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?