Is there anybody who would be willing to invest in the Ukraine’s gas transportation system? Moreover, why is there actually no one at all?

Popular opinion has been spread for a long time, especially among European politicians, that the pipelines "Nord Stream" and "South Stream" had the only one goal - to punish Ukraine depriving this country of gas transit business. Of course, this point of view primarily reflects the Ukraine's interest in retaining of its transit revenues. This is a fact that now it is one of the few stable sources of foreign currency earnings, which are very severely lacking on urgent needs of the Ukrainian dented economy.

As well as everywhere in the energy sector now Ukraine is experiencing an acute shortage of funds for purchasing gas. Therefore, no wonder if the amounts received from Russia for gas transit services are paid back to the Russian company “Gazprom” for new gas deliveries. According to Ukrainian sources, in September 2014 Russia paid for the transit of gas 68 million USD and about 70 million USD in October. These, in terms of gas contracts relatively small amounts were included in 387 million USD that on 5 December the Ukrainian company “Naftogaz” transferred to “Gazprom” as an advance payment for the supply of 1 bcm of gas from Russia. Recently on December 31 "Gazprom" received 150 million USD from Ukraine’s "Naftogaz" as an advance payment for Russian gas supplies in January 2015.

At first thought, usage of transit revenues for gas purchase seems to be a common practice, and perhaps Ukraine has to be just satisfied with this possibility. However, if you look at this situation from our side taking into account EU countries' interests as importers of Russian gas transported through the Ukraine’s gas transportation system (GTS), the attitude towards this practice should be quite the opposite, because it is bad for Europe and even very bad!

The main problem here is that, as is widely common in energy sector, the calculation of gas transit tariffs is based on operating and investment costs. That means that revenues obtained from gas transit payments mostly should be directed to ensuring proper maintenance and technical condition of the Ukraine’s GTS.

Meanwhile, actually in Ukraine such basic requirements have been ignored for many years. It had taken place already at a time of the previous Ukraine's governments. And even more so under the pressure of severe fiscal deficit now nobody cares to use this transit money for its intended purpose of GTS maintenance. Ultimately, the Ukraine’s GTS keeps operating although a service lifetime stipulated by the technical regulations for the majority of pipes and equipment have been completely exhausted long time ago.

An excessive deterioration of the Ukraine's GTS caused an increase in number of technical accidents. Last summer there were two gas explosions in the Poltava region on the largest pipeline "Urengoy - Pomary - Uzhgorod", which pumps Russian gas to Europe. Later in autumn an accidental depressurization put out of order the pipeline “Brotherhood” in the Transcarpathian region on the section “Valley – Uzhgorod – Border”. It is not difficult to figure out that in all cases the main reason appeared an out-of-limit technical deterioration and lack of funding for necessary modernization.

The pipeline accident in the Poltava region apparently made the Ukraine's government pay attention to the pressing problem of deteriorating the GTS condition. As a result, last summer the Ukraine's government officially announced the beginning of a radical modernization of the GTS at its own expense, which, according to preliminary estimates of Ukrainian experts, would amount to 5.3 billion USD for 5-7 years.
Since there is no money in the country in August the Verkhovna Rada (the Ukrainian Parliament) at the third attempt adopted the law on modernization and operation of the GTS. It launched a procedure of attracting investors to the Ukraine’s GTS, where the state will own its share in a control package, and another 49% can be distributed only among an operator company or several companies from Europe or America.

However, so far the expectations of reconstructing the Ukraine's GTS by means of foreign investors have not been met at all. The Ukraine's Government attempts of attracting foreign companies and, in particular, the negotiations with Chevron, Statoil and other companies have not yielded any result yet. There are several reasons for a failure.

First of all, it is necessary to realize that, in spite of the Minsk Agreement, Ukraine is still teetering on the brink of the renewal of hostilities which have already massively undermined the Ukrainian economy. Meanwhile artillery strikes and civilian casualties take place up to now.

In addition the US Congress passed the "Ukraine Freedom Support Act" on December 13 that would allow 350 million USD in lethal and non-lethal military assistance to Ukraine from 2015 to 2017. It should be quite clear to everybody that even promises of supplies for military use instead of private investments will not contribute to the stabilization of peace in Ukraine. Under such circumstances it is unlikely possible to find investors who would dare to invest heavily in a multi-billion project that should be fulfilled near half-ceased battlegrounds. Do they?

Besides that, we have to recognize a critical weakness in functional structure of the Ukraine’s GTS, which I described almost half a year ago in the end of June. It consists in the fact that the infrastructure of the Ukrainian transit pipelines simultaneously are in permanent and total use for meeting the needs of internal gas consumers in Ukraine. Direct access of local Ukrainian consumers to transit pipelines as well as an insufficient administrative control and corruption that all together make it easy to carry out an unauthorized gas offtake. Or by other words it means stealing a transit gas partly instigated by a severe energy shortage in the country.

Practically it will not change anything if European or American companies become co-owners of the Ukraine’s GTS. In such circumstances, they are unlikely to be able to ensure that Russian gas intended for Europe will not be pumped out on the territory of Ukraine. But in that case why should investors sustain such financial and image risks?

Finally, we need clearly to understand the consequences of recent events - namely, Russia's action of canceling the South Stream pipeline construction. Simultaneously Russia and Turkey completed an agreement on the construction of the other gas pipeline with the same capacity of 63 bcm, which is now called the Turkish stream.

The announcement that the South Stream would be halted caused a surge of enthusiasm in Ukraine. Ukrainian Prime Minister Yatsenyuk again repeatedly called foreign companies to invest in the Ukraine’s GTS. But at the same time almost nobody paid attention to the fact that, as well as the South Stream, the Turkish stream will provide a new route for gas supplies to Europe bypassing Ukraine. Therefore, redirection of the Russian gas pipeline to Turkey means only one thing: Ukraine will lose a status of gas transit country for the foreseeable future.

Nevertheless, the transit agreement between Russia and Ukraine will be valid for another five years until 2019. As long as there are no companies willing to invest in the Ukraine's GTS neither in Europe nor in the US, the financial burden of its preservation from a complete collapse rests on the EU itself. While politicians in Brussels and Washington go on talking about gas dependence on Russia, as you can see, the real threat to our security of gas supplies is much closer. It is right behind the EU borders and has a name that is known as "the Ukraine's gas transportation system."

An indirect recognition of this fact is that the EBRD extended a loan for modernization of the Ukraine's GTS in December. But the allocated amounts are much less than those required according to the calculations in Ukraine. It is 200 million USD intended only for the reconstruction of the Urengoy - Pomary - Uzhgorod pipeline.

Generally speaking now when the Ukrainian economy is sinking into deep trouble, this loan would be like "a drop in the bucket."

Obviously Europe launched its loan initiative too late spinning out almost until a middle of winter! Now Ukrainian media covers so-called rolling power cuts occurring every day in all the cities, which, by the way, a few of us in Europe can imagine. And what is more there was a nuclear power plant accident in Zaporozhye, which resulted in shutting down one of its generating blocks. Ukraine purchases coal from a far South Africa and negotiates about coal shipments even from Australia. Ukraine's government approved temporary electricity import from Russia.

It is paramount for European security of gas supplies that due to acute shortage of energy from the very beginning of winter Ukraine started increasingly pumping out gas of underground gas storages (UGS). There are 12 UGS in Ukraine with a total active capacity of 31 bcm. According to the Gas Storage Europe Association (GSE) data in 2014, the maximum filling volume of the Ukraine's UGS was recorded on October 19 and accounted for 16.759 bcm. As of January 10, 2015 this volume dropped by 37% to 10.615 bcm. Furthermore, from 5 to 6 bcm out of 16.5 bcm is a so-called inactive gas that in principle cannot be used at all.

As a matter of fact Ukraine does not have to use much of its storage volumes for the domestic consumption because these UGS facilities perform an important role of buffer stocks in the gas transit system, ensuring security of stable supplies to meet peak increases in gas consumption in Europe especially during a cold spell in January and February. Meanwhile, the Ukraine’s UGS now filled only to 33.51%.

For refilling the Ukraine’s UGS, it is necessary to import gas from Russia. But evidently Ukraine has no money for that. Instead, there is a multi-billion unpaid gas debt to Russia, which Ukraine hoped to pay off with the financial assistance of the European Commission.

In such a tense situation, why are our European politicians in Brussels and in other European capitals still urging to the accompaniment from Washington that Europe should cope with its gas supply without Russia? Why did the EU refuse a new gas pipeline to supply Russian gas bypassing the decrepit the Ukraine’s GTS? And ultimately why is Ukraine going to squeeze further out the EU to finance its GTS while, as we see, it is of no interest to investors?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Why should Bulgaria pay an exorbitant price for European solidarity?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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