Why has the Brussels-based commission been so long exploring the interest in trilateral talks with Ukraine and Russia ahead of energy supplies in winter 2016/2017?

The beginning of autumn is the best time in Europe because there is insignificant rainfall and the ground still has stored warmth through the summer. But as the old saying goes, in fair weather prepare for foul. In recent years, one of the necessary preventive measures to prepare for the winter heating season was the trilateral format of gas talks involving the European Commission, Ukraine and Russia to sign a "winter package" securing gas supplies for Europe and Ukraine during the winter season. For the first time a ‘winter package’ was agreed on 30 October 2014 after seven rounds of the trilateral talks in Brussels. One year later last autumn the three negotiating parties reached agreement on the next winter package much earlier on 26 September 2015.

This year, there was a considerable delay in the official notification by the European Commission of its intention to restart the format of trilateral gas talks with Ukraine and Russia. On September 1, Maroš Šefčovič, European Commission Vice-President for Energy Union wrote on Facebook: "In the past, this forum has proven its usefulness: it is better for all to sit down together around one table. Russia as an exporter, Ukraine as a transit country and the EU as the main importer share a common interest ..." But this is nothing more than just a signal to begin the process of preparing possible negotiations, and with a few days remaining before the date of signing of "winter package" in the past year.

What are the reasons for the delay in the initiative of the European Commission to restart the gas talks and what could be the consequences for Europe?

As it was before, each of the three negotiating sides evidently has its own distinct motivation behind the "common interest' mentioned above. With regard to the European Commission, the current ability of Europe to prepare for the coming winter should be of alarming concern. Any person who is familiar with the peculiarities of gas imports by transit via Ukraine knows that in this case the security of supplies is technically dependent on active volumes of natural gas in Ukraine’s underground gas storages (UGS). It is precisely these UGS facilities, which were mostly built in the previous century in Western Ukraine together with other parts of gas transport infrastructure, should ensure stability of supplies for European consumers to reduce vulnerability to cold weather shocks.

According to Eurostat, 15.0 % of the natural gas entering the EU come from Ukraine’s transit in 2015. Evidently, not only a winter package, but the full active volume of gas in the UGS will give a guarantee to bring reliably to the EU countries the necessary volumes of gas through the Ukraine's transit during the coming winter.

 

However, as data of Aggregate Gas Storage Inventory (AGSI+) transparency platform of Gas Storage Europe (GIE) reflects the fact that Ukraine is significantly overdue in injection of natural gas into UGS. Experts note with concern that such a fundamental characteristic of any UGS facility as "Gas in storage" showing the gas contained within it at a particular time is much lower this year. As table above indicates, GIE reported that on August 31, 2016 there was only 12.5 bcm gas in UGS, 40.4 % of the total working gas volume.

At this point, there is a substantial slippage in the schedule seasonal injection of natural gas - the volume of gas in storage accumulated on August 31, 2016 is 2 bcm less than at the same date during the previous year.

It seemed that usual volumes of gas seasonally pumped into Ukraine's UGS, which once met the winter peak demand are now unavailable and this situation has so far not received the attention it requires neither in Brussels nor in Kiev. It would not be overstating the case to wonder whether energy policy makers in Brussels use any seasonal checklist in addition to the gas stress tests well-publicized in the EU. Such a checklist is supposed to be kept under constant review along with the weather forecasts for the coming winter. Another question remains: would it be acceptable to ignore the importance of this challenge hoping that rather warm winter would repeat again and again?

The probable reason for a clearly insufficient attention to the Ukraine's UGS before the coming winter might have to do with the weakening the EU interest among both beneficiaries and providers of financial support to the Ukraine's gas transit and its national economy as a whole. Thus, we can see that, while urging Russia to continue gas transit through Ukraine in words due to European `solidarity’ with that country, in deed the EU reveals less enthusiasm about ensuring the reliability of gas supply route via Ukraine.

This should not be surprising to those who have followed the situation. The existing practice of EU relations with Ukraine shows that at a time of deep economic and financial crisis, and other huge challenges in that country implementation of any measures to be initiated by Brussels to keep Ukraine's gas transit afloat would need to be financed with the direct participation of the EU.

It is unlikely possible to succeed at persuading Russia even indirectly to share the burden of financing unsustainable gas transit business in Ukraine

Possible results of future trilateral gas talks would differ significantly from the previous winter gas package because of a substantially changed situation. Let us recall that according to the "winter package" of 2014 the Russian side provided a discount in the amount of 100 USD per thousand cubic meters. In 2015 the winter package envisaged that Kiev would pay a reduced price of 232 USD per thousand cubic meters during the period covered by the agreement (October 2015 – March 2016). Earlier, Ukraine was paying 252 USD per thousand cubic meters. The EU also agreed to allocate 500 million USD to Ukraine’s Naftogaz to ensure gas stores of 2 bcm for the 2015-2016 winter season.

However, currently it is unrealistic to await that outcomes of future talks would be somewhat similar to the previous ones, since all the circumstances, including also Russia's position, have changed significantly. Obviously, price reductions will not be on the agenda of the next trilateral talks. At the end of June one of online news portals in Ukraine (http://ukropnews24.com/) cited the statement of Russia's Energy Minister Alexander Novak that "it will be absolutely competitive prices, at a level not above the market ..., no discounts on gas for Ukraine is necessary".

Furthermore, Ukraine’s Energy Minister Igor Nasalik also recognized that Russian gas is considerably cheaper so-called reverse, which Ukraine prefer to buy in Europe. "Yes, we pay more because we pay for transit through Ukraine, and across Europe and back, and today the price is 185 USD. Direct contract with Russian the price would be 140 USD," said Igor Nasalik on August 24, 2016, speaking in Ukrainian TV channel, according to The Newspapers.

Many of you could pay attention to how Minister Nasalik described the overpayment of 45 USD as the price of "Ukraine’s independence from Russian gas". Given the large volumes of gas purchases, the cost of "independence" of Ukraine turns into a very large, economically groundless expenses – the country has to pay extra 45 million USD for every bcm of natural gas. However, as can be seen Ukraine does not bother that reverse gas for UGS and internal market is much more expensive. Meanwhile it seems not to be recognized by Ukraine as its own problem.

Liberation from the energy dependence is worth Ukraine getting into a permanent debt bondage

It is clear that due to the limitations of its own funds for gas purchases the Ukraine's side has taken a wait-and-see attitude towards the trilateral talk’s prospects expecting answer to the main question: who will give money to obtain necessary volume of gas before winter? And who could doubt that the EU will be the first to pay the Ukraine’s gas bill again. The official reason to allocate funds has become the regulatory reform of the energy sector in Ukraine. "Completing this process will allow the European Commission to provide 600 million Euros of macro-financial assistance," - said Maroš Šefčovič.

There might be a feeling that if Ukraine received enough reverse gas and funding to pay for it, then the critical issue of UGS readiness for the coming heating season would be solved without the participation of Russia. That is exactly what is being pursued as a primary goal of an unceasing struggle for the Ukrainian energy independence and the present course of European policy to ensure the security of supply. However, it would just be a rather common delusion.

We have to admit that Russia's participation is necessary due to the external circumstances: first, we should not forget that reverse gas is sourced from the EU gas imports from Russia. And second, within the remaining time before the start of the heating season it is already impossible to ensure the readiness of Ukraine's UGS only by means of reverse gas.

There is a common opinion shared by all parties of the trilateral talks that to ensure a secured gas imports to the EU through Ukraine's transit in winter the company UkrTransGaz, which operates underground gas storage facilities, should accumulate 17 bcm of gas by the start of a new heating season. To achieve this, it is necessary to pump into the underground storages in Ukraine still about 4.5 bcm of gas.

What should cause far more concern to gas consumers in Europe would be the lack of time to complete technically this gas injection task because it is known that the reverse gas flow capacity from the EU to Ukraine amounts only to 40 mcm per day. That is why if only reverse gas were used, that would take practically four months to perform the injection operations. In this case, the required volume of gas in Ukraine's UGS would be filled out almost in Christmas Eve!

But that is not all: we should also bear in mind the gas needs in Ukraine that are also met by the reverse from the EU, which has become the only external source of natural gas supplying the Ukraine’s domestic market since Kiev stopped purchasing Russian gas directly.

Thus, in the coming months many of us being European gas consumers will be able to take more or less part in assessing the real capabilities of UGS facilities and Ukraine’s gas transit as a whole.

In the meantime, the question remains present in the mind of Europeans as to why there is no any other gas imports route including among other pipelines from the North of Russia through Belorussia or the Baltic, which has caused over the years as much trouble as Ukraine's gas transit does?

Why do gas consumers in the EU in addition to their genuine concerns regarding workplace and home place temperature have to worry about what a balance pointer reads when Ukraine's UGS problems and growing Kiev debts on one side await to be counterbalanced on the other side by Brussels politically motivated desire to preserve Ukraine's gas transit by all means? And how will the upcoming winter weigh all pros and contras?

 

Why may the shale LNG from the US float away in the other direction?

The EU is the biggest energy importer in the world. According to Eurostat, more than half (53.5 %) of the EU-28’s gross inland energy consumption in 2014 came from imported sources. A special role is given to LNG imports that is increasingly used as an alternative energy resource. In a press release issued on 16 February 2016, the European Commission tried to raise the Europeans’ expectations that new gas liquefaction plants primarily in the US will come on stream shortly.

 

What, then, are the realistic prospects for improving the access of all Member States to LNG?

 

Cheniere is the first US company to be given a license to export liquefied natural gas by FERC. Earlier the company planned to complete the first export shipment at the end of January 2016. However during the final phase of putting the first liquefaction train into operation Cheniere Energy's Sabine Pass LNG export facility encountered serious technical difficulties. After solving the problems this liquefaction and export plant located in Louisiana shipped its first ever cargo of LNG on February 24. Only the sixth tanker from Sabine Pass plant for the first time headed for Europe.

 

The tanker Creole Spirit (IMO: 9681687), which can hold up to 174,000 m3 of LNG docked at the port at Sines in Portugal on April 26. The second delivery to Europe took place three months later, when on July 22 the tanker Sestao Knutsen (IMO: 9338797), with 138,000 m3 of LNG aboard, arrived at the Reganosa terminal at Ferrol in northwest Spain.

 

What do two LNG cargoes within more than half a year mean for the whole EC gas market? With LNG density within 450 kg/m3 we can calculate that the total weight of two LNG cargoes, which were shipped from the US to Europe, accounted for a little more than 140 thousand tons. In comparison, according to the International Association for Natural Gas, Cedigaz, in 2015 net imports in Europe increased by 4.47 million tons up to 31.35 million tons. Thus two cargoes of the US LNG amounted to just less than one-half of one percent of the EU' annual imports.

 

Could a couple of LNG "drops" within more than half a year be appropriate to the EU expectations?

 

A better time could hardly be imagined to see how such a "high wave" of shale LNG from the US leaving the mountains of the Pyrenees behind may influence the EU gas market. Some experts believe that LNG imports from the US will not be able to provide a significant alternative to other sources of the EU gas supply mainly due to lack of regasification terminals. However, it is enough to look at the map of LNG import terminals in Europe, to make sure that at least in the western part of the European continent it is unlikely to be a pressing obstacle to LNG supplies from the US. According to GIE, there were 22 LNG receiving terminals with total annual capacity 197 bln.m3 two years ago in Europe.

 

The development of necessary infrastructure for LNG imports in the countries - members continues. A recent example is France's fourth LNG import terminal in the port of Dunkirk that received its first commissioning cargo from Nigeria on July 8. This LNG terminal will have an annual regasification capacity of 13 bln. m3 of gas, enough to cover about 20% of France and Belgium’s yearly gas consumption.

 

The real obstacle to LNG imports from the US actually is a triple imbalance in the gas market current development

 

Firstly, it is natural gas supply-demand imbalance in the global market. Bloomberg article covering the launch of the Dunkirk LNG terminal especially pointed out that it was made "with market plagued by glut". Before that in the Global LNG supply and demand monitor released in June Bloomberg predicted that a global glut of the fuel would peak in 2020 with production capacity exceeding demand by 29 percent.

 

Secondly, it is an imbalance in the capacity utilization rate of all the existing LNG regasification capacity in Europe. According to the International Gas Union’s annual LNG report, usage averaged 25 percent in 2015, ranging between 7 percent and 54 percent by country.

 

The imbalance in the third plane is strongly related to an actual accessibility to the LNG infrastructure for certain EU member states. In fact, although the EU's overall LNG import capacity is significant, in some regions of the EU, especially in Southeast Europe many countries have not got access to LNG. As can be seen, there are countries, such as Bulgaria, which are completely absent in the table prepared by GIE.

 

What is notable in this regard, however, is that LNG cargoes from the US have been stuck halfway towards most other EU countries not only because of the continued imbalance in the geographical distribution of LNG regasification capacities. One of the principal reasons obviously has to do with transport costs, which on long transoceanic routes becomes a key component of LNG purchasing costs.

 

As is known a simplified LNG supply chain consists of four components: costs of feed gas purchased at the source, costs related to the liquefaction process, transportation costs and costs of regasification. The share of transport costs usually ranges between 10-35 percent of the final price paid for natural gas. The significant transportation expenses have a great influence on the ability to compete in the EU gas market. Moreover, this is recognized by many experts that transport costs are frequently even more volatile than other components within LNG supply chain.

 

An ordinary estimate shows that in the current market situation of increasing competition LNG from the US can at best reach its destination no further than the Iberian Peninsula

 

The article, entitled "US LNG capacity utilization: Lower prices challenge US exports" (www.gastechnews.com) contains a cost dispatch formula to illustrate US LNG competitiveness in the EU, which uses NBP spot price as a proxy for EU and Atlantic Basin LNG prices, and Cheniere’s feed gas charge of 115 percent of HH spot price. There are also additional 10 percent to cover ship fuel.

 

Based on this formula, it is easy to calculate the cost dispatch on a certain date. For example, NBP spot price was 3.85 USD/MMBtu and 125 percent of HH accounted for 2.75 USD/MMBtu on August 15. As a result, the value of discussed "cost dispatch" of LNG from the US to Europe would amount to 0.41 USD/MMBtu.

 

Meanwhile the figure calculated for the gas hub in the UK cannot, of course, be seen as precise indicator of the US LNG competitiveness for the whole gas market in the EU. In continental Europe it would be even lower.

 

Think again about the example of calculation above. On the same date, TTF spot price was 11.04 Euro/MWh, which equals 3.65 USD/MMBtu. Accordingly, after subtracting there would be a balance of 0.21 USD/MMBtu, which provide obviously insufficient resources for covering expenses of the US exporter dispatching LNG to Europe. That hardly seems like enough for rental costs of LNG tankers, harbor fees and charges associated with freight by sea, such as a fee for crossing channels, let alone how much of it should be envisaged for costs of regasification as the final component of LNG supply chain.

 

In this example, it is easy to see that US LNG is not ready to compete successfully for a share of the EU gas market. Two Cheniere's cargoes to the Iberian Peninsula that, as is known, just has not got proper connection with European gas infrastructure yet, should be seen as only a marketing initiative that is not able to affect the entire market place.

 

Moreover, we cannot ignore that the LNG suppliers from other regions of the world have already captured leading positions on the Southwest European gas market. Portugal and Spain mostly import LNG from Algeria, Nigeria, Qatar and Norway. Moreover, according to Cedigaz, in Spain, which in addition to imports to internal market also reloaded about 3.99 million tons in 2014, LNG re-exports dropped almost fourfold to 1.05 million tons in 2015.

 

East or west, what would be the best?

 

Almost right after the second shipment to Europe another tanker Maran Gas Apollonia (IMO 9633422) with the capacity of 161,870 m3 of LNG was loaded with a cargo from Cheniere’s Sabine pass liquefaction plant and on July 25 transited through the newly expanded Panama Canal connecting the Atlantic and Pacific oceans. Of course, the Panama Canal Expansion is an important event affecting the global LNG market as well. The question remains as to whether it helps US LNG to take a worthy position in the Asian gas market.

 

In searching for an answer to that question, it is not difficult to repeat for the Asian market the above made calculation. As Bloomberg reported, Asian spot prices for LNG have already slumped by about 60 percent since September 2014 amid new supplies and fell to 5.413 USD/MMBtu on August 15, according to the Singapore Exchange Ltd. Taking this into account the value of discussed "cost dispatch" of LNG from the US to Asia would amount to 1.98 USD/MMBtu. Although it is many times higher than for Europe, and therefore more optimistic, we cannot ignore that the global glut is also having considerable impact on the Asian gas market.

 

Newcomers to the Asian gas market are supposed to have to be prepared for unpleasant surprises caused by the continued natural gas supply-demand imbalance. On the one hand, as experts estimate it is likely to expect that Australian gas production almost double from 2015 levels of almost 80 bcm to 153 bcm in 2021. There are concerns, on the other hand, about poor prospects of gas demand in Japan, which is the world's largest LNG importer. The country's government has forecast imports decline to 62 million tons in 2030 from a record 88.5 million tons in 2014 resulted from a shift to nuclear power as plants restart and more renewable energy.

 

Despite the glut of global LNG market, Cheniere Energy continues to expand production. It "expects substantial completion of Train 2 to be achieved in late September 2016", the company said in a statement. Trains 3 and 4 are expected to be completed in 2017. According to the company's plan, a total of six trains are to be built at Sabine Pass LNG plant, each with annual capacity about 4.5 million tons.

 

Meanwhile it looks like the company is not sure of its future strategy and has only a vague notion of what might meet on its way ahead. In the recent past the company has endured the replacement of Chief Executive Officer Charif Souki who has been its longstanding leader. According to Bloomberg, he was fired because of his plans to expand the company’s operations. The company carries 24 billion USD in debt, and the current market situation still makes it harder for the company to service its huge debt. Cheniere Energy quarterly reported growing net losses.

 

Nevertheless, those who would like to see into the future obviously expect that the more LNG Cheniere produces, the more certain the company should become with regard to the choice of its export routes. Up to now, the results cannot inspire confidence for fairly massive supplies taking place further on.

 

Every sports fan, especially who visited The Rio Olympic Games, is well aware that to achieve a new challenging height, one needs a very good run-up.

 

Why does Cheniere's exports "run-up" appear so muted? Why does the company seem to be uncertain whether it is worth at all setting a proper run-up in the direction of the EU gas market?

 

Why is Brussels less concerned about the impact of Brexit on the EU gas market than the future Ukrexit?
 

The European Union has always attached importance to the development of the UK energy sector. It is enough to mention that in 2014, total European Investment Bank (EIB) investments in the UK economy came to 7 billion euros and energy projects accounted for 50 per cent of this amount.  

  Brexit: the last EU gas exporter is leaving

Before Brexit, the UK was the only EU member state, producing and delivering gas to other EU countries, mostly to Belgium. A short list of the EU gas exporting countries is vanishing before our eyes, as the Netherlands - the leader in gas production in the EU - changes from a net gas exporting country to a net gas importing country.

According to the BP Statistical Review of World Energy, June 2016, gas exports from the UK to the EU market amounted to 13.4 bcm in 2015. On the one hand, it would seem quite insignificant amount compared to the annual gas consumption in the EU, which reached 426.3 bcm in 2015. However, it depends how you look at it, because, on the other hand, it could be compared with considerable efforts made by the EU to support the projects of the Southern Corridor, aiming at an even smaller annual volume of gas imports than from the UK - only 10 bcm.

The global trend should be obvious for all of us - in the long-term energy resources do not become cheaper, but quite the contrary. This should make everybody realize a high value of every bcm of gas supplied to our market by different routes, the choice of which is necessary to maintain competition.

In that regard, the British National Balancing Point (NBP) secession from the EU market can hardly benefit competition on the EU gas market. Before 2014, the NBP hub had been at the forefront of gas market development and then the Dutch Title Transfer Facility (TTF) overtook NBP as Europe's most liquid gas hub. For many years these two European gas hubs – the UK's NBP and the Dutch TTF - together conducted more than 80% of transactions, significantly outperforming its competitors on the spot market of gas in the EU. The NBP secession nominally reduces a number a virtual trading locations for sale, purchase and exchange of natural gas on the EU market. It will considerably enhance the TTF competitive position that can influence trends of spot gas prices not in favor of consumers in the EU market.

It is expected that there will be new problems not only for gas consumers but for European energy companies too. According to Reuters, Royal Dutch Shell's chief executive, Ben van Beurden told that Britain's decision to exit the EU could slow its 30 billion USD asset sale plan, especially in the North Sea.

Ultimately, with the Brexit vote the EU is losing an important participant of the Energy Union project. However, neither parting with the last EU gas exporter and one of leading gas trading hubs nor rising financial and investment complexities for energy companies of course are not the only consequences of the Brexit vote, which in general significantly increases an uncertainty and will lead to further problems.

The issue of the Brexit economic impact is becoming therefore a source of grave concern to European energy companies and gas consumers in the EU. But strangely enough, despite all alarming signals, the European Commission has been slow to focus on the Brexit energy implications. As before, Brussels takes much greater interest in eastern energy policy aimed at substantially reducing and even for some member states eliminating imports of Russian gas by the early 2020s. At the same time, there has been an ongoing attempt somehow to weaken the Ukraine crisis, which, in particular, in gas sector leads to "Ukrexit".
 

A major question remains as to whether such in essence geopolitical goals of the European Commission conform to the interests of the EU gas market participants.

The Ukrexit: who would be in favour of an exit, and who would want to remain?

Let us first define that in the context "Ukrexit" means a serious limitation of the Ukraine's gas transit and thus the Ukraine's exit from a group of countries mainly providing transportation of gas to the EU market. Now we could imagine a voting script, which is disclosed by actions and positions taken by stakeholders.

At first about Ukraine's position that opposes vigorously a reduction of gas transit services because if it happens the country annually will lose budget revenues of around 2.0 billion USD.

Moreover, the gas transit is of particular importance to Ukraine that has since been trying to cut its dependence on Russian gas. Indeed Ukraine has not bought gas from Russia since November 25, 2015. Since then and up to the present time the country imported Russian gas only by means of reverse operations from the Eastern European countries - Slovakia, Poland and Hungary. The scheme of reverse supplies to Ukraine have been widely discussed in the past few years.

It is well known that European companies sell to Ukraine gas previously purchased from Russia and returned by reverse to the territory of Ukraine. Nevertheless, even in the case of physical reverse when it is necessary to spend money to pump gas back and forth across the border, anyway it is cheaper than, for example, to pump Norwegian gas for a distance exceeding 2.5 thousand km. In fact, without the transit of Russian gas European suppliers would have to look for other, more expensive sources of supply to Ukraine instead of reverse gas.

However, Ukraine is not satisfied with the existing financial returns from operations with Russian gas reverse that is seemingly unique for its benefits. Ukraine tries not only to keep its transit status, but also to increase significantly gas transportation services revenues. So far, the rate of transit tariff is determined under the long-term contract between Naftogaz and Gazprom that is in force from 2009 to 2019. The rate is calculated based on a formula linked to the fuel cost factor and inflation rate in Europe. In 2015, the gas transit rate through the territory of Ukraine was 2.73 USD per 1,000 cubic meters per 100 kilometers. Meanwhile Kiev has intended to raise it to 4.9 USD counting on Ukraine's geographic location on the gas transit route to Europe may be able to earn very high returns.
 

It is clear that such intentions of Ukraine only further strengthen Russia's determination to abandon the Ukrainian transit that would be Ukrexit implementation in practice.
 

Suppose, gas consumers in the EU would vote Ukrexit. In principle, Europeans should not really care where gas comes from to their houses and offices. The most important thing that European gas supplying companies are aware of very well is that their customers are expecting stable gas supplies at competitive prices.

One cannot merely fail to notice that Ukrainian transit is not capable to meet these expectations of Europeans. Who still doubts that the Ukraine's gas route has no future? Facts speak for themselves: the gas delivery costs grow so fast, the Ukraine's gas transportation system, on the whole, has become more and more old, its technical conditions and ecological characteristics have even more dramatically worsened in recent years, and the Ukrainian economy, which subsists primarily on the IBRD and IMF loans but still continues to drown in debt.

In 2015, the transit of Russian gas through Ukraine amounted to 67.1 bcm or about 16 percent of an annual gas consumption in the EU countries. Now it is in a high-risk area that raises the alarming prospect and may become a real source of major concern for Europeans.

Europe’s choice: The Ukrexit and Nord Stream 2
 

Pursuant to the common business guidelines, European energy companies are assuming the primary responsibility for meeting the expectations of gas consumers. It is quite natural that companies take into account the interests of consumers in seeking the most profitable and reliable partners and suppliers. When Russia put forward an idea of new more economical route for EU imports of gas through Nord Stream 2 as an alternative to the Ukrainian transit five leading European energy companies supported the initiative.

Participation of E.ON Global Commodities SE, Engie SA, OMV Nord Stream II Holding AG, Shell Exploration and Production (LXXI) B.V., Wintershall Nederland B.V. in a joint project Nord Stream 2 together with Russian company Gazprom can be regarded as an accomplished fact of voting for Ukrexit. Due to Nord Stream 2, the annual capacity of the direct offshore pipeline between Russia and Germany will increase from 55 bcm to 110 bcm by 2019 that will make possible largely to bypass the Ukraine's transit.

Many opponents in the EU are seriously engaging in attempts to find any economic competitive disadvantages of the new gas route but there is no any convincing arguments yet to be presented. "The tariff for transporting gas by Nord stream – 2 will be half cheaper than through the territory of Ukraine", said the financial Director of Nord Stream 2 Paul Corcoran.

The tariff for gas transport via the existing Nord Stream is set at 2.1 USD per 1,000 cubic meters per 100 kilometers, which is 20% below the current tariff for transit through the territory of Ukraine. According to Financial Times, Alexei Miller, chief executive of Gazprom, said in a speech at the St Petersburg International Economic Forum in June that the company would plan to tap fields in the Yamal Peninsula, meaning that gas delivered to Germany via the Nord Stream 2 route would travel 4,166km compared with 6,051km via Ukraine. Therefore thanks to decreased operating costs and a shorter route the total costs of gas delivery from Russia’s North to Germany via the Nord Stream will be about 1.6 times lower than for transportation through the territory of Ukraine even at the current transit tariff.

Mr. Miller also said that transit through Ukraine would fall to 10-15 bcm per year after 2020, when Gazprom’s contract with Ukraine expired and Nord Stream 2 was set to start operations.

"We cannot worry each summer what will happen in the winter"

This is an extract from the speech made by Vice-President of the European Commission for the Energy Union Maroš Šefčovič at the Energy Security Summit of Frankfurter Allgemeine Forum and the Munich Security Conference last year in Berlin. It was hoped that Mr. Šefčovič meant Brussel’s reluctance to experience further the risk of disruption to gas supplies from Russia by the transit route through Ukraine and that it was time to choose an alternative and more reliable route but that was not the case.

The European Commission persistently confronts the process of Ukrexit despite the fact that given the status of the Ukraine's gas transport system its future is doomed because of a number of obvious reasons. Meanwhile, Brussels is not only trying to impose a direct relationship between the approvals of Nord Stream 2 with the further fate of the Ukrainian transit but is continuing to spend the EU funds for the latter "resuscitation".

The EU promises to consider a possibility to grant 100 mln Euro to support the Energy Efficiency Fund in Ukraine. It was announced on July 19 at a meeting of Vice-President of the European Commission for Energy Union Maroš Šefčovič with Prime Minister of Ukraine Volodymyr Groysman.

Brussels should finally pay attention to a growing number of people in Europe who would vote for Ukrexit, who do realize the futility of such financial droppers and other attempts to preserve the gas transit function and the physically worn out and over age gas pipes for artificial breathing of the Ukrainian economy.

A new study "Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe and the UK" written by Andreas Goldthau for the European Centre for Energy and Resource Security and the Russia Institute of King’s College London has concluded, "As the case of Nord Stream 2 demonstrates, the EU therefore needs to take choices on a central question: is the Commission a regulator (hence neutral) or a political animal?"

Why not admit that neither any consideration of geopolitical nature given by the European Commission nor least of all a constant Trans-Atlantic preaching may affect the real market competitiveness of the Ukrainian transit? Only people who actually pay for gas in Europe should vote Ukrexit.

 

Why has the European Security of Supply Strategy been the central tool to address for already two years the interests of Ukraine, but not the majority of EU member states?

It has now been two years since the previous European Commission adopted in May 2014 the European Security of Supply Strategy. As the time from the adoption of the Strategy passes there are growing doubts regarding the validity of its objectives and methods to achieve them, but especially its compliance with the interests of the population and undertakings in the EU. The implementation of the European Security of Supply Strategy certainly is costly for the EU countries. The question is how big impact these expenditures would have on many challenges in the EU.

As it is recognized in the Strategy, its necessity was due to external factors, the main of which was "the ongoing Ukraine crisis". Then, two years ago, violent events in Ukraine reminded Europe about another Ukrainian crisis a decade ago, when in January 2006 gas supplies through Ukrainian transit have been threatened for many countries. It is not difficult to note that, like ten years ago, continuing unreliability of Ukrainian gas transit to the EU from Russia keeps putting pressure on the security of supplies and related costs. In other words, the Ukrainian gas bridge between the EU and Russia continues to be unsafe, it oscillates and may completely collapse.

 

Thus, if we sum up the two-year history of the European Security of Supply Strategy, it appears that

the European Security of Supply Strategy has become something of an additional pillar or crutches for a shaky Ukrainian gas bridge
The question then arises: what purpose does this Strategy serve if the European Commission uses it as a handy tool for keeping alive the Ukrainian transit?

Anyone can well understand that the Ukrainian transit is entirely unreliable in the long term thereby increasing the need to look for alternatives. Brussels, however, clings to the Ukrainian gas transport system (GTS) taking a leading role in opposing implementation of new projects for the delivery of Russian gas to Europe. The motivation is clear - it has to enable Kiev in economic distress to earn on the gas transit to the EU and to avoid even greater financial support of the current Ukrainian government. However, despite that additional pillar provided by the EU, the situation in Kiev is not improving. "Kiev is losing the fight against corruption", Foreign Policy magazine wrote in February. Such an assessment has completely scared all private investors away. It is unlikely that any of them may be interested in the aging Ukraine’s GTS.

It is obvious to European energy business that the Ukrainian transit is actually fraying. It is not a coincidence that major European energy companies E.ON, Shell, BASF/Wintershall, OMV, ENGIE would like to build the Nord Stream 2 project rather than repair decrepit Ukraine's GTS because their shareholders also don't want to lose their money. They are well aware that there are big problems in Ukraine as a transit country that should be solved not by means of additional supporting political and financial "pillars", but by creating bypassing routes.

It would be difficult furthermore to defy the logic of Russia's action because, as confirmed by the WTO principles, diversification is important not only for consumers but also for the suppliers. After the collapse of the Soviet Union, the EU imported about 90% of Russian gas via Ukraine. Having turned into a transit monopoly, Ukraine began to demand lower prices and higher transit tariffs. The scenario of Ukrainian gas crisis in 2006 showed that in such a case a monopoly position of Ukraine in providing transit services had a crucial role.

However, evidently there is no any EU strategy with the potential to maintain the transit revenues for Kiev, which has been decreasing: Ukraine earned some 4 bln USD for transit services in 2013, some 3 bln USD in 2014, and some 2 bln USD for 2015 in transit fees.

At the same time, it has to be recognized that Brussels policy implanting the security of supply strategy does not result exclusively in strengthening the unity in Europe, but often even on the contrary is preparing the ground for development of a conflict of interests between the EU Member States. It is no coincidence that some Eastern European countries such as Poland and Slovakia are the staunchest supporters of the Strategy actively opposing new gas routes bypassing Ukraine. This is due to individual economic interests of these countries. For example, Slovakia's state company Eustream had revenues of 630 mln Euros in 2014, down from 697 mln Euros in 2013, and most of this came from Russia’s Gazprom as transit fees for gas delivered to the EU through Ukrainian territory.

Meanwhile, the delivery cost is the question that no doubt attracting the attention of all gas consumers in Europe. As we know, in any market, the delivery cost of goods is included into the price that ultimately the end user has to pay. In this case, we are talking about millions of gas consumers in Germany, Italy, Austria and other countries. Therefore, it is not surprising that the gas companies in these countries expressed a particular interest in bypass route of the Nord Stream 2 project, which will give an opportunity to reduce delivery costs of imported gas.

By looking at the results of the European Security of Supply Strategy, some of us can also argue that its two-year implementation has not brought the European Commission closer to its political goal to limit gas imports from Russia. According to the recent report of ICIS, Russian gas imports to Europe of 37.9 bcm represented the greatest quarterly total for more than four years and accounted for 55% share of the total, compared to 47% in the first quarter of last year. What is also notable in this regard is that the unprecedented growth of gas imports from Russia was accompanied by similarly unprecedented warm winter in Europe. As the Guardian wrote, "February was the warmest month in recorded history".

Let us guess how it would be in a colder-than-usual winter.

Why wouldn't the founding fathers of the European Security of Supply Strategy acknowledge that in practice the European gas market is rather reluctantly responsive to external influences such as politically motivated orientation and is committed to respond primarily to the economic interests of population and undertakings in the EU countries?

 

 

Why should we believe rather small in terms of capacity, but very expensive project of the Southern Gas Corridor can profoundly improve the security of supply?

Would the Southern Gas Corridor be ready to perform effectively the assigned role in ensuring the security of supply throughout a whole long life cycle envisaged for such a gas infrastructure project? That this can happen may be only a delusive hope of politicians, given obvious challenges in attainment of the project goals. If anybody wants to see them, it is just necessary to pay attention to the facts and views of experts within the gas industry highlighting a number of specific issues.

Is there enough natural gas reserves for the Southern Gas Corridor in Azerbaijan, whether the dwarf project acquires longevity?
To answer this question, just look at the current state of the export potential of Azerbaijan's gas industry. In the first quarter of 2016, gas exports amounted to 2.459 bcm. It is not difficult to see that, if the Southern Gas Corridor is launched now, annual exports would be 1.5 times less then the designed capacity of the gas pipeline. Of course, we do remember the promise of the consortium of companies developing the Shah Deniz II, led by BP that its implementation is aimed to supply 16 bcm per annum of gas to Turkey and EU by 2019-2020. However, this business plan requires a very big volume of investments - the cost of the second stage of Shah Deniz field’s development is estimated at 28 billion USD.
　

It is no secret that securing investment remains one of the major difficulties for Azerbaijan. The shortage of funding continues to curb the development of Azerbaijan oil and gas industry. Azerbaijani economy is highly dependent on oil and gas revenues. The drop in oil prices led to a reduction in gas prices with a lag of six to nine months, as the prices of long-term contracts for gas are mostly linked to oil quotations. As a result, gas production in Azerbaijan almost stopped developing: in 2015 annual production of gas accounted for 18.9 bcm, whereas in 2014 - 18.7 bcm. At the same time, the major part of gas was consumed in the Azerbaijani domestic market. In 2014, the total domestic consumption amounted to 11.654 bcm.

In addition, it is important to consider that the demand for gas within the country is expected to increase because of the emergence of new industrial consumers in the future. According to Reuters, Azerbaijan planned to complete the construction of a fertiliser plant with an annual capacity 700,000 tonnes of carbamide as well as chemical plants by the end of 2016. The polypropylene plant, with an annual capacity of 150,000 tonnes, was expected to start production at the end of 2016, while the polythene plant, with an annual capacity of 100,000 tonnes, would be ready in the beginning of 2017. Meanwhile there is no official data yet on what resources will be used for this new production, although the main raw material is natural gas.

Perhaps, Azerbaijan is going to import the missing gas from Russia to meet its own growing needs, as it was in 2015 when according to Azerbaijani media, in September-October Russia's Gazprom was delivering 6 mcm of gas per day to the Azerbaijan Methanol Company (AzMeCo) through the Haciqabul-Baku gas pipeline.

In the longer perspective, when the existing reserves become depleted of gas, Azerbaijan promises to connect Europe with two new large deposits Absheron and Shafag-Asiman. Exploration of these gas fields are implemented by the Azerbaijani company SOCAR PSA jointly with European companies - the first of them with Total and the second with BP. According to Azerbaijani authorities, the production is likely to begin in 2021-2022. Thus, only somewhere in the middle of the next decade, the development of new fields will enable to replenish the resource base of TANAP-TAP.

Apart from gas resources necessary for the Southern Gas Corridor there is an equally important question regarding the technical ability to increase gas supplies by TANAP-TAP to Europe as from Azerbaijan and probably from other countries in the Caspian region. Actually, this will require increasing capacity of the entire chain of these gas pipelines.

In this regard, it should be recalled that there is another pipeline in this chain ahead of TANAP. It is the South Caucasus gas pipeline (Baku - Tbilisi - Erzurum), which is currently operating. The length of the Baku-Tbilisi-Erzurum gas pipeline exceeds 700 km. It is apparent that in future further expansion of the Southern Gas Corridor will also require an adequate upgrade of this pipeline through the territory of Azerbaijan and Georgia.

Reaching such goals of extending gas supplies to the EU by TANAP-TAP in the future will require installation of new strings of pipes, compressors and other equipment. In other words, in order to grow up and to progress to a category of larger gas suppliers to the EU the two percent dwarf project will require very substantial investments in the next decade. However, the investments to be made to accomplish the Southern Gas Corridor have already been deemed excessively high.

The Southern Gas Corridor that is too small, but too expensive. Why?

At the High-level Conference "EU energy cooperation with the Eastern Neighbourhood and Central Asia" Vice-President of the European Commission Maroš Šefčovič responsible for Energy Union stated that "this pipeline chain of 3,500 km (the Southern Gas Corridor) whose value 45 bn. USD is one of the biggest construction projects of our times".

When compared with information about investing in other pipeline construction projects that are being implemented in the world gas industry, we can see that the Southern Gas Corridor is indeed the greatest, at least, at its cost. For example, in an interview with the Official News Service for Oil and Gas in Iran (Shana) Hassan Montazer Torbati, planning director of the National Iranian Gas Company, told that Iran plans to establish 5,000 km of gas pipelines for both export and domestic demand as well as 25 pressure boosting stations by 2021-2022. Iran is going to invest about 15 bn. USD in the implementation of the plan. It is easy to see that the value of the Iranian project is three times lower than that of the dwarf project, although the volume of work to be accomplished in Iran is significantly bigger.

In respect of its cost, the Southern Gas Corridor is not comparable with any other similar pipeline projects. For example, the Nord Stream 2 gas pipeline launched by Russian Gazprom and European BASF/Wintershall, E.ON, Engie, OMV and Shell are estimated at 12 bn. USD with the total capacity of two strings 55 bcm and the length of 1,224 km.

Another much more powerful project, initiated by Russia in 2007 as the South Stream, with the capacity of 63 bcm and the total length of offshore and onshore parts of 2446 km was estimated at 40 bn. USD.

Among all similar projects, the South Transport Corridor stands out as an extremely expensive gas supply infrastructure in terms of cost per unit of throughput. "There is no commercial rationale for spending 3bn. USD to produce and transport just 1 bcm per year," Turkish expert Dr Volkan Ozdemir said in an interview with Natural Gas Europe.

Anyone is able to draw his own conclusions, what project will be more commercial, more favorable for the European gas market, as well as for distribution companies or commercial and residential gas users. Overall, everybody understands a cost recovery structure provided for reimbursement of related project investments: the more expensive the project, usually the higher will be the price of its products. That is why, it does not matter who would have invested into the Southern Gas Corridor, eventually the price of Caspian gas may be a really expensive surprise for end users both in Turkey and in EU countries. However, as we can see, the future gas prices, its competitiveness on the market are not the issues of concern to policy makers who are placing a high political priority on the Southern Gas Corridor ignoring the importance of its commercial viability.

With regard to the Southern Gas Corridor, it would be therefore accurate to say that despite the fact that competitive advantages over its "rivals" in the European gas market in the future is questionable, the attention paid by politicians to this dwarf project is staying ahead of any competition. Paraphrasing the old metaphor of "dwarfs standing on the shoulders of giants can see…", in respect of the Southern Gas Corridor it would have been more than appropriate to say that the dwarf sitting on the lap of the European Union, gains increasingly impressive size.

Whatever some say, such a vigorous promotion of the dwarf project providing only two percent of the EU annual gas consumption - the value that almost lies within the operating control limit, first is aimed at supporting the political image of Brussels as well as the US attempts at pushing Russia aside as a major supplier to Europe. At the same time, it should be evident to everyone today that TANAP-TAP alone never resolve those major economic and social challenges, which require a significant increase in the supply of gas to the EU, for example, a growing energy poverty problem in Southeastern Europe.

According to ENTSO-G’s projections, used to plan gas pipeline investment, range from a 13% increase in the EU gas demand to 2030 in its lowest scenario, to a 35% increase by 2030 in its high scenario.

Why wouldn't policy makers in Brussels recognize that, when the Azerbaijani gas is supplied to Europe, the volume of 10 bcm is the maximum that Azerbaijan will be able to provide, while the needs of the EU by 2030 may grow by another 150 bcm?

Why, notwithstanding the circumstances, does the European Commission continue to assert that the Southern Gas Corridor plays a key role in the European Security of Supply Strategy?

Why do politicians lined up to support the Southern Gas Corridor project, which will have annual capacity of no more than two per cent of the EU gas consumption?

 

According to estimates from the trade association Eurogas, natural gas consumption in the 28 European Union Member States grew by some 4% last year to 426.3 bcm. Demand for gas in the EU will continue to increase, so it is important to look for new opportunities to import it, because our own production has decreased significantly. From 2004 to 2014 gas production in the EU fell by 42%. In the third quarter of last year, a leading producer of gas in the EU the Netherlands became a net importer. British gas fields in the North Sea are gradually being exhausted.

The future of the EU gas market illustrates a graph below taken from the 2016 edition of BP's Energy Outlook, which shows a stable rise of the imports share in the European gas consumption over the next twenty years.

 

In the previous decade, the EU started seeking opportunities to increase gas imports. The European Commission put forward an idea of the Southern Gas Corridor for the gas supply from Caspian and Middle Eastern regions to Europe. This initiative was in the European Commission's Communication "Second Strategic Energy Review – An EU Energy Security and Solidarity Action Plan" (COM/2008/781). It took many years for the idea of the European Commission finally came to the realization phase. Remarkably, during that time Russia, Germany, the Netherlands and France had carried out the construction of the Nord Stream offshore pipeline from Vyborg to Greifswald. It has an annual capacity of 55 bcm. Germany begun to import Russian gas through the Baltic Sea in November 2011.

 

 

The Southern Gas Corridor: Would the dwarf project grow up under perfect conditions of being placed on the EU knees?

It is currently known that within the framework of the Southern Gas Corridor, Azerbaijan plans to bring the Caspian gas to Europe from Shah-Deniz 2 via the Trans Anatolian Pipeline (TANAP), which will transport gas across Turkey, and the Trans Adriatic Pipeline (TAP), which will take gas through Greece and Albania into Italy. First gas is targeted in 2019 for supplies to Turkey. Gas deliveries to Europe are expected in 2020.

The designed capacity of the pipeline is 16 bcm of natural gas per year. Turkey will import 6 bcm of gas from the pipeline. The remaining volume of 10 bcm will be delivered through TAP for the European customers. Out of this capacity, 8 bcm will be marketed in Italy and the rest will be equally divided between Greece and Bulgaria.

On the scale of gas consumption in the EU 10 bcm is an extremely small volume, which accounts for only 2.3% of the annual consumption in 2015. If an annual rate of gas consumption growth in the EU remains at the same level of 4% up to the commissioning of the Southern Gas Corridor in 2020, in five years the share of TANAP-TAP will be even less than 2%. Therefore, a comparison of the Southern Gas Corridor to a "dwarf" can be deemed quite appropriate.

Of course, some can argue that "albeit it is extremely small dwarf project, but nevertheless it is important" because it is given a very special role to play in diversification of gas supply routes to Europe as a part of the European Commission's comprehensive Energy Security Strategy.

 

Why does the European Commission pay so much attention to the only one new pipeline route of a relatively dwarf size to ensure gas imports to the EU?

Whether is it possible that, while being in the singular, the Southern Gas Corridor will be capable to perform the assigned role for achieving the diversification, particularly in view of the challenges related to this project, which will be considered on the following pages?

--- -

Why has the arrival of the first high wave of the US shale LNG to Europe remained overdue as well as a promise to overflow the European gas market?

Anticipation of the first high wave of shale LNG supplies arriving from the US to Europe would be obviously dragged on further. Back in September last year, during the interview given to "Turkish Policy Quarterly" Amos Hochstein Special Envoy and Coordinator for International Energy Affairs leading the Bureau of Energy Resources (ENR) at the US Department of State stated, "The first LNG exports are poised to begin as early as this December."

The European Union, as usual, is attentively listening to the words of its leading Atlantic partner. Promises from Washington regarding an imminent arrival of shale LNG should give more confidence, at least at a high political level of the EU, that, thanks to their fulfillment, Brussels will have more opportunities to implement its proposals formulated in the new "Energy Security Package" released by the European Commission in February.

The economic reality is that the EC is required to increase gas imports to achieve the objectives adopted by the 2015 Paris Climate Conference, to cover the growing energy needs of households and industrial entities, to develop new areas of natural gas applications such as using natural gas as a transport fuel in Europe. And above all, there is a great challenge of energy poverty, which has long been acute especially in the South East Europe countries.

As many of us are aware concerning gas, we cannot expect the production development in Europe. Domestic gas production accounted for 34% of gross inland consumption in 2013, and this share has been steadily shrinking further. For example, the Netherlands covered its consumption through national production by 47% and this country was the fifth largest natural gas exporter in the world. However, because of production cut the Netherlands is going to change from being a net exporter into a net importer of gas.

The new "Energy Security Package" presented by the European Commission provides detailed proposals on the key issue of how to ensure gas supplies for a sustainable development of the member-states. Meanwhile, probably many more people in the EU countries have not found in these proposals convincing economic justification. The European Commission's proposals, as in the past, but this time even to a greater extent contain political aspects, when energy policy context clearly prevails over economic feasibility, although the latter is precisely what is of most interest to all end gas consumers and gas undertakings in the member-states.

One feature of these proposals is that the drafters of the new energy strategy continue making it with such a political compass that for the last years has led in the same direction to reducing energy cooperation with Russia in the gas sector, citing the needs for energy security. This mode of the EU energy policy making obviously complicates the task of guaranteeing the future gas supplies, as it attempts to divert consumers in Europe away from Russian pipeline gas, which ensures about a third of the total gas consumption and even much more in some of the member-states, without offering an adequate replacement. As stated regarding such a scenario in the documents of the new Energy Security Package, "Russian volumes would have to be replaced mostly by increased LNG imports, given the limited availability of other sources."

At the same time, we have to give credit to the authors of the new Energy Security Package that in its documents related to the EU LNG and gas storage strategy they speak in a rather temperate manner about the prospects of increasing LNG imports into the EU at the expense of shale LNG supplies from the US. As it is stipulated by one of the action points of the EU LNG and gas storage strategy, "Priority should also continue to be given to high level energy dialogues with Algeria, the US and Canada."

This is correct that they put Algeria in the first place. As we know, this country is one of the main LNG supplier in the EU. More than 90% of Algeria's LNG exports were sent to Europe, primarily to France, Turkey, and Spain. We should nevertheless not ignore the fact that the second place in this short list for the US shale LNG without a proved experience of supplies to the EU countries can be considered only as a great credit of faith in the US promises regarding the first high wave of shale LNG that seems to be shortly reaching Europe.

However, there are several reasons that actually hinder the fulfilment of these promises. In this case, it is not sufficient to demonstrate a political willingness on both sides of the Atlantic. Most of these reasons are too well-known to all who are familiar with current state of the world energy market. Let us consider at least three reasons creating barriers on the way from upstream market segment (shale gas production) to downstream segment (sales of shale LNG to for undertakings of gas traders and suppliers at the EC market).

1. The deepening decline in the US shale production.

 

The Wall Street Journal reported that the U.S. Shale Producers Cut Output - Continental Resources Inc., Devon Energy Corp. and Marathon Oil Corp. plan to pull roughly 10% less from the ground in 2016 than they did last year. There are even more pessimistic forecasts of Energy Intelligence, warning investors that the actual peak of US shale industry development has long passed and this industry is expected to have negative growth of shale oil production in 2016 as shown in the graph below.

 

The situation is similar with regard to gas production at shale plays in the US. According to EIA information published in "LNG North America Journal" in January 2016, natural gas production across all major US shale regions are seen declining. Substantial drop in rig counts since mid-2014 can no longer be compensated by productivity gains. For this reason, EIA anticipated gas production would decline within one month alone from 44.3 Bcf/d in December 2015 to just over 43.9 Bcf/d in January 2016.

 

 

As it turned out, the US shale industry was not prepared to withstand the pressure of oversupply and low prices on the world oil market. Now none of us has the foresight to see exactly when such a negative effect may become at least a little bit less. On the contrary, pessimism in the projections is greater than ever. For example, Jim Teague, Executive Vice President of Enterprise Products Partners L.P., one of the biggest pipeline companies in the U.S., said to The Wall Street Journal that he could not predict how long the pain in the oil patch will last. "I don’t have a clue how low crude oil is going to go, how long it’s going to stay there, or what normal’s going to look like" when things finally stabilize, he said. "People keep calling it a cycle. I call it pure hell."

 

2. The expected flow of supplies from new producers - an important factor affecting the LNG market

 

In addition to low oil prices, tightening competition will reset LNG prices even lower, cutting off delivery opportunities for the US suppliers in Asia as well as in Europe. According to March edition of "LNG North America Journal", Brent is forecast to average 38 USD/bbl in 2016, while Henry Hub spot gas prices keep dropping below 2 USD/mmBtu threshold.

 

Not only that oil prices drop drags down prices for LNG, along with it, there are also several new large-scale LNG capacities to be launched soon. For example, at the same time with start-up of new LNG capacities in the US it is planned to complete the construction of Gorgon LNG project on Barrow Island in Western Australia in the coming months. Up to now, this is the most expensive project in the history of the LNG development - with a capacity of 15.6 million tons per annum (MTPA) it will cost 54 billion USD.

 

Australian Petroleum Production and Exploration Association says that Australia is on track to overtake Qatar to become the world's largest exporter of liquefied natural gas in 2018. The total value of Australian LNG projects exceeds 180 billion USD. By 2017, total LNG production capacity in this country will reach 53 MTPA.

 

3.In practice, European gas companies already abstain from purchasing shale LNG from the US

 

Amos Hochstein, the Special Envoy and Coordinator for International Energy Affairs leading the Bureau of Energy Resources (ENR) at the U.S. Department of State paid a visit to Zagreb, where he actively supported the Croatian government's intention to create the LNG terminal on the island of Krk.

 

Croatian First Deputy Prime Minister Tomislav Karamarko met

with Amos  Hochstein

 



A special interest of the United States to such a small Balkan country like Croatia appearing as if out of nowhere, in fact is quite evident. The reason, of course, is that at once two European countries changed their mind to purchase shale LNG from the US although Cheniere Company, the leading US exporter of LNG had already included them into the list of their prospective customers.

 

At first in mid-January, Lithuania put plans to buy LNG from the US on hold. "We are not buying gas from the U.S., because the gas they are offering at the moment does not meet specifications needed for our gas distribution system," Ernesta Dapkiene, a spokeswoman for Lietuvos Energija, told Reuters.

 

Two weeks later this time Greece hit the Cheniere Company’s plans hard. The new CEO of Greek state gas supplier Depa, Theodoros Kitsakos, revealed the company's mid-term strategy. Kitsakos expressed uncertainty about a planned LNG terminal to be constructed in Alexandroupolis by the GasTrade Greek Company and the part it will play in supplying the IGB. As pointed out by the CEO, should GasTrade agree to LNG delivery from Cheniere Company in the future, pricing will be a key issue. Currently Greece imports gas from Gazprom at a price of between 4.6 and 4.7 USD/mn Btu, Kitsakos said; from Turkey's Botas at 5.9 USD/mn Btu; and from Algeria's Sonatrach at 6.5 USD/mn Btu. Gas at the Dutch TTF is around 6 USD/mn Btu. However, the price Cheniere Company will ask for gas is rumored to be around 7 USD/mn Btu.

 

Thus, the US LNG exporters are now viewing Croatia as an extremely important client, which can become regular customer. In fact there no any other such clients for Cheniere Company in Europe yet.

 

However, despite the foregoing, there are also some more or less optimistic assessments of the future development of the LNG market as well as prospects for its supplies to Europe sometime in the future. This is reflected by the forecasts made by British Petroleum Research Center. Besides a representative of another well-known British center for advanced energy research - the Oxford Institute for Energy Studies, David Ledesma found a very figurative picture of the future of the US LNG supplies to the European market. Speaking at the European Gas Conference in Vienna, he creatively expressed his opinion that now many of us in Europe are like a "rabbit staring into the headlights of a car coming towards us. We do not know what to do, and are having to think through new strategies…"

 

As far as we need to take care of new strategies for "rabbits", let us now, in the beginning of spring, recall another rabbit - the March Hare - a fictional character from "Alice's Adventures in Wonderland" by Lewis Carroll. This friend of Alice would unlikely become confused and indecisive caught in the headlights on the road because he did remember her talk with the King:

"Just look down the road and tell me if you can see either of them."

I see nobody on the road," said Alice.

I only wish I had such eyes," the King remarked in a fretful tone. "To be able to see Nobody! And at such a distance too!"

 

Why should all of us in Europe, instead of trying to see "Nobody" behind the Atlantic horizon, better think well, where to buy enough gas for sustainable development?

--- -