Tuesday, 31 October 2017

Why do Ukraine's preparations for gas blackmailing Europeans not any longer seem something extraordinary?
In recent years, the European Commission on many occasions has urged Ukraine and Russia not to use gas as a blackmail tool in their conflict. The energy crisis in January 2009 due to acute shortage in gas supplies has not faded from Europeans’ memories yet when all four gas pipelines forming the transit corridor in Ukraine through which gas from Russia comes to the EU market were completely blocked. As a result, Russian gas supplies through Ukraine to Hungary, Serbia, FYROM, Croatia, Bulgaria, Turkey, Greece and Bosnia ceased, crippling their economies. In addition, supplies to Italy, Poland, France, the Czech Republic, Austria, Slovakia and Slovenia were notably disrupted.

Given this painful experience, in 2010 the European Commission introduced Regulation 994/2010 specifically focused on gas security of supply. This legislation is intended for establishing a framework to coordinate security of gas supply issues between gas TSOs, EU member states and the European Commission. In February 2015, the Commission announced, as part of its Energy Union strategy, that it would revise this legislation and recently, in September this year the European Parliament approved the new security of gas supply regulation. The new rules are aimed at being better prepared for gas shortages if a crisis occurs and, for the first time, it applies the solidarity principle. It means that in the event of a serious gas crisis, neighboring Member States will be obliged to help their neighbors out to ensure gas supply. This, of course, can happen if other countries do have the opportunity to share gas for example from their underground or liquefied gas storages.

Meanwhile it is yet unclear how the EU member states would implement such gas sharing with each other in a crisis, even if it requires "some sacrifices" from donor countries. However, it seems there may be an occasion to try out the solidarity principle already for this winter. Although this time consumers may unexpectedly find themselves in a stress test mode because of stopping Russian gas supplies during the heating season. Unfortunately, it will not mean a simulation testing as was the case initiated by the European Commission in 2015.

Stress test specialties from Kiev according to a new prescription of the Ukraine's political kitchen
The alarming news for Europe came from Ukraine: the Kyiv Economic Court granted the appeal by the Antimonopoly Committee of Ukraine and the Enforcement Service of the Justice Ministry, as reported by the Ukraine news agency Interfax, and changed the way of enforcing the court decision regarding the recovery of a 6.4 billion USD fine from Gazprom.

It is particularly important that that enforcement of the Kiev court judgement would threaten well to turn into not at all hypothetical, but quite real stress test in Europe, or more specifically, a new gas crisis, which may even be more severe than those that occurred in 2006 and 2009. In fact, the only property of the Russia’s company Gazprom in Ukraine, adequate to the amount of the declared debt and actually available to the Kiev authorities is natural gas in transit gas pipelines intended for supplies to Europe. According to the transit agreement, this gas belongs to the company Gazprom throughout a whole way via Ukrainian territory and European companies buy it on the border of Ukraine with Slovakia, Hungary and Romania.

One cannot disregard the fact that the decision of the Kyiv Economic Court has no effect outside the country and does not retain validity under international law. Therefore, if Ukraine begins to siphon off gas from the transit stream then such a way of collecting a penalty would not differ much from Somali pirate activities in Bab el Mandeb strait, which probably also could be accomplished so openly only at the behest of local powers. Of course, it would be naive to think that the middle of Europe has at least a little in common with the Horn of Africa, and Brussels will not have to take care of escorting the gas volumes purchased from Russia.

Now all Europeans should experience a pre-stress state, worrying about how far this legal conflict between Ukraine and Russia may develop deepening further into the wider context of highly political controversy. The worst scenario is obvious: if Ukraine decides to seize the transit gas, Russia will cut off pumping it into the Ukraine's gas transport system, but it is energy consumers in the EU member states, not trade or policy negotiators, who would suffer the most in this case. Unfortunately, there is nobody in Europe capable of ruling out completely the likelihood of such a negative prospect. It now remains only to weigh up the pros and cons and continue with growing concern and anxiety to await the negative consequences of this clash over gas supplies.
Why does Europe continue to carry politically motivated transit risks?
The trial in the Kyiv Economic Court, which has led to the threat of confiscation of transit gas, began more than a year and a half ago, when in January 2016, the Antimonopoly Committee of Ukraine imposed 3.4 billion USD fine on company Gazprom and until now, this amount has almost doubled due to penalties for delay in payment. This fine was inflicted allegedly for abusing the monopoly position in the Ukraine's market for natural gas transit services. It is common knowledge company Gazprom, indeed, is Ukraine's only customer for the transit of gas.

However, even briefly having considered the above situation, one cannot help but notice that Ukraine's judges made this decision most apparently under the impact of political passions that have not exhausted yet in the country affected by massive political unrest and economic problems. Not only an expert, but also anyone who is familiar with the basics of a market economy, could note that it is utterly illogical and unrealistic to blame the buyer company, in this case, of transit services for not seeking other natural gas suppliers, which would also like to use transit services provided by the Ukraine's gas transport system (GTS). At the same time, those familiar with common business practices might just indicate that before advancing such a claim to a business partner, it is necessary that the relevant clause should be included in the terms and conditions of the long-term contract of Russian gas transit to European customers in 2009-2019 signed between Gazprom and Naftogaz. In this sense, here is another lesson for the future.
Fewer and fewer people are willing to believe that Ukraine would be able to insist upon such arguments in stating its position after the expiration of the current transit contract in 2019. The desire to insist that company Gazprom should somehow attract other gas suppliers to use the Ukraine's GTS would undoubtedly lead to failure of a future gas transit contract. It is surprising to see how recklessly Ukraine "burns ships," crushing the already shaky foundations of its position in the negotiations about the future of its GTS, which largely depends on the transit of gas to Europe. It's no exaggeration to say that, the more violent the legal conflict over the so-called Gazprom's monopoly gas transit through Ukraine's GTS, the more GTS days will seem to be numbered.

And in the meantime, everything seems to suggest that the EU is even more concerned about the future of Ukraine's transit and its partner's GTS than Ukraine itself. Attempts by Brussels to preserve, no matter what it takes, this "skeleton of Soviet pipes in the closet", which is falling apart just because GTS has already reached the end of technical life, should deserve respect, if they would not have raised questions: what it might lead to and who will have to pay. These questions have long been the cause of growing concern of all stakeholders in the European gas market.
Try to tell from the photo below about the prevailing mood of our high-ranking Brussels politicians, masterminds of energy cooperation looking at their unusually meditative and tense faces when they attended the ceremony of signing the Memorandum of Understanding on Strategic Energy Partnership between Ukraine and the European Union held about a year ago on November 24, 2016. At present, it is even more evident that President of the European Council Donald Tusk and President of the European Commission Jean-Claude Juncker together with Vice President of the European Commission for Energy Union Maroš Šefčovič both then and now have sufficient grounds for being absorbed in deep thought. In fact, transit risks of member states are growing and it is becoming increasingly difficult to explain political motives behind them. However, the present reality is that obviously Brussels just has no other worthy strong motives besides political ones.
Well, but Ukraine has such non-political motives, which have to do with the fact that there is no one energy sector in this country has not escaped the impact of the economic crisis that has been going on for at least three years already. According to Gas Infrastructure Europe, in the beginning of the 2017/2018 heating season as at 21 October the Ukraine’s underground gas storages were filled only by 55.1%. The worst situation continues to be in the coal sector formerly the largest local source of primary energy, which was devastated by the loss of mines on the East of Ukraine. As reported by Eurocoal, Ukraine ranked sixth in the world in terms of coal reserves. After Ukraine had refused to purchase coal from the mines of Donbass, the US company Xcoal Energy & Resources LLC based Pennsylvania concluded a contract with Ukraine's power generator Centrenergo PJSC to supply the 700,000 tons of power plant coal for this winter season. Ukraine’s initial purchase for 210,000 tons will be at a price of 113 USD a ton. As highlighted by Bloomberg, this coal deal was heralded by the administration of President Donald Trump "as an important tool to undercut the power Russia has over its European neighbors."

Needless to be too much smart to notice a similarity of the basic objectives and methods of achieving them in these two situations related to coal and natural gas. In both cases, the ultimate goal is getting rid of the competitors in the European energy market in favour of the US suppliers of coal or LNG. With regard to the methods, this is all that falls under the category of the mentioned above "tool to undercut the power Russia has over its European neighbors."
It has to be acknowledged with regret that the energy policy of the present EU leaders with support from a few member states has also become such "tool". There is no other word when they continue to support the right of the gas transit in Ukraine to exist despite everything, which, as it turns out, is essential primarily to keep all the EU energy market participants in a state of high alert under the threat of new gas stresses. "I have to underline that continuation of the important gas transit through Ukraine in the post-2019 period is a top priority for the European Union," Maroš Šefčovič, Vice President of the European Commission for Energy Union, said during a visit to Kiev on September 15.
Why do the ones determine priorities in the key energy sphere within the EU while a lot of the others have to pay for them despite everybody should be equally responsible for preserving the historical traditions of democracy?