Why does the Baumgarten accident once again evidently prove that the Third energy package is not a universal means of ensuring the security of gas supplies?

All the world-leading sources of energy information immediately reported on an explosion in the Baumgarten gas hub in Austria on December 12, which resulted in a disruption in gas transmission affecting a large part of Europe. The accident caused disrupted supply to Italy, Slovenia, Croatia, Slovakia, Hungary and even the UK receiving gas from Belgium and the Netherlands.

Gas Connect Austria, the operator of Austria's gas grid said late December 13: "The initial suspicions that the accident may have originated with a newly installed filter separator have been increasingly confirmed by the evidence in the course of the day."

Moreover, like if accompanied by bad luck, the disaster occurred at the worst possible time. Concurrently, compounding supply problems, Europeans, especially in the UK, heard some disturbing news from the Norwegian network manager who said that gas flows would be trimmed from Troll, Europe’s largest offshore gas field. It takes about two weeks to bring LNG from Qatar, the U.K.’s biggest supplier of the super-chilled fuel. Last but certainly not least, in Italy, where rain, snow and extreme cold weather have disrupted traffic in the north-east over several days, the country’s industry minister declared a state of emergency due to a lack of gas supplies. As a common result, it pushed up the price of natural gas in many EU countries.

In effect, the gas supply crisis sparked much debate on the role of LNG trade development and the importance of further gas imports routes diversification. For example, only one tanker, the Bu Samra, was confirmed as arriving in the U.K. in December. In addition, this shortage in supply coincided with the first tanker Chris. de Margerie from Russia’s Arctic plant Yamal LNG that also has headed to Britain and would arrive in Grain LNG Terminal on the Isle of Grain, 60 kilometers east of London in a few days.
 

Apparently, at this time many in Europe felt a prevailing sense that there was something wrong with Europe energy heart because Baumgarten gas hub is really a key distribution knot for the European gas market - this facility 50 kilometers northeast of Vienna transports the equivalent of about a 10th of European gas demand. It handles some 40 bcm of natural gas mainly from Russia and Norway per year, Deutsche Welle reported.
 

 According to a fact sheet of Gas Connect Austria GmbH, the gas reception and distribution point at Baumgarten an der March was commissioned in 1959 and took its first gas shipment from Russia nearly half a century ago in 1968. Natural gas from Siberia has to travel about six days to make the 4.000 kilometers trip to Baumgarten where the incoming gas is measured, cleaned, dried and finally compressed for dispatching further from Baumgarten within Austria, as well as to Germany, France, Hungary, Italy, Slovenia and Croatia.
 

OMV was the first company in Western Europe to conclude in 1968 a long-term contract for gas suppliers from the Soviet state. OMV holds an interest of 51% in Gas Connect Austria, 49% are held by AS Gasinfrastruktur GmbH. Allianz Group and Snam S.p.A., 60% and 40% respectively, own the latter.
 

Now Gas Hub Baumgarten is known not only as a key distribution knot. With the establishment of Central European Gas Hub AG (CEGH), it became the main platform for modern gas trading in Central Europe. CEGH was founded in 2005 as a subsidiary of OMV Gas & Power GmbH. In December 2009, CEGH together with Wiener Börse AG opened the CEGH Gas Exchange Spot Market. The Futures market followed in December 2010. CEGH is owned by OMV Gas & Power GmbH (65%), Wiener Börse AG (Vienna Stock Exchange) 20% and the Slovak gas transmission system operator Eustream a.s. (15%).
 

This brief overview of the Baumgarten facility history and current status helps us recognize that the events associated with it can be actually regarded as an important indicator or pointer to those features of the extraordinary situation that need to be taken into account to indeed facilitate European gas market development in favour of gas consumers in EU member states.
 

The Baumgarten accident reminds us of the consequences of disruptions in the operation of gas infrastructure. Following the European Commission’s lead, EU member states have recently put into place a framework to decrease the impact of supply disruption, by means of an update of the so-called Security of Gas Supply Regulation. However, in the current political debate on EU energy security, the risks associated with infrastructure had been diverted by concerns over EU dependence on Russian gas imports.
 

On September 13, President Juncker announced in the context of his State of the European Union Speech, that the Commission is going to expand the application of the Third Energy package rules for gas pipelines entering the European internal gas market. In addition to the EU itself, this will have much influence on energy connectivity with at least six countries more or less involved in gas deliveries to the EU by pipelines including Algeria, Libya, Morocco, Norway, Tunisia and Russia.
 

There are four pipelines in the Mediterranean Sea that transport gas to the external borders of the European internal market: Transmed, Greenstream, Maghreb-Pipeline and Medgaz. They bring gas from North African countries to delivery points on the Mediterranean coast of Italy and Spain. Moreover, a new Mediterranean pipeline, the Galsi project from Algeria to Italy, has been planned to become operational only in 2018. As to Russia, in the Baltic Sea, the first Nord Stream pipeline has been operating already for several years. In the future, after the expected Brexit, the UK may be also in the list of countries that should become subject to the Third Energy package. It can happen especially because flows of gas between the UK and the Netherlands through the 235 kilometers BBL pipeline beneath the North Sea should go bi-directional from autumn 2019.
 

After the new initiative of the European Commission, even more questions appeared if to take into consideration how previous attempts to make incoming gas pipelines, in particular Russia’s Nord Stream 2, subject to the security of gas supply regulation had been already treated controversial. For example, in early this year Jonathan Stern, the founder of the OIES warned that any restriction of Russian gas supplies – which have the lowest cost of delivery for substantial volumes of pipeline gas into Europe - would inevitably increase the price of the commodity in Europe.
 

Nevertheless, public and business opinions that dependence on Russia has been politically used unreasonably extensive have long been ignored.
 

The Baumgarten incident puts forward a strikingly different from the old ones, yet quite powerful argument in that connection. "If the Baumgarten incident shows anything", the article by the Centre for European Policy Studies in Brussels (CEPS) states, "It is that energy security is not only synonymous with diversification of import sources. Resilience against disruptions like the one that occurred in Baumgarten requires a degree of redundant infrastructure, including storage, domestic transport and import systems."

While confirming such a logical assumption, Italian industry minister Carlo Calenda told reporters, as quoted by Reuters, "If we had had the TAP, we would not have to declare a state of emergency." The same is true for new offshore gas pipelines Nord Stream 2 and Turkish Stream that Russia is developing now to enlarge reliability of gas supplies to Europe.
 

Very recently, while summarizing conclusions about the future of European gas, Jonathan Stern has continued again that the political and media perception is that the principal threat to European gas security comes from Russia… By contrast, analysis based on future gas supply and demand sees Russia as the only possible source of additional large-scale gas supplies for Europe, after the current wave of surplus LNG supplies is exhausted (probably around the mid-2020s).
 

Although there is most probably no need to wait so long given that at the moment anyone following current developments in European gas market can already witness an unprecedented increase in gas imports from Russia this year. As has been reported in New Europe, the EU affairs newspaper, on December 27, in early November Austria had beaten its record for Russian gas imports set in 2005 at 6.8 bcm. According to estimates, from January 1 through December 21, 2017, Gazprom delivered to Austria 8.25 bcm of gas, a rise of 2.4 bcm - 40.7% more than for the same period of last year. Baumgarten has directly involved in achieving this high results.
 

However, the mood from high results and ongoing festive season was overshadowed by the accident at Baumgarten, which became another proof of that there is an undoubted priority of reliable and diversified gas transportation infrastructure over Brussels political ambitions. Most regrettably, this has been achieved through human losses and health of people - one person died in the blast while a further 21 were injured, one seriously, according to officials.
 

If it is hard to recall at once, Ernest Hemingway, an American who lived in Europe, evoked John Donne, who wrote, "never send to know for whom the bell tolls…"

Why shouldn't we say that the Baumgarten "bell" tolled for a short-sighted political approach being imposed by Brussels on the EU security of gas supplies?

Why are preventive actions for supporting gas security of supplies to the EU Member States guided by selective approach countering against some supplies opportunities in favour of others albeit less affordable?

The imminent advance of winter reminds all of us of the need for reliable readiness for the next heating season of 2017 -2018. It goes without saying that in this case, it is important to take into account past experience, especially one that was associated with overcoming difficulties and even crisis situations. It should be recalled that last winter a number of European countries did not avoid significant energy supply problems. One of previous blog posts described a sharp drop in the electricity generation by renewables in the north of the continent earlier this year, particularly in Germany that affected the gas market.

At the same time, in the middle of last winter, Spain's energy market experienced an even more difficult situation caused by serious disruptions in gas supplies during the January cold snap. As it was characterized by E&C Consultants, "tourists in search of mild winter weather were caught in snowstorms and frost. The Siberian circumstances are exceptional and obviously cause a peak in demand for electricity and gas. The power system struggled to cope with this peak. In the Communidad Valenciana, 32.000 clients were without electricity and utility Iberdrola had to rush in 23 emergency generators. Álvaro Nadal, the new Minister of Energy is all over the press, warning the Spanish citizens to get adapted to more costly energy."

Spanish consumers appeared to be really caught by an unpleasant surprise as an unprecedented jump in energy prices occurred in January 2017. On 19 January, the day ahead electricity price averaged 88 euro per MWh. That was the highest level since February 2006. The new Spanish hub for natural gas, MIBGAS, created by integration of companies Mercado Ibérico del Gas (MIBGAS) and Iberian Gas Hub (IBGH) in 2016, set a price record, racing to 41.87 euro per MWh on 12 and 13 of January.

For comparison, at the same time in the North West European natural gas market the Daily Reference Price at the TTF hub was 20.856 euro per MWh. On January results, as the infographic shows below, at the Spanish hub MIBGAS the average price turned to be about 85% higher than at the Dutch hub TTF - 37.20 euro per MWh compared with 20.13 euro per MWh respectively.

 

The main reason for the serious disruption to gas supplies to Spanish consumers in January 2017 was the unanticipated reduction in LNG supplies from Algeria. The Skikda LNG plant of 4.7 million mt per year went down drastically at the end of December due to a heat exchanger issue, according to Algerian company Sonatrach source.

Besides that during the winter of 2016/17, weak rainfall and low wind speeds reduced significantly hydro and wind generation by 31% and 18% respectively. As stated in Global Gas Security Review 2017 by the International Energy Agency, because of low temperatures at the beginning of 2017, conventional demand for natural gas rose by 21% compared to a year earlier.

At this time, unfortunately, the European market responded to an unprecedented gas demand in Spain with a very considerable delay. Although, following the logic of the market, suppliers usually can only dream of grabbing a chance of that kind representing a unique business opportunity. However, suppliers actually did not take advantage of this situation on time, including companies delivering LNG via the Port of Zeebrugge in western Belgium, which is considered one of Europe's largest terminal for LNG, or directly from Qatar or Nigeria

It is also a matter of concern that the widely advertised US LNG terminal in Louisiana turned to be unable to make up for the missing Algerian gas. Anyway, one would think that a prompt response by means of shipping the US LNG to help Spain to overcome the January gas crisis might have a positive impact on the image of the North American shale gas. Given Spain is in fact one of the nearest destinations at the European market for the US LNG supplies. In this context, it is, of course, relevant to recall that such cases already occurred in practice when, if necessary, loaded LNG tankers being on the route changed their final destinations. But in the case of Spain this did not happen, and therefore the effect on the shale gas image turned out to be rather the opposite.

The Spain's case revealed that the current scheme of LNG supplies to the European market is incapable to respond in a timely manner to sharp weather-related fluctuations or technological accidents. Therefore, those in Spain who are responsible for the security of energy supply need to think about how to minimize the occurrence of stressful situations primarily by creating the appropriate reserves of energy resources.

It would be also necessary to take care of the diversification of supply routes using more reliable pipeline transportation. As, for example, it is in Germany or Austria, where LNG by sea does not reach. These countries are steadily increase gas supplies delivered by pipelines, therefore, the January gas stress like in Spain is unlikely to be possible. It turns out that many countries in Europe, except for the few as the countries of the Iberian Peninsula, attain much better position with regard to security of supplies since they have a greater or lesser potential to benefit from reliable natural gas flows by pipelines mostly from Russia, and the latter have been growing progressively. As Platts reported in the current mid-year, Russia had increased gas supplies to Europe and Turkey by 12% year on year in the first half of 2017. It has come to the attention of those who look into recent news published online that in the period from January 1 to August 15, 2017 gas imports from Russia increased by 14.5% in Germany, by 66.7% in Austria, by 28% in Slovakia, by 27.9% in the Czech Republic. Now hardly anyone can be surprised that European consumers of the pipelines from Russia more often take the opportunity to nominate volumes of gas they plan to get that exceed the contractual obligations.

Meanwhile, the same scenario as the Spanish one was already carried out by European Commission in 2015 and included the simulation of stress tests entailing in theory the disruption of gas deliveries from Russia as a basic assumption, which was made with a view to implementing the EU policy to ensure the security of gas supplies. Spanish energy stress demonstrated in practice that the security of supply policy actively promoted by Brussels has not yet proved to be effective in addressing genuine needs of gas consumers in EU Member States.

Someone perhaps could not help noticing how the newly adopted revised Directive EU No. 994/2010 has introduced the solidarity principle stipulates that "Member States will have to help their neighbors out in the event of a serious crisis so that European households do not stay in the cold". However, this innovation unfortunately failed to cope with the energy emergency in Spain, because both Portugal and the northwestern part of France happened also to be far beyond the boundaries of energy well-being. For example, according to MIBGAS Monthly Report, the volatility of prices on the gas hub PEGnord in the part of French gas market adjacent to the border with Spain reached 173% (for comparison, MIBGAS - 110%) by the end of January 2017.

The question that arises on this occasion is whether the EU policy on security of gas supplies is intended pointedly for the EU Member States importing gas from Russia. But then it has to be recognized that this policy as it currently stands is a targeted action pursuing the goals, which failed to reflect the interests of gas consumers, at least in those countries that do not have supplies from Russia.

Is not one precedent of the Spanish scenario enough to understand that the newly revised Directive EU No. 994/2010 adopted in September by the European Council primarily aims at restraining gas imports from countries that, in the opinion of Brussels policy makers, are not sufficiently reliable? The same can be said for new requirement that natural gas companies will have to notify long-term contracts that are supposedly relevant for security of supply. However, existing practice shows that taking care of the security of supply, above all, it is necessary to take into account the supplier's ability to overcome any unforeseen risks in performing of its contractual obligations and to be economically attractive to European gas consumers.

It should also be borne in mind that, when forecasting the future of energy, international experts have predicted a stable development of natural gas consumption in the long term in the EU countries. This is expected despite a likely significant declining trend in total energy consumption in Europe, which, according to the recent forecasts of the International Energy Agency, will be reduced by 200 Mtoe by 2040. At the same time, it is now quite clear that, the continuing substantial decline in gas domestic production will additionally increase the EU Member States needs for much high imports.

In such future conditions, the EU competition policy should even stronger seek to spur gas suppliers to offer better deals to consumers. And do not fulfil it by means of policy-oriented measures focusing on stronger controls for commercial activities of European energy companies with regard to their long term gas SPA (Sale and Purchase Agreement), assumed stress situations under far-fetched pretext, etc.

Why should not the European Commission try, instead of intimidating member states with hypothetical stress tests, show real concern for market positions of those gas suppliers that have already proved their reliability and are ready to ensure it at the proper level, including through the diversification of gas supplies routes?

 

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?

Why could a new gas import route to EU from Russia face a fork while crossing Turkey?

 

According to Financial Times, in early September the UK Company Petrofac was awarded an engineering, procurement and construction (EPC) contract by the Gazprom-owned South Stream Transport company to develop a gas-receiving terminal near Kiyikoy in Turkey. Under the contract, Petrofac will provide EPC for the receiving terminal, which will be ready for commercial operations in December 2019. When implemented, it will receive 31.5 bcm from the Turkish Stream offshore pipeline, originating from the compressor station in Anapa on Russia's side of the Black Sea.

The Turkish Stream gas pipeline, it was said, will comprise two lines of 15.75 bcma each. Moscow and Ankara signed an intergovernmental agreement on the construction of the Turkish Stream in October last year. According to this agreement, the first line of the gas pipeline is intended for natural gas supplies directly to Turkey while the second should ensure transit of gas via Turkey’s territory to the neighboring countries of South Eastern Europe.

However, the extension of the second line from the Turkey's border further into Europe is associated with certain conditions. Yet a year ago, the Turkish newspaper Daily Sabah, as well as a number of other media, quoted the Russia's Minister of Foreign Affairs Sergey Lavrov who said, "After the failure of the South Stream, we will be ready to extend Turkish Stream to the territory of the European Union only after we received an unambiguous formal paper that guarantees the implementation of this project."

Offshore pipe-laying for the Turkish Stream across the bottom of the Black Sea began in May this year. According to Natural Gas World, at the 86^{th Izmir International Fair in August Russia’s energy minister Alexander Novak informed that Gazprom had already laid more than 170 kilometers of the offshore part of the Turkish Stream gas pipeline. By the end of September, the work most likely has progressed far even no less than a hundred kilometers.}

Of course, European gas consumers especially in South Eastern countries would be interested in knowing how the preparations are now proceeding to receive gas supplies to the EU by the Turkish Stream pipeline, which, as announced, are planned to commence in December 2019. Gazprom and BOTAS are reportedly negotiating the foundation of a joint venture TurkAkim Gaz Tasima intended for the construction of the onshore part of the Turkish Stream's second line. To ensure transit of gas through Turkey's territory from the receiving terminal on the Black Sea coast near Kiyikoy to the Turkish Greek border, it will be necessary to construct a gas pipeline of 180 kilometers. Meanwhile, Greece, Italy, and now Bulgaria again are in active support of the idea that gas imports should be carried out to their territories.

An infographic above shows how while reaching Turkey this new gas transportation route faces two alternative scenarios, as it should be decided whether to follow by the Greek direction, or take another direction actively supported by Bulgaria.

What is the outlook for extending the Turkish Stream towards Greece and Italy?

Many attentive observers in Europe have already noticed the real progress in creating the conditions for extension of the Turkish Stream gas pipeline to Greece and Italy. This, in particular, is evidenced by the results of First bilateral intergovernmental conference organized by the Greek-Italian Co-operation Council in Corfu. The two prime ministers, Alexis Tsipras and Paolo Gentiloni also attended this event on 14 September. In their presence the ministers of the two countries, Giorgos Stathakis and Carlo Calenda signed a joint declaration. The document notably made a reference to the development of a new diversified route for the transport of Russian gas through the IGI Poseidon pipeline and the extensions of the gas transmission systems of Greece and Italy, named by the Greek side as the Greek Stream.

In fact, this is not the first joint action in support of projects granted a common logo of "Greek Stream". It was made public in June that the CEOs of Gazprom Alexei Miller, Edison, Marc Benayoun, and Depa, Theodoros Kitsakos who is also the chairman of IGI Poseidon, signed a co-operation agreement at the St Petersburg International Economic Forum. The agreement envisages carrying out joint efforts to establish a new route for Russian gas supplies to Europe. Thus, these companies confirmed their desire to co-ordinate the development of a pipeline project, including IGI Onshore of 600 kilometers pipeline with the capacity up to 16 bcma through the Greek territory and IGI Poseidon of 200 kilometers offshore pipeline, 10-12 bcma across the Ionian Sea to Italy. It was made in the presence of Carlo Calenda and George Tsipras, the secretary-general for international economic relations at the Hellenic Ministry of Foreign Affairs.

Before the above-mentioned events, in March Eni concluded a memorandum of understanding (MoU) with Gazprom for the supply of Russian gas through the route providing gas imports by transit via Greece to Italy. It is no secret that Italian energy companies are interested in replacing the current Russian gas route to Italy from Central European Gas Hub AG (CEGH, formerly known as Gas Hub Baumgarten) in Austria with a shorter and more economical southern route. This goal can be achieved by connecting the second line of the Turkish Stream with the IGI Poseidon gas pipeline at the Turkish Greek border. In arguing its position in the European Commission Italy has said more than once that since it would be just a replacement the use of the southern supply route is not expected to result in enlarging Russian presence in this part of European gas market.

Meanwhile, the IGI Poseidon gas pipeline project is only one of the possible options for connecting European consumers to the Turkish Stream pipeline. Although, up to now, this scenario is obviously regarded as a priority, in South Eastern Europe another alternative gas transportation route is being discussed.

How much is it possible returning back supposedly to a new, but partly to not-yet-forgotten old route of gas imports to Europe via Bulgaria?

Probably, many in Europe still remember how in December 2014 Moscow abandoned plans to build the South Stream gas pipeline because of which Bulgaria together with some other countries of South Eastern Europe lost an opportunity for transit-free access to gas supplies directly from Russia through the Black Sea. The irony of the situation is that just when the cooperation on the South Stream project had been stopped Bulgaria actively came up with new initiative to create a gas hub "Balkan" to distribute imported gas to other countries within South-Eastern European region. Insufficient economic rationale of this initiative speaks for itself - after three-year discussion it is still unclear, from where and, most importantly, when Bulgaria will receive the gas necessary for the hub "Balkan" to fulfill its gas distribution functions. It is evident to anyone that one billion cubic meters of natural gas from Azerbaijan, which Bulgaria plans to import by the TANAP pipe line from Shah Deniz 2, will meet only one-thirdŽ of Bulgaria’s annual gas consumption by 2020 that is absolutely not enough for the operation of this regional hub. And the suggestions to expect Iraqi, Israeli, Egyptian, Cypriot, Qatari, US or any other gas could help balance off regional demand are still very far from practical implementation.

Under these circumstances, seeking a chance to catch up Bulgaria apparently prepares at once for two new scenarios of gas supplies from Russia. The first one related to an old route of the South Stream tentatively named Black Sea Stream during the presentation of the gas hub "Balkan", executed by Bulgartransgaz EAD on 5 September 2016; the second is a new route of the Turkish Stream passing by transit throughout Turkey's territory.

As for the latter scenario, "15.7-16 bcm of natural gas could be supplied both to and from Turkey", Prime Minister Boyko Borisov said as he inspected the construction of a transit gas pipeline to Turkey in the Lozenets-Nedyalsko section, Bulgaria’s FOCUS News Agency reported. This pipeline stretching almost 20 kilometers from the Lozenets gas compressor station to the village of Nedyalsko is considered as the initial part of the new gas interconnector Turkey - Bulgaria (ITB). In total, the Bulgarian section of the pipeline will be about 75 kilometers in length - from the Lozenets gas compressor station to the Turkish village of Malkoclar. The Bulgaria’s government is working to secure the delivery of 15.4 bcm of Russian gas directly to a planned gas hub. However, "The Russian gas could come via the pipeline we are now building if we do not reach an agreement between the European Commission and Gazprom for a direct pipeline to the gas hub. We are preparing for both options," Prime Minister Borisov commented.

One should bear in mind the fact that Bulgaria managed to obtain permission from the European Commission for the supplies of Russia’s gas needed for efficient performance of the gas hub "Balkan".

According to an announcement of Premier Minister Borisov on 19 July, he had requested from Brussels for a link to the Turkish Stream, through which Russia’s gas would be delivered directly to Bulgaria. In a letter of reply signed by Miguel Arias Cañete, European Commissioner for Climate Action and Energy, Brussels said it supported the development of the gas hub and reminded that Bulgaria needed to improve its energy infrastructure. The letter, however, did not mentioned the particular project.

Unlike Brussels officials, whose special opinion can be obtained, as in the case of Bulgaria, only through official requests and repeated reminders, in the European gas market all stakeholders and beneficiaries - from energy and utility undertakings to many ordinary citizens - gas consumers in member countries - all of them, most evidently, are monitoring development of gas routes on their own initiative without any outside aided awareness or strong recommendations. Eventually, one does not have to be excessively perspective to realize how it is important to be better prepared for possible changes and new challenges in the certain segments of gas market. Professional organizations provide useful assistance with such efforts. For example, the European Network of Transmission System Operators for Gas (ENTSOG) published a Regional Investment Plan for South East Europe. According to the publication, the report underlines importance of the IGI Poseidon pipeline and refers to the Tesla pipeline. It should be noted that both energy projects are considered as alternative routes for the Turkish Stream’s extension towards Europe.

 

Why are the diverging paths of gas supplies, at which both the investment projects' developers and future consumers must target, indicate possible directions a lot faster than energy policy strategists in Europe make their principal decisions?

Why would it be too naïve to expect a mass arrival of LNG tankers labeled "America first" to the Baltics through Danish Channels?

Financial Times creatively described how during the 16-hour trip made by President Donald Trump on July 6 "he was cheered by the crowd to the rooftops" while welcoming US President’s pledge to raise US shale LNG exports in Europe. Two months earlier in the framework of the official visit of Polish delegation to Washington in April Poland’s state-owned PGNiG SA bought a spot LNG cargo from Cheniere Energy Inc.’s Sabine Pass plant. Then as a prelude to the President Donald Trump’s visit, the 162,000-cbm Clean Ocean arrived at the Lech Kaczyński LNG terminal in Świnoujście on June 8.

The total cost of the Poland's LNG terminal is 950 million euros (3.5billion zlotys). The European Energy Programme for Recovery (EEPR) funds supported the engineering, construction and implementation of two LNG storage tanks and the docking area for the LNG infrastructure in Świnoujście. The European Commission and Poland's political leaders believe that the terminal is necessary to foster EU energy security objectives in terms of diversification and to reduce dependence on Russian gas. The terminal's initial regasification capacity is 5 bcm per annum. The vessel with first ever delivery of LNG cargo arrived to the Polish LNG receiving terminal in Świnoujście from Qatar on 11 December 2015.

It was expected that the LNG terminal in Świnoujście would be operating at full capacity by 2018. To date, however, Poland has managed to utilize much less than half of the existing regasification capacity. It would be sufficient to take a look at the data in BP Statistical Review of World Energy 2017 to come to this conclusion. The consumption of natural gas in Poland in 2016 amounted to 17.3 bcm largely come from domestic production of 3.9 bcm and imports of 12.6 bcm including 10.2 bcm of gas supplies from Russia. As Figure below illustrates, the remaining part of natural gas consumed in the country in the volume of less than one bcm accounted for LNG imports.

Despite the fact that the terminal in Świnoujście has operated at less than 20% of its intended capacity, this year Polish gas transmission operator, Gaz-System has decided to upgrade it. With the construction of the third tank, its capacity can be expanded to reach 7.5 bcm per annum satisfying about 50% of Poland's annual gas demand. Such an increase in regasification capacity is expected to provide Poland with opportunities for playing an active role in the changing LNG market in Central and Eastern Europe. In seeking an execution of this plan, Warsaw puts special hopes on a possibility of signing a long-term sales and purchase agreement (SPA) for supplies of US LNG to Poland.

In that regard during the ceremony welcoming the US tanker on June 8, Poland’s Prime Minister Beata Szydlo said it was a historic moment that improves the region's energy security. A month later, the country’s President Andrzej Duda also expressed his enthusiasm after meeting US president Donald Trump in developing a LNG hub for US deliveries for the region. Thus, it would appear that everything is about ready in Poland to promote LNG from the U.S. to the European market. Moreover, the preparatory process has already moved from the political level to the sphere of business, since Polish Gas and Oil Company (PGNiG) opened a trading office for LNG in the Western London district of Mayfair, which is being run by PGNiG Supply and Trading GmbH, a Germany-based subsidiary of PGNiG.

In the meantime one cannot disregard the fact that Even the successful testing of transatlantic route for LNG supplies to Poland is not the only prerequisite for the full load of the LNG infrastructure enterprise in Świnoujście. The major concern is that US LNG has failed to be competitive with other natural gas supplies to Europe, in particular those which come from Russia by pipelines. This is far from saying, however, that current and most likely future underutilization of productive capacity in the Poland's LNG terminal is not the only eye-opener for Europeans regarding the problem with US LNG competitiveness.

In fact, the European gas market is already very familiar with US LNG competitiveness problem that has captured the attention each time when so-called test cargoes arrived from the only LNG exporting facility in the U.S. The geography of US LNG deliveries should be eventually predetermined by the peculiarities of the gas infrastructure in Europe, such as regional accessibility to LNG regasification terminals and gas pipeline networks. At the existing price ratio of LNG compared with pipeline gas it is much more likely that LNG from the U.S. can find and maintain its market niche, where there is an insufficient access in Europe to natural gas supplied by pipelines. This particularly concerns the western part of the continent, especially such European countries as Portugal and Spain.

Poland, of course, is not relevant to the group of countries mentioned above. As the figure indicates, in 2016 about three quarters of gas demand in Poland was met by pipeline imports from Russia and other countries like Germany and only by 5% due to imports of LNG from Norway and Qatar. It should be added that Poland gains benefits from the transit of Russian gas coming from the Belarusian and Ukrainian routes. A new profitable business for gas transport operators and traders appeared in Poland after Ukraine had stopped buying Russian gas in November 2015 opened up opportunities for gas re-exports to this country. According to Reuters, company PGNiG plans to double gas exports to Ukraine to 0.7-0.8 bcm in 2017.

All this may serve as strong economic arguments against attempting to take a sharp swing away from gas imports by pipelines in Poland. At the same time, original causes of such attempts should be sought essentially in the political domain. The reality is that by this way Poland's government demonstrates its special loyalty and devotion to its transatlantic ties with the U.S. What is more remarkable that this is occurring at a time when Europe is experiencing a cooling of relations between Brussels and Washington to such extent that it even led the EU's leadership to question publicly the factual strength of the Atlantic partnership. In a German radio interview broadcast on August 2 the European Commission president Jean-Claude Juncker noted, "I still assume that we are allies of the U.S."

In the meantime, Poland itself apparently does not attach a considerable importance to what the rest of Europe can think about this country, which is ready to deserve a political encouragement from Washington in the form of medium- or long-term SPA for the supplies of US LNG. The irony is that for many years Europeans have been used to hearing how Russia was using its energy resources as a tool to sort out political preferences in partner relationship. Now everyone has a chance to see that providing access to fossil energy has also become one of the central questions in the present political relations between Poland and the U.S.

Article entitled "UAE and Mexico favoured for US LNG while Poles pay much less for their cargo than Dutch", published in LNG Journal 18 July 2017, highlights a new episode in the use of energy as a political instrument. The point is that, according to the detailed data released by the US Department of Energy, the price of LNG dispatched to Poland on May 22 from the Sabine Pass terminal was 30% lower than the price of LNG that was sent to the Netherlands on the day before (May 21). The Dutch buyer paid 2 USD per MMBtu more for a cargo from Sabine Pass than Poland’s importer. Specifically, the Netherlands shipment to Gate LNG in Rotterdam by the "Arctic Discoverer" was priced at 6.10 USD per MMBtu while Poland’s shipment delivered to the Baltic port of Swinoujscie on the Clean Ocean cost 4.10 USD per MMBtu.

 

An essential distinction between the two prices is that the Polish price refers to a short-term contract for spot cargo delivery aiming at testing and promotion. It is highly unlikely that this price reflects current market conditions because everybody could see a political rather than a commercial motivation behind the agreement signed during the Polish secretary of state and chief of the cabinet of the president, Krzysztof Szczerski‘s visit to Washington on April 26 – 27.

In contrast, the Dutch price was determined under a typical long-term LNG SPA Contracts with a 20-year lifespan. It should be noted that in this case price formation is based on the model applied for all long-term LNG SPA of Cheniere Energy Inc. The Table above contains information on several LNG SPA concluded with European and Asian buyers. According to long-term LNG SPA Contracts, Cheniere Energy Inc. sales LNG on the FOB basis at the tailgate of the plant when the price includes two components: fixed fee of 2 – 3 USD per MMBtu plus 115% of NYMEX Henry Hub. The charge of 15% above Henry Hub mainly accounts for liquefaction and basis differential. It is particularly important than under the terms of long-term LNG SPA Contracts customers must take (or pay) annual contract quantity of LNG.

However, the practice has shown that Cheniere’s long-term LNG SPA Contracts are not always in line with the interests of customers. Such opinions are existing even in the key premium Asian market. For example, this year one of the main buyers of LNG in Asia - the state-owned Indian company GAIL attempts to renegotiate pricing with Cheniere under previously signed long-term LNG SPA Contract. As the Hindustan Times wrote, quoting an unnamed representative of the Indian site: "At current US prices, the landed cost of the LNG (in India) is not very attractive."

And in fact, it is obvious that the transportation of LNG across an ocean to distant European or Asian markets, regasification and storage operations, as well as technological losses of gas in transportation and during processing - all together add a significant value to the US export price FOB that ultimately makes the total landed cost of overseas LNG uncompetitive.

In this context, the S&P report entitled "Can The U.S. Shut Off Russia's Gas Supply to Europe?" has not gone unnoticed. As concluded in the report, "the main problem for US exporters is that European hub prices are currently well below those that would be attractive." the S&P analysts estimated that gas prices would need to increase by about 30% from the current level (of about 5.0 – 5.5 USD per MMBtu) to make exports profitable for US suppliers."

Washington's present policy is unfortunately aimed at imposing by any means on Europe supplies of US uncompetitive LNG although such practices ran counter to the basic market principles. With this in mind, the part of the leadership of the European Commission, Member States and European energy companies that correctly assesses the current situation deserves respect. Probably, many would agree to join the words of Klaus Schäfer, Chief Executive of German utility Uniper who said, "I’m very pleased that the German government and the European Commission have this firmly in view and have stated their position unequivocally. The United States is putting Europe’s supply security at risk for the sole purpose of pursuing its own economic interests and to protect domestic jobs."

As for Poland, truth be told, Europeans might be having doubts, some serious doubts about prospects of awarding a cost-effective medium- or long-term LNG SPA Contract at least while the President Donald Trump keeps his election promise. "’America first’ will be the major and overriding theme of my administration," the President Trump said.

Why would not Poland's leaders dreaming of new advantageous offers from US LNG suppliers prepare a simple projection for estimating a number of LNG carriers sufficient to meet an annual gas demand in domestic market without re-export to neighboring countries?

The result of this estimate would be like that: This question sounds theoretical, because, firstly, there is no terminal infrastructure in Poland, the capacity of which would allow regasifying the volume of gas equivalent to an annual consumption of this country. But, secondly, if even part of the regasification were performed by some other terminals, in this case it would require in total about 180 LNG carriers of the same capacity as the Clean Ocean for delivering 17.3 bcm of natural gas annually to Poland. This is about twice the total number of liquefied gas tankers, according to the US Department of Energy, carrying cargoes since the commissioning of Sabine Pass terminal.

 

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?

 

Why cannot renewables replace such fossil fuel like natural gas?

Ten years have passed since the European Commission put forward proposals for a reduction in greenhouse-gas emissions in 2007. These proposals, later on, formed the basis for the strategy well known as the EU 20-20-20 strategy, which made it necessary to review different energy resources taking into consideration not only fundamental evaluation criteria for different energies such as efficiency, natural resource base, their availability, security of supplies and energy storage requirements. The EU 20-20-20 strategy attached a particularly great importance to environmental impacts of energy sources. In this regard, one of new environmental targets was to reach 20% of renewable energy in the total energy consumption in the EU by 2020.

The EU Member States have made significant progress in promoting development of renewable energy sources (RES) over the past years. According to the last year's report of the European Environment Agency, the share of gross final energy consumption to come from RES rose to 16.4% in 2015 from 16% in 2014. The Second Report on the State of the Energy Union issued on 1 February 2017 contained the same data and showed that it helped to decouple economic growth from greenhouse gas emissions - during the 1990-2015 period, the EU's combined GDP grew by 50%, while total emissions decreased by 22%.

It is worth recalling however, that apart from alarming climate changes another reason why RES have become a focus of special interest is the declining national potential of primary fossil energy resources in the EU member states. According to Eurostat, in the decade between 2004 and 2014 the production of renewables increased by 73.1%. By contrast, the production levels for the other primary sources of energy generally fell over this period, the largest reductions being recorded for crude oil (-52.0%), natural gas (-42.9%) and solid fuels (-25.5%), with a more modest fall of 13.1% for nuclear energy.

It would seem that the reduction in local production of conventional primary energy should not cause any problems if instead of them consumers in Europe have a possibility to switch to RES. Experience has shown, however, that along with the obvious advantages, RES have revealed some serious weaknesses in operation – it is unstable and fluctuating power supplies. By an unlucky coincidence, those problems became apparent exactly ten years after gaining an official recognition when in January 2017 Europe experienced a sharp fall in output of RES generating capacities.

It is unlikely to find a rational person in Europe, especially in the northern part of the Continent, who would need an explanation of how much stress an unstable energy supply can cause during a winter cold spell. Fortunately, the present generations of European citizens have almost never encountered such problems. Meanwhile, to give everybody an opportunity for imaging such an energy breakdown in winter the German daily "Die Welt" tried to describe the picture of snow-covered solar panels and drooping blades of wind turbines by using an old word Dunkelflaute, which refers to that time of year, when neither sun nor wind occur in necessary abundance.

 

 

"Dunkelflaute could be pushing Germany's power supply to its limits," says the title of the article published in Die Welt on 6 February 2017. Let us notice that is what happened in the EU member state with well-advanced energy sector, which in all circumstances is capable not moving beyond that critical boundaries and avoiding unscheduled interruptions in the power supplies. This was possible thanks to the prompt switching over to conventional energy sources to substitute RES when the latter significantly cut their contribution to gross final energy consumption.

According to statistics from the Berlin-based institute Agora Energiewende, by the end of January 2017 as much as 90% of the country's power was provided by coal, gas and nuclear. The chart below illustrates that on 24 January 2017 the generation of electricity by onshore wind power in Germany dropped to its historic minimum 0.486 GW. Later the electricity production by onshore wind returned to the pre-crisis level and after about six months on 7 June exceeded 23 GW.

 

As Stefan Kapferer, Managing Director of the Federal Association of the Energy and Water Industry (BDEW) told Die Welt, the past January saw a combination of lower-than-average temperatures, a high demand in electricity and extreme fluctuations in input from wind and solar power. "Flexible, conventional power stations are essential if we are to stabilize the electricity network," he said. "We have to be able to cover energy demand regardless of the weather."

Kapferer further noted that all this pointed to the need for flexible gas and coal power stations. Particularly in this case there would be an opportunity to "integrate renewables into the energy provision system," so they become "supporting pillars" of supply.

The January’s green electricity generation crisis requires differently looking at implementation of the Energiewende concept to perform the transition by Germany to a low carbon, environmentally sound, reliable, and affordable energy supply. The target was introduced of a 40–45% share of renewable energy in gross electricity consumption in 2025 and then in ten years achieve 55–60% in 2035. In 2015, as reflected in the figure below, the share of green energy accounted for about 30% mostly produced by wind and solar power.

 

Meanwhile the increasingly obvious problem of RES insufficient reliability no doubt weakened their position in favour of brining conventional energy sources into sharper focus. In addition, there will now be caps on the amount of green power eligible for subsidies what makes them even more uncompetitive.

It is important to note, however, that although the crisis of wind and solar generation, which had arisen in January, was successfully resolved by increasing the contribution of coal, gas and nuclear stations, in fact only natural gas has clear comparative advantages within this energy triad. As to the future of coal power, it indeed has poor prospects because further decarbonization should expel solid fuel from heat and energy balance in most EU member states. According to the report prepared by experts of the Berlin institute Climate Analytics, the EU will exceed its Paris Agreement-compatible emissions budget for coal based electricity generation by 85% in 2050 if all existing coal-fired power plants continue operating to the end of their full life span. Analysis suggests 25% of currently operating coal-fired power units need to be shut down by 2020, rising to 72% by 2025, before a complete shutdown by 2030.

Nuclear energy will have equally challenging future because its reputation has not been restored after Fukushima and Chernobyl nuclear disasters. According to a recent Greenpeace survey, 85% of Germans over 45 years old believe a disaster similar to Chernobyl could take place in Europe. Now anti-nuclear tensions are arising from the growing number of recent terrorist attacks in Europe that may have made their situation even more difficult.

In this regard, it's not hard to see that RES are going to compete for this emerging market niche, further increasing their share in the energy mix in Germany. However it is evident that this can be done effectively if renewables in Germany pair with natural gas, which, as in the January case, should assist to strengthen resilience of energy system as a whole especially against the vagaries of the weather.

An example of this collaboration between two kinds of energy has already excited in the United Kingdom where energy business are making progress in exploiting the advantages of natural gas in comparison with other primary energy sources. They include flexibility of supplies and responsiveness reflecting fluctuations of actual daily demands in the gas market, all-weather capability, technological opportunity to create significant reserve and emergency stock to overcome current uneven distribution and seasonal variations in demand, much higher environmental safeness incomparable with other fossil energy resources, competitive prices and transportation costs, development of NGV fuel markets, etc.

So guided by the classic SWOT analysis (analysis of strengths, weaknesses, opportunities and threats) it should be noted that natural gas can be considered not only as RES close rival but to a much greater extent as their partner, which can compensate energy consumers for still existing weaknesses of the latter. Of course, partnership conditions can change initiating an impact on the future energy mix.

Meanwhile, those who doubt whether such a partnership between RES and natural gas is possible especially emphasize that EC member states actually do not have their own natural resources of this fossil fuel. In that regard, it is worth pay due attention to the report prepared by the Oxford Institute for Energy Studies in January 2017, which argues that "the European gas industry has reason to panic about its future up to the mid-2020s. Falling domestic production will mean that additional gas will continue to be needed (and will be available) from upstream producers and exporters". Clearly, in the foreseeable future of natural gas imports by the EU member states much will depend on whether RES can be enough competitive and on further development of innovative technologies of storing large volumes of electricity.

Why do not admit any realistic sustainable scenario of economic development, as if shaped by the laws of physics, should have several energy pillars where natural gas shall be deemed to provide one of prospectively vital resources along with RES?

Why do consumer expectations of a higher competition between LNG and pipeline gas in Europe now perceive as even more problematic than before?

A year ago, forecasts for development of the European gas market suggested that expansion of a global gas glut would tend to increase competition between LNG especially the first American shale LNG to arrive in Europe as well as conventional LNG on the one hand, and pipeline gas on the other hand. However, these hopes have not materialized yet. In 2016, there were only four shale LNG cargoes delivered to the EU market from the US, including Portugal, Spain, Italy and Scotland. In the latter case, ethane from US shale gas was shipped to company INEOS' petrochemical plant at Grangemouth. Two more LNG shipments from the US were made to Turkey. In total, the volume of American LNG delivered to Europe in 2016 was about 500 mcm. For comparison, that is approximately 40 times less than the increase in gas imports to Europe via pipelines from Russia reaching almost 20 bcm in 2016.

Despite overall natural gas demand growth in Europe in 2016, in the majority of the European countries LNG had been driven out by the competition of pipeline gas and many of them saw a decline in LNG imports as most of this fuel went to better-priced markets in Asia and the Middle East. As a result, utilization of the total installed capacity at the European LNG import terminals had been declining during 2016 to a very low level. According to the LNG World News, the average rate of LNG terminal utilization in Europe has decreased significantly since 2010 to below 20% of the total send-out capacity last year.

This trend seems to be continuing. For example, LNG FSRU in Lithuania has a particularly low rate of utilization. During the first four months of this year LNG FSRU Independence located in the port of Klaipeda regasified 2,977,000 MWh of LNG, 54% down compared to 6,478,000 MWh for the same period of 2016. It has to be admitted that since the beginning of this LNG project the fundamental rules of market competition and economic feasibility have not played their usual role. Lithuanian company Klaipėdos Naptha has a 10-year lease with Norway’s Hӧegh LNG for use of an old LNG tanker as FSRU at an annual cost of 61.45 million Euros. Installation of the terminal in the port of Klaipeda, and its connection to the gas transportation system cost 101 million Euros. It is not hard to calculate that lease payments for 10 years including other costs will exceed 710 million Euros, which indeed is a heavy burden for the country since, as a comparison, in 2016 the State budget revenue of Lithuania accounted for 9.3 billion Euros only. Thus, regrettably, the Lithuanian LNG project is not fulfilling its mission efficiently, nor did it represent the best use of funds for energy development aimed at competitive retail pricing in the gas market.

Retail prices - an attribute of the "game" on several playgrounds for price formation but common principles of market competition do not apply to all of them.

The formation of prices can be compared with the sports game that reveals an important distinction - this "game" is going on three playgrounds each with different rules to settle the score. Three playgrounds correspond to the three components of the diagram of different colors below. There are those playing on blue color game site that determine cost of the energy component, thereafter, toffee color – cost of the gas network component, and the last one, green color – cost of the taxes and levies component.

 

It should be clear to everyone that competition occurs just on blue playground. Only there competition is exercising direct influence on formation of the energy component within a retail price in gas market. According to Report on Energy prices and costs in Europe, published by the European Commission on 30 November 2016, due to competition the share of the energy component in the total price decreased by 5 percentage points from 59% to 54% for the period from 2008 to 2015. The average energy component accounted for 3.54 Eurocent per kWh in 2015.

Unlike the above-mentioned, the competition is absent, by definition, on toffee color and green color playgrounds. In this case, the formation of retail price components is governed by state regulations. The share of the network component marginally increased from 21% to 22% and amounted to 1.49 Eurocent per kWh in 2015. The biggest increase by 4 percentage points occurred with the taxes and levies component from 20% to 24% and accounted for 1.56 Eurocent per kWh in 2015. According to the recent Eurostat data, the EU-28 average price of natural gas for household consumers during the second semester of 2016 amounted to 6.4 Eurocent per kWh.

Thus, owing to competition in the gas market the share of the energy component declined although gas consumers could hardly benefit from it because both of the other price components related to the network cost as well as taxes and levies still make up half of retail price for household consumers in the majority of the EU member states.

On these last two price components, it is commonly believed that only they are regulation objects. Meanwhile, non-market administrative and regulatory forces actually interfere in the formation of the energy component, in particular influencing competition through selective imposing certain import barriers and conditionalities on the routes of gas supplies to the market. However, fundamental analysis of commodity markets claims that the greater the supply, the lower the price tends to fall benefiting gas consumers.

In practice the arguments in favour of "concerns about potential disruption of gas supplies" to Europe because of the ongoing conflict in Ukraine, which still remains a major transit route for Russian gas, do not seem convincing any more. Attempts to limit natural gas imports from Russia, for example via pipeline OPAL can negatively affect the supply-demand balance and leads to undesirable changes in competitive prices. Quantitative restrictions imposed on gas supplies are known to contradict the core principles of the WTO, although it seems as if Brussels does not care about it. What is more, for the European Commission it seems to be the normal thing to consider initiatives of some EU member states, particularly Poland, which are standing for limiting of gas supplies from Russia, while European companies fulfilling the Russian gas imports recognize its ability to compete in the European gas market.

"Europe is "dependent on Russia" in terms of a secure and affordable gas supply," Chief Executive of Germany’s largest crude oil and natural gas producer Wintershall, Mario Mehren, said in an interview with Handelsblatt in April, explaining that Europe needs additional gas imports and Russian gas can withstand any competition.

According to Reuters, in 2016 the average gas price was expected to be 167-171 USD per 1,000 cubic meters (1.60 – 1.64 Eurocent per kWh). By way of contrast, Lithuania, for example, was purchasing imported LNG at the price of 2.19 Eurocent per kWh in the first quarter of 2016. Such a high price obviously did not resulted from the market competition but was politically motivated. During a presentation for investors in Singapore in February Gazprom announced that following the trends in the world oil market prices of export gas contracts to Europe would rise in 2017 to 180 -190 USD per 1,000 cubic meters (1.72 -1.80 Eurocent per kWh) remaining competitive.

So why not start considering competition at gas market not only within business environment but also at the policymaking level of the EU member states entirely as means to reduce costs and improve energy services rather than a tool for advancing narrow political interests?