black Sea and the Eastern Mediterranean. The development of these gas resources was mentioned only once in the European Energy Security Strategy in the context of projects of the distant future to be realized after 2020. Moreover, there is no any data yet properly proving a commercial value of potential gas resources of the Black Sea. A verification of hypotheses about the presence of substantial volumes of gas on the Black see shelf would require many years of costly works.

As to the use of gas resources of the Eastern Mediterranean it could be a realistic scenario if we take into account the natural gas reserves in the Israeli shelf, where two new large gas fields were discovered in 2009-2010. It is the Tamar gas field with reserves of 274 bcm and the Leviathan gas field located 130 km off the Mediterranean port of Haifa, which has estimated gas reserves of 481 bcm considered now as one of the largest newly discovered gas fields in the world. However, Israel is planning to deliver gas from these fields not towards Europe but in the opposite direction. Israel has already signed preliminary agreements with Egypt and Jordan that envisage exporting gas to the amount of up to 70 billion USD within the next 15 years.

It is impossible to estimate a complete potential of the sea shelf gas reserves near Cyprus because they have not been properly explored yet. But this task encounters a very difficult political obstacle - even for exploratory drilling first of all it is necessary to conduct a territorial delimitating of the sea shelf of Cyprus and to define the rights to use the natural resources of the island. This problem has not been solved for forty years since when Cyprus was divided into three parts: Greek, Turkish and another part under control of British military forces.

Besides that, it is necessary to take into consideration separately that transport and logistics infrastructure for gas deliveries to Europe from the Eastern Mediterranean would cost dozens billion Euros. Neither Cyprus nor Greece has got such financial capabilities. Ultimately, it would take many years to extract and bring this Mediterranean energy to Europe.

As you can see, the gas supplies from the Black Sea region and the Eastern Mediterranean should be attributed to the very distant future. The question is when will it happen? But it is even more difficult question: up to what extend could these opportunities be really implemented?

The second alternative proposed by the European Commission for compensating shortages of energy because of the cancellation of the project "South Stream" concerns future development of LNG terminal network. The necessity of LNG terminals is being discussed permanently and, of course, public attention to this topic is quite justified. Nevertheless, if we imagine that such a modern network of LNG terminals would be created, the question immediately arises: where to get gas volumes necessary for its effective usage.
In my post on October 23 I already wrote that the European LNG market is losing out to its competitors who more actively attract suppliers of LNG to Japan, China and other Asian countries. It is still unknown when the US will start delivering to us a long-promised shale LNG.

Consequently, there is a high probability that the planned terminal network in significant extent will accommodate LNG from Russia. It is noteworthy that there is an idea to build a gas hub together with LNG terminal at the end of a new pipeline "Turkish Stream" near the Greek-Turkish border for distribution of Russian LNG further along the Mediterranean.

By the way, LNG from Russia may appear in the Mediterranean even before completing the construction of the gas pipeline "Turkish Stream". For example, recently Russia has negotiated possible supplies of LNG to Bahrain in Persian Gulf. Therefore, it will come as no surprise for you to learn in future that instead of Russian gas failed to be transported by the pipeline "South Stream" Europe would buy Russian LNG.

As saying, what we had gone from, then to the same we will return! However, in fact it will be a return with the transition to a significantly higher price level taking into account LNG production and transportation costs.

One more, the third alternative of replacement of undelivered Russian gas proposed by the European Commission is to be well-known to us. This is the "Southern Gas Corridor" consisting of the pipeline TANAP from Azerbaijan via Turkey and the pipeline TAP through several countries alongside the coast of Adriatic Sea. Now there is a supplementary idea of creating a so-called "vertical corridor", which will consist of cross-border gas pipelines linking GTS in Romania, Bulgaria and Greece that will allow these countries in the future to connect with the TANAP pipeline and, it is not improbable - to the pipeline "Turkish stream" as well.

An encouraging information about the project TANAP is that after its completion scheduled for 2018 Europe will receive 10 bcm of gas per year from Shah Deniz gas field in Azerbaijan.
However, an important question arises that its capacity is insufficient since Azerbaijani gas would be enough only to compensate for less than sixth of volume of undelivered gas by the pipeline "South Stream" with an annual capacity of 63 bcm.

Meanwhile the statements about possible doubling of "Southern Gas Corridor" capacity up to 20 bcm a year do not stand up to scrutiny, as all the arguments break against boundaries of the existing resource portfolio. It is obvious that a significant increase in volumes of gas deliveries without an adequate increase in resource portfolio would result in deteriorating the security of gas supplies. Therefore, the latter is hardly possible in case of using only Shah Deniz field.

There is no reasonable answer where the pipeline TANAP can get gas in addition to supplies from Azerbaijan. Availability of additional gas supplies from Turkmenistan and Iran remains in the row of unrealistic ideas. Now deliveries from Turkmenistan are mostly aimed at the Chinese market providing more than 88% of pipeline gas to this country. It is unlikely that Turkmenistan is sufficiently interested in the construction of the Trans-Caspian offshore pipeline in the direction of Azerbaijan, which requires very large investments. It is equally important that such an offshore pipeline under the Caspian Sea must get certain environmental and other permits from all Caspian states including Russia. As to Iranian gas, you will remember that it would require settling a whole complex of problems in relations with this country.

As a result, we can see that all the alternative proposals of the European Commission actually do not bring nearer, but on the contrary postpone a stable growth of gas supplies to Europe. This is especially true of South-East part of the continent.

Why does it happen that the struggle for European energy security sometimes looks like as the struggle against this security, when our policy makers are trying to convince us that less gas supplies to Europe in the longer term would be better (!?), than much larger gas supplies, which could start as early as next year?

Wednesday, 10 December 2014

Why should Bulgaria pay an exorbitant price for European solidarity?

After Vladimir Putin had said that Russia would abandon South Stream Pipeline, the headlines have appeared in news media: "The South Stream is breaking against the wall of European solidarity". However, this is obviously the point of view of those European countries that were not directly related neither to the construction, nor even to a future gas consumption to be delivered by the "South Stream". There should be entirely different public opinion in Austria, Serbia, Hungary, Bulgaria and other countries - in fact, public expectations of economic growth and dreams of a better and stable life in general crashed against this wall. Meanwhile in return these countries have received only compliments from Brussels and Washington.

Bulgaria happened to be the number one loser, although as in sign of encouragement this country has been promised speeding up the process of accession to the Schengen area. Visa abolition by the EU can really become for somebody an emergency exit for avoiding future problems. After all, in any case it would facilitate a relocation from the warm countries of South-Eastern Europe where gas usage is extremely low, to the North Europe with high per capita energy consumption.

About three months ago in the blog post on September 1, I already wrote about the "Bulgarian bastion", at that time expressing the hope that it will be a temporary obstacle on the way of real strengthening the European energy security. Unfortunately, the "Bulgarian bastion" was turned into the wall of European solidarity. Now Bulgaria is nailed to this wall by the entire power of transatlantic allies' influence. It is resulted in that one of the European countries much more than most of others requiring an economic assistance was deprived not only of new revenues but also in the long term of those revenues, which now Bulgaria is permanently earning from gas transit.

Brussels has always shunned issues related to economic losses of Bulgaria in case of cancellation of the South Stream project, replacing the assessment of such a pessimistic scenario with the stress tests campaign in case of emergency caused by interruption of Ukrainian transit this winter. Most probably, they should be nervous because the calculation of missed benefits and other losses resulting from failure of the South Stream project logically would lead to a discussion of the need to compensate for the economic losses of Bulgaria, which sacrificed their sovereign rights to make decisions in national energy industry.

As Vladimir Putin pointed out at the press conference in Turkey: “If Bulgaria is deprived of the opportunity to act as a sovereign nation, then they should at least demand money from the European Commission to compensate for their lost profits, because direct revenues to Bulgaria's budget alone would have been no less than 400 million euros a year”.
In addition, the South Stream project would bring over 5 billion euros of investments in Bulgaria, which would provide over 6 thousand of new jobs. Now at the beginning of the preparatory phase of construction 800 people were already employed on the offshore part of the project, 80% of them - Bulgarians.
It was expected that the project would ensure a significant increase in gasification of the residential sector in Bulgaria. In fact, now only 2-3 % of Bulgarian households are taking advantage of natural gas usage, this is compared to the average number in Europe, which stands at around 50%. This highlights an actual opportunity for growing in regards to energy efficiency as well.

Our mass media is widely disseminating an idea that the main reason for the cancellation of the South Stream project was not at all the EU-US policy aimed at building an opposition to the project and forcing Bulgaria to join it, but that because of steadily falling oil prices, this project has become prohibitively expensive for the Russian company "Gazprom". However, the argument allegedly concerning the high cost of the project completely collapses if we take into account that Botas Petroleum Pipeline Corporation signed in Ankara a Memorandum of Understanding on constructing an offshore gas pipeline across the Black Sea towards Turkey. The new gas pipeline will have the same capacity of 63 bcm, with 14 bcm scheduled for Turkish consumers. It is necessary to draw a special attention to the fact that now this volume is being delivered via the Balkan Corridor. Another part of nearly 50 bcm will be transported to the Greece–Turkey border, where a gas hub will be arranged.

It actually reveals that, firstly, in the future, Turkey will not need supplies of Russian gas via Bulgaria. Therefore, besides the above mentioned losses caused by termination of the South Stream project there will be the loss of existing transit payments in Bulgaria as soon as a new gas pipeline to Turkey is constructed. That is what is now Bulgaria annually receives about 60 million euros for the transit of 14 bcm.

Secondly, in future it will be unlikely possible for Bulgaria to purchase gas from Turkey at the same prices as it would be in the case of direct supplies from Russia.
Nevertheless, it is evident that Europe's efforts are contributing a great deal to the establishment of Turkey's position as a leading transiter of gas on the EU southern borders. How it can affect gas supplies to the EU, obviously, deserves a special consideration.

Ultimately Brussels will have to continue searching excuses and trying to shift off responsibility from themselves for consequences of the destruction of the gas infrastructure agreements.
The following quotation from the novel of famous English writer Elizabeth Bowen as an epigraph could set a non-biased coverage of these events of the EU gas market: “Sacrificers are not the ones to pity. The ones to pity are those they sacrifice”.

Why did it happen to Bulgaria? Why did a leading role of the victim of European solidarity fall to Bulgaria despite the fact that according to a survey of the Institute of Modern Politics carried out in this country in September 2014, South Stream project enjoyed the greatest level of public approval amongst all current energy projects, 51% survey respondents indicated that they supported the project?

Wednesday, 3 December 2014

Why does a "Golden age of gas" come to China, and maybe Turkey is already on the verge of it, while Europe could be prepared for an elusive "Age of Shale"?

China has long stopped surprising us with their high rates of economic growth and unique projects. Although there are more and more talks about slowing down the development of this country, new projects continue to be created that each time makes us move further away the limits of our imagination. For example, such a project is like the largest in the world fan-shaped solar-powered office building located in the Shandong Province in northwest China. This building set a new world record for the usable area covered by solar panels, a total area of which amounts for 75 thousand square meter.

Chinese natural gas market also deserves much of our attention, especially with regard to growing environmental requirements. Air quality problems give an impulse to the Chinese government to take tough measures for reducing environmental pollution. In this regard, the use of natural gas, especially as a replacement of coal, becomes one of the main directions for reducing emissions. It is stated in the 2014 Medium-Term Gas Market Report of the International Energy Agency (hereinafter - IEA) that the development of energy, industrial and transport sectors of the Chinese economy stimulates demand for gas which will increase over five years by 90% and in 2019 will amount to 315 bcm. The national gas resources will meet a half of the demand since projected natural gas production in China will grow by 65 per cent from 117 bcm in 2013 to 193 bcm in 2019.

In the meantime, it is expected that China will continue to act as a major importer in the world gas market.
Here it is very appropriate to repeat a summarizing conclusion of the IEA five-year forecast, published on 10 June of this year: " 'Golden Age' of gas coming to China".

In fact, it is unlikely possible for us to consider the EIA experts' conclusion as something extraordinary. That is rather a matter of the recognition of obvious facts.

A the same time there is another statement in this IEA market report which should be regarded already as a signal to Europe that expected changes in the global gas market will pose significant challenges for the European energy security. In particular, it is quoted as saying that "near-doubling of Chinese demand for gas by 2019 offsets slowdown in other regions (of the world – ed.)".
Let us to clarify that it will happen primarily because of the reduction in gas supplies to European market!

Consequently, gas intended now for "European" imports after a while will become gas for "Chinese" imports... In such a manner, probably, we shall be told soon about LNG redirected to Chine from Qatar, Peru, etc. What is more important, it can obviously concern the gas imports by pipelines from Russia!

Apparently, our policy makers in Brussels both in the former and in the new structure of the European Commission in addition to all the other duties indirectly are turning into reality the above-mentioned forecast of the Chinese gas market development.
In Europe, all of us know their statements about the aims of diversification of gas supplies to the EU and strengthening the security of gas supplies by means of reducing the share of Russia in the European gas market.

There is a famous old saying: "Be careful what you wish for, it might come true".
Have our policy makers in Brussels and other capitals really expected that their wishes would be executed by Russia to that extent? What kind of reaction from Russia did they expect to receive in response to the repeated statements of their intention of limiting the share of Russian gas imports and, particularly, in response to the decisions of the European Commission aimed at countering the construction of gas pipeline "South Stream"? Unfortunately, getting deeper and deeper into a gas confrontation with Russia, Europe mostly confine itself to vague generalities and assessments of the stress tests before the upcoming winter.

Our old and therefore wiser Europe, unfortunately, showed no foresight. After all, the majority in Europe hardly expected to obtain such an extensive and definite response of Russia.

At first, the Russian counter-response became the new Russian-Chinese gas agreement, which provides for supplies of gas to China via a so-called "Western route". It is especially important for Europe, that gas for Western route to China will be produced at the same gas deposits in Western Siberia, which are used to ensure supplies to our market.

Thus, while there is an political discussion in Brussels how to carry out a diversification of gas suppliers, Russia is already performing in practice a diversification of its export markets.
Although the tone of the EU policy makers began to soften and there have been recently some statements mentioning the gas pipeline "South Stream" as an important project for Europe.
However, it was too late and not enough - so now Russians shut down the project "South Stream" themselves!

Not for the first time, as they might say, unwittingly, Brussels and Washington efforts to restrain Russia in the energy market have played a catalytic role in its transition to a new, higher level of diversification of export markets for Russian gas.

New, but maturing for some time breakthrough in relations with Russia in gas sphere was achieved in the talks of President Vladimir Putin in Turkey where he stated that for Russia under the present conditions it is impossible to continue implementation of the "South Stream" project because of the non-constructive position of the European Union.

“If Europe does not want to carry out [South Stream], then it will not be carried out,” he said. “It would be ridiculous for us to invest hundreds of millions of dollars constructing a project, bringing it to Bulgaria’s borders and having to drop it from there on.”

In turn, as a result of these negotiations, Russian supplies would increase by 3 bcm through the pipeline "Blue Stream" and Turkey would receive a 6 per cent price cut on Russian gas from January 1. Ultimately, Turkey has taken an important step toward becoming the gas hub on the southern border of Europe. Moreover, this is a considerable contribution into the opening of the "golden age of gas" at the Anatolian peninsula.

Meanwhile current developments in the European gas policy reveal even for non-experts that further attempts of the dialogue with Russia from a position of monopoly buyer of its gas do not make sense.
It is obvious that packages of sanctions and other types of EU pressure on Russia have given unique results. Nevertheless, to our disappointment they are opposite to those on which many Europeans would like to count.

It raises disappointment of Bulgarians that their country lost a historical chance of being a big player at European energy market should not it?
It happened also much to the annoyance of other countries of South East and Central Europe, which in vain have been preparing for the implementation of the pipeline "South Stream" for a number of years.

Now Europe is suffering from a shortsighted policy in energy sphere and is looking constantly backwards on the transatlantic partners, who promise an elusive "Age of Shale" setting back hopes for a "Golden Age" at the European market of natural gas. The impression is as if somebody else decides for Europeans that there will be no new demand growth in gas in Europe, and that Europe should live out its remaining time only with thoughts about the Golden Past. Indeed, according to Eurostat in 2013 gas consumption in 28 EU member states decreased by 0.4% in comparison with 2012.

Why under these circumstances do the political ambitions of some of our state leaders not give way to economic feasibility, as well as to citizens' desire for stabilizing relations with Russia strained below any reasonable limits, especially in the gas sphere? 
Why would not do it, and thereby actually drive Europe's economy forward particularly in the less-developed European countries to the sustainable growth?