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?

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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?

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Why did EBRD hardly manage to get Ukraine off a so-called gas needle?

The process of the EU-Ukraine Association is nearing completion of an important stage. Most member states have already ratified the Association Agreement. However, the number of problems related to Ukraine have by no means become smaller. On April 6, 2016, the Dutch voters will answer the question "Are you for or against the law approving the treaty of association between the European Union and Ukraine?" Opinion polls show that turnout will exceed expectations, and the majority will vote against. A recent Maurice de Hond poll revealed that 73% of the Dutch population are willing to vote against the association with Ukraine. Greece gave a similar signal delaying the ratification process.

It would seem that these two European countries are very different in terms of their present economic situation. At the same time, apparently, there is an equal understanding in both states regarding the association with Ukraine that they don't think it's fair to use your own people's money to subsidize a country that's shown itself to be really bad at basic state functions.

Now, the criticism of the Government of Ukraine from Brussels is stronger as well as requirements to solve more actively the pressing economic problems. Ukraine for its part behaves itself as if there is nothing to bother responding appropriately to what was said, and continues to ask for more and more money.

The issue about continued financing has become a permanent part of the agenda at talks of the European Commission with Ukraine

When Vice-President for Energy Union Maroš Šefčovič was in Davos for the World Economic Forum 2016, he held bilateral meeting with Natalia Jaresko, Ukraine's Minister of Finance. One could easily predict that this time as usual Natalia Jaresko at the talks in Davos raised questions about financing of the state-owned company "Naftogaz" and granting aid for support of macroeconomic stability in Ukraine.

 

EBRD First Vice-President Phil Bennett and Minister of Finance of Ukraine Natalie Jaresko signed a government guarantee agreement on EBRD loan

A noteworthy detail is that financing of the state gas monopoly "Naftogaz" was that particular question, which was brought to the forefront of many other problems. This has happened despite the alleged success achieved in the gas sector of Ukraine. Ukraine's President Petro Poroshenko, mentioning the key achievements of 2015 during the first press conference in the new year, said, "We got off of the Russian gas needle."

Indeed, the supplies of Russian gas to Ukraine, which had been ongoing for decades, were stopped in autumn of last year. Let us recall that the Russian company "Gazprom" halted gas supplies to Ukraine on November 25, 2015 because Kyiv did not make advance payments for gas. This took place despite the fact that the prepayment for gas was one of the terms of a binding protocol to secure gas supplies for the winter period from the 1st of October until the end of March 2016 signed by the European Commission together with Ukraine and Russia.

Given the situation, we can readily draw the conclusion that the actual reason for the declared getting off "the gas needle" and refusal to perform the protocol, for which the European Commission had spent so much effort, is rather ordinary. There were no necessary financial means for Ukraine's gas purchases in Russia.

Getting off the gas needle Ukraine is directly descending into the financial noose

However, the main intrigue is that Ukraine decided not to purchase gas from Russia not only because of the lack of its own funds, but also in conformity with the conditions put forward by European lenders. October 23, 2015, in Berlin EBRD First Vice-President Phil Bennett and Ukraine’s Minister of Finance Natalie Jaresko signed a government guarantee agreement on EBRD loan to finance the purchase of gas of the company "Naftogaz". According to media reports, the funds in the amount of $ 300 million are intended for the purchase of about 1 bcm of gas on the western border of Ukraine. In short, the condition of the loan, if the money comes from Europe, in this case gas should be from here too.

It is also specified in the Berlin Agreement that within three years the company "Naftogaz" may partially return the loan and then again re-borrow this amount. Thus, within three years the EBRD provides Ukraine with an opportunity to repay partially its debt and borrow new funds. In principle, it may only aggravate the already deteriorating state budget and the rising public debt in Ukraine. It will tighten even worse the financial noose around Ukraine.

Among other things, we must not forget that the EBRD money, before returning to the European gas traders will have to go through the maze of corrupt Ukrainian state gas monopoly as it was publicly acknowledged by past court cases. Obviously, with this in mind, the Bank is trying to insure itself, putting prerequisite for the provision of the loan that the Government of Ukraine should implement the Action Plan on corporate governance reform in the company "Naftogaz". According to this plan a corporate restructuring at "Naftogaz" envisages the creation of a supervisory board of five directors in which there are only two to be appointed by the Government of Ukraine. The other three members of the Board have got a status of independent directors. Candidates for the supervisory board's independent members will be selected with the assistance of the Odgers Berndtson Group, which is engaged in the executive recruitment and international executive search. It is important to underline that the Odgers Berndtson's services will be paid by the EBRD, which is evidently very interested in introducing their tried-and-trusted representatives to monitor operations of the company "Naftogaz".

However, many would probably agree that it would be less risky to do the opposite - first get rid of the old corporate structure of the company replacing it by a new one, and only after that to lend the money.

Financial noose is really bad, but the reverse gas noose may be even worse

None of us would be surprised by the EBRD's special concern for future of its assets. However, who should consider the public interests in this case? A general question, which arises here, is how much the EU citizens should worry that Ukraine would continue sinking into bankruptcy with the growing sovereign debt. On the one hand, this is bad, that there is a clear risk of debt accumulation up to the point when Ukraine as a chronic borrower will be even heavier hanging on our pockets for a long time asking for more and more new loans and trying to restructure the old ones. In fact, this can turn into a kind of hole in the pocket, which will make the EC countries lose money that are especially necessary now in order to overcome the worst migration crisis, not to mention many other problems.

Meanwhile, this does not confine just to the grim prospects for emergence of such "a hole in the EU countries pocket". Because, on the other hand, the attempts to justify the gas purchases by Ukraine on the border with the EU by referring to allegedly more competitive prices do not look convincing. According to www.oilprice.com, the average price of both EU and Russian gas imported to Ukraine in the third quarter of 2015 fell by 2 USD from the previous quarter to 226 USD per 1,000 cubic meters.

We should not lose sight of the geographical origin and particular technical transmission of reverse gas eastward across the western border of Ukraine. It is the same Russian gas from the Ukraine's transit pipelines, which European traders purchase and then resell back to Ukraine. There is no question that conducting gas reverse flows to Ukraine is a profitable business for Slovakia's Eustream, Germany's RWE or the other European gas supply companies. They have gained a good opportunity for making money thanks to the loan provided the EBRD to Ukraine.

However, it is clear that the reverse supply of gas from Europe may continue as long as the money of the EBRD loans or other lenders are available. This reliance on external loans indicates that the reverse gas supplies for European companies can hardly be regarded as a strategic business because as soon as financial support runs out, such a business will be over too. The consequences of such a "game of reverse gas" might be more unfortunate for the EU countries receiving Russian gas by transit through Ukraine.

The pursuit of reverse operations will lead to strategic miscalculation in ensuring security of supply

The matter in question is related to the basic characteristics of the Ukrainian gas transport system. Particular attention should be paid to that the gas transit pipelines in Ukraine were designed in the Soviet times to transport gas in one direction only - from the east toward the EU border. These pipelines are similar to single-track railways. There are no second strings through the Ukraine's territory for reverse flow of gas. Therefore, reverse gas may not actually achieve Ukrainian consumers. The special short pipelines were built across the border to ensure reverse flow of gas. They are connected to the main transit pipelines in two places. The first connection is in the EU in order to take gas for reverse flow while the second connection is on the Ukrainian side of the border, where this reverse gas comes back to the transit pipeline over and over because there is no further route deep into the territory of Ukraine. This reverse circuit forms a cross-border ring of pipes, compressors and other equipment, where gas can circulate as much as long.

Probably you are curious to find out how in this case Ukraine meets its domestic needs for gas, if the reverse scheme is not capable to do it. Russian gas that passes through the Ukrainian territory under transit agreements for the EU imports are used for internal consumption in Ukraine. In this case, offtake of transit gas from Russia is compensated by means of returning to Europe that reverse gas, which is purchased on the EU border under the EBRD loan.

Undoubtedly, circular transmission of gas inside a cross-border "multi-reverse" ring requires certain costs. Someone, of course, may argue that in theory it would be cheaper just to divide the funds earmarked for gas purchases, between European traders on the western border and the Russian supplier on the east instead of carrying these additional costs for a physical multi-reverse of gas. However, that would contradict one of the basic terms of the EBRD loan, which, as we remember, determines the place of gas purchases from the EU on the western border of Ukraine.

This means that the EBRD loan granted to Ukraine with the condition of gas purchasing only on the EU border can just contribute to stability of gas supplies temporarily, but does not address the key issues related to long-term balanced provision of Ukrainian consumers with natural gas. In addition, the loan conditions ruled out the possibility of choosing between gas purchases on the western and the eastern border of Ukraine based on price competition that therefore turns to an additional competitive advantage for our European gas traders.

Let us imagine what would happen if the agreement between Russia and Ukraine on gas transit to Europe is not prolonged after 2019, when the current transit agreement expires. In that case on one hand a transit gas will not be longer available for domestic consumption in Ukraine and on the other hand this country will be able to apply the transit pipeline system vacated after 2019 for transporting gas from Europe. However, the question arises, where European traders will take gas for Ukraine in the absence of transit gas from Russia, as the reversal circuit on the border will become useless. Potentially, it is possible to provide gas supplies to Ukraine from other sources, but that will push the prices up and would be fatal to Ukrainian economy suffering badly from poor creditworthiness.

Here is the conclusion that without transit flows of Russian gas to Europe it will be much more expensive to ensure constant gas supplies in Ukraine over a long period. Is that not a strategic miscalculation that we are going to welcome Ukraine as a new associate member of the EU taking on ourselves in addition to everything else its huge burden of outstanding issues on financing of energy supplies? As regards the EU security of gas supply through the Ukrainian transit route, without Russian gas this problem will disappear by itself.

It is apparent that in reality Ukraine is unable "to get off the gas needle" or, to be exact, off the transit gas pipeline system, to which this country has been rigidly tied throughout history of gas supplies from Siberia to Europe.

Why does Brussels instead of openly admitting the growing problems of gas supplies to Ukraine, just push up the Ukraine's public debt, thereby only delaying a proper response to these growing challenges?

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Why did the Prime Minister of Turkey Ahmet Davutoglu pay a visit to Bulgaria very shortly before the EU Summit in Brussels?

Prime Minister of Turkey Ahmet Davutoglu arrived in Bulgaria two days before the EU summit in Brussels. After the meeting with Bulgarian Prime Minister Boyko Borisov on 15 December 2015, he said, "Bulgaria is a gateway of Turkey to the EU". Immediately after the visit to Bulgaria Turkish Prime Minister traveled to Belgium. What were the reasons for a snap working visit to Sofia only two days before the Brussels meeting?

The talks between the leaders of Turkey and Bulgaria were focused partially on an escalating migration crisis in the European Union since the summit of eight EU countries on 17-18 December was held for further discussion of ways to stem the flow of Syrian and Iraqi refugees. However, Bulgaria had relatively little involvement in management of the waves of migration towards Europe because they entered the EU through the Greek-Turkish border.

Therefore, this issue was hardly the only major reason for the visit, and even more so in respect of migration such a comparison of Bulgaria with "a gateway of Turkey to the EU" is not completely suitable.

Focus Information Agency. Bulgarian Prime Minister met with Prime Minister of Turkey Ahmet Davutoglu

 

Reportedly, the talks in Sofia also included bilateral issues of mutual interest. A speed train from Istanbul to Sofia was mentioned as one of major future transport projects to be carried out. Is that indeed all so? It is evident that the question has not fully disclosed to the public why Prime Minister of Turkey paid this visit to Bulgaria.

The Bulgaria's desire to revive the South Stream gas pipeline project - a serious topic of concern of Turkey

One would assume that the trip of Turkish Prime Minister to Sofia might be also caused by a number of circumstances pointing to the fact that in recent time Bulgaria has taken a more active stance on the resumption of the South Stream project.

Perhaps no surprise that Bulgaria continues with procedures for the South Stream project. Bulgaria has been discussing with the European Commission for several months the possibility of building an abridged version of the South Stream project consisting of two offshore lines, which would deliver Russian gas to a receiving terminal near Varna. As Deputy Prime Minister for Economic Affairs Tomislav Donchev stated in the Bulgarian Parliament, "The last months there have been ongoing meetings and discussions with representatives of various structures of the European Commission in order to carry out a precise legal analysis with their help of what options would be possible according to European legislation to transit gas coming from the Russian side in the Black Sea".

Besides, following the plans of the European Commission, Bulgaria agreed with Greece on the construction of a gas interconnector. Shareholders in the joint project company ICGB signed a final investment decision on the construction of intersystem gas connection Greece – Bulgaria on December 10, 2015 in Sofia. As noted, this project will provide a real possibility to diversify natural gas supply to the South East Europe region.

In addition, Bulgaria's desire to facilitate a return of the South Stream project back to life is indicated by the fact that Bulgaria did not join the group of EU countries, which signed a collective letter against the construction of the Nord Stream II pipeline. "I will defend the position for the construction of Nord Stream II and a gas hub in Bulgaria - it is advantageous for the country and nobody can reproach me for that," Bulgarian Prime Minister Boiko Borisov told Reuters.

The Bulgaria's initiative to establish a regional gas hub "Balkan"

The idea to create a gas hub had first been presented at the energy forum in Sofia on February 9, 2015. The European Commission has supported Bulgaria in principle. In December, according to Reuters, Bulgaria's deputy Prime Minister Tomislav Donchev and Klaus-Dieter Borchardt, director of the EU's Internal Energy Market Directorate informed that the European Commission and Bulgaria set up working group in order to begin assessing the legal, regulatory and financial requirements for creating the Balkan gas hub.

Gas distribution functions of the hub will be carried out based on a new UGS to be constructed not far from the Black Sea city of Varna. From this UGS near Varna the gas will be distributed to Bulgaria, Romania and Serbia. It is planned that in total about 43 bcm are to be delivered to Central European countries.

Turkey zealously monitors current development of Bulgarian initiative to create a regional gas hub. An article in Turkish Weekly, published in early January, was entitled "Bulgaria wants to become main gas hub in Europe."

Even in the absence of comments of the Turkish officials, it is obvious that Turkey itself claims to be a leading supplier of gas on South Eastern border of the EU and the prospect of competition in achieving this goal would unlikely be delightful.

Regional gas hub requires major sources of stable and competitive gas supply

The success of Bulgaria in the implementation of plans to achieve a leading position in the regional gas transport infrastructure will depend not only on the approval of the European Commission regarding mentioned above legal, regulatory and financial requirements. Regardless of how all these conditions would be successfully implemented, as Platts experts correctly noted, "question marks remain over what sources of gas can help create a Balkan hub."

Presently, interconnector with Greece (IGB) is the only one source of gas, which will be actually available for the hub operations in Varna. This gas connection has a length of 140 km on the Bulgarian territory and the planned initial capacity of 3 bcm per year. The IGB pipeline is expected to become operational in 2018. In the next stage, a maximum annual capacity of up to 5 bcm should will be achieved. The IGB pipeline will deliver to Bulgaria 1 bcm of gas, which will start flowing through the TANAP / TAP pipelines by transit via Turkey to Greece in 2019.

Future supplies from other sources of gas, such as regasified LNG from Greece and offshore gas production on the shelf of the Black Sea in Romania and Bulgaria, do not have yet certain implementation timelines. All of them can be considered only in the longer term.

South Stream - a way of ensuring access to capacities of gas sources necessary for the hub "Balkan"

The reply to the question of where to get enough gas in order the Bulgaria's hub really acquires a status of regional distribution center, is suggested by many tens of thousands of pipes stored at the ports of Burgas and Varna, which were originally prepared for the South Stream project. As was known, the two lines of that pipeline had a planned annual capacity of 32 bcm that would be enough to raise of the Bulgaria's hub operations up to the expected level.

Nevertheless, as practice usually proves, just only political declarations and public expression of desire is not sufficient to make anything like that happen. The revival of the South Stream project would require certain actions and decisions obviously not only at the level of the European Commission, but also in Bulgaria itself. For example, to demonstrate serious intent with regard to the South Stream Bulgaria also should reform its domestic energy act, especially since it does not comply with European law.

Two contenders to gas from Russia

Turkey is still counting on imports of gas from a terminal, which is being built on the Black Sea coast of Russia. Despite a dramatic deterioration of relations between Turkey and Russia, anyway the former has not given up its plans to enlarge gas supplies by means of Turkish Stream pipeline.

All Ankara's attempts to arrange replacement of Russian gas have not, as of yet, yielded tangible results. President Recep Tayyip Erdogan's visit to Turkmenistan where he held talks with President Gurbanguly Berdimuhamedow ended in nothing. It was assumed that the Turkmen gas would go to Turkey via Iran, although the existing infrastructure is not sufficient for transit of large volumes. Meanwhile the continued political tensions in the region disrupt these plans. In December, Tehran even halved existing supplies of gas to Turkey, referring to the increase in domestic consumption due to the harsh winter.

Thus, both Bulgaria and Turkey are contenders to Russia's gas. In this regard, returning to the question about the reasons of the working visit of Prime Minister of Turkey Ahmet Davutoglu to Sofia it can be assumed that it could be an attempt to persuade Bulgaria to change its position on the revival of the South Stream project in return for a promise of gas supplies from Turkey.

As one can see, the ultimate goals of the two countries are very similar. Each of them seeks to ensure new supplies of gas within a reasonable time, without which it would be impossible to realize ambitious plans to take the lead in developing gas transport infrastructure in South East Europe, let alone adequately meet growing needs of their national economies.

Klaus-Dieter Borchardt, director of the EU's Internal Energy Market Directorate, explaining the EU position on that question to the Bulgarian news agency, said that Bulgaria and other countries in the region had been focused on large-scale pipeline projects such as the South Stream and neglected the development of regional infrastructure.

There is no arguing the regional infrastructure is necessary, but precisely in order to distribute gas from these large-scale pipelines, without which it becomes simply useless.

This is well understood in Germany, which intends to secure Nord Stream II despite the fact that several EU countries as well as the USA have taken position against its expansion. The implementation of this large-scale project will provide opportunities for creating a regional gas hub in Germany that will encourage further development of regional gas infrastructure in several EU countries, including Austria and Italy.

Why does the European Commission accuse some member states of too much enthusiasm in promoting large-scale projects and limits its own activity (with the exception of TANAP / TAP) by supporting only a development of regional gas infrastructure? Had our countries not learnt yet that they do not need these regional pipes and underground storages without gas?

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Why have EU countries turned out at the junction with a difficult choice of gas transit partners trying to strengthen security of supplies?
 

In May this year, the European Commission adopted a new European Energy Security Strategy, which was a response to an acute political crisis in Ukraine and emerging threats to security of gas supplies to the EU.

Since then, despite all steps, statements and assurances made by the European Commission, the situation remains complex, not to say that by the end of the year it has worsened. Especially it concerns medium-term prospects for the desirable risk reduction of unstable gas supplies to Europe that are becoming daily less and less optimistic.

It is clear that as we talk about the partners of the EU who are responsible for ensuring supplies, we have to consider countries - gas suppliers as well as countries providing the transit through their territory. They are sharing the responsibility as it takes place within any supply chain. It should be recalled that the European Energy Security Strategy mentioned above completely focused on Russia's role in gas supplies to the EU countries. However, this Security Strategy did not pay necessary attention to responsibility of gas transit countries, especially in the case of Ukraine and those violations of the transit obligations, which has been already committed by that country. However, responsibility of gas transit countries, especially in the case of Ukraine and those violations of transit obligations, which had been already committed by that country, are being ignored in this Security Strategy and it shouldn't.

 

 

 

It is impossible not to recognize that gas transit countries play an equally important role in ensuring the supplies. Transit reliability is similarly essential for maintaining a high level of security of supply. A transit country could be figuratively compared with a drawbridge, which our ancestors were supposed to use often at entrances to medieval castles. They were well aware that even if the road to the castle could be in excellent condition, but such a bridge was out of order or under the control of non-friends, security of supplies to the castle would be a big problem.

The fact that transit countries unreasonably have taken a backseat of the European energy policy regarding security of supply reflects the official position of Brussels encouraged by the transatlantic alliance and some followers among the EU member states. By the way, some of the latter are transit service providers themselves for the EU gas market. As a result, it continues to remain silent on the contribution of transit countries in ensuring security of supply, especially if it is negative.

Supply risks related to gas transit countries in particular Ukraine deserve much greater attention

Ask yourself the question what country is the biggest and the most difficult gas transit service provider to the EU? It would not be easy to find anyone among the active population in our countries, who would not know an answer that it is Ukraine.

A close political association between Kiev and Brussels, constant guardianship of the Ukraine's events under supervision of the Washington Administration, recurrent "winter gas packages", etc., all together it serves the PR-campaign creating an image of Ukraine as an absolutely important and, it might even seem, an irreplaceable transit country for supplying gas from Russia.

There are, probably, those among us who could not at once name another transit country for Russian gas. It is Belarus, through which European consumers, especially in Poland and Germany also receive big volumes of gas from Russia. In 2014, Russian gas transit through the territory of Belarus will amount to 45.4 bcm. What is more, unlike Ukraine, this transit route is surely quiet - there are neither problems, nor PR actions relating to the Yamal–Europe pipeline in Belarus. As the phrase goes, "Good business does not go on amidst the hustle and bustle".

However, this expression is not about Ukraine, where shocking news around economic reality and business relationship appear to be very common. Firstly, one may recall that now Kiev refuses to repay sovereign debt by 3 billion USD to Moscow.

Secondly, three months ago, Ukraine and Russia signed a protocol ensuring supplies of gas to Ukraine at market prices for the entire winter season until the end of the first quarter of 2016. It is very important for the security of supplies of Russian gas via Ukraine to the EU. With that in mind, the European Commission acted as a mediator in the multiple dispute-settlement talks that had started long ago in March 2015. Nevertheless, within only two months of signing this agreement, on November 25 Russian company Gazprom stopped supplying gas because company Naftogaz of Ukraine did not pay in advance for the deliveries as it was envisaged by the winter deal. Although under this trilateral agreement, Russia reduced the price it charged Ukraine to the same level granted to neighboring countries, from 251 USD per 1,000 cubic meters to about 230 USD.

In this regard, news agencies quoted the head of Gazprom A. Miller, as saying that "Ukraine's refusal to buy Russian gas threatens a safe gas transit to Europe through Ukraine and gas supplies to Ukraine consumers in the coming winter."

The incident underscores the fact that now the most significant threat to European consumers is embodied in transit risks via Ukraine, but not in the risks relating to the initial supplier. Obviously, even that may be insufficient just to recognize the important role of the risks associated with the transit of gas. It is necessary to judge accurately transit risk levels equally but not lower than risks associated with initial suppliers of gas. Transit risks should not be ultimately ignored (or substituted for some others) while selecting routes of important energy flows to the EU countries.

This observation has meant the necessity of giving separate consideration to both lines of action directed towards ensuring diversification of gas supplies declared by the European Commission including initial gas suppliers and gas transit service providers or gas transit routes.

 

The European Commission still has been putting in place quite modest actions to diversify gas supply routes

In fact, there is only one project in the medium-term plans of the European Commission to create outside the EU a new transit route for gas supplies to Europe. It is frequently mentioned TANAP - the Trans-Anatolian Natural Gas Pipeline (Trans-Anadolu Doğalgaz Boru Hattı in Turkish) from Azerbaijan through Georgia and Turkey to Europe planned in 2019 to add to the EU imports 10 bcm of gas, of which 8 bcm will be intended for Italy and one each for Greece and Bulgaria.

 

A continuing cause of concern is a relatively small capacity of this project in comparison with the volume of gas consumption in the EU. Although TANAP project is considered as a part of the South Gas Corridor, which in the future would be able to provide opportunity of delivering to Europe gas from the Middle East and Central Asia. Nevertheless, it is also admitted that there are still so many interlocking political, economic and technical challenges to be solved achieving these goals. Perhaps it will take even more time to erase most of them than to fulfil the long awaited expedition to the Moon.

It is important that TANAP / the SGC opens a new page in relations between the EU and Turkey, which is going to play the role of one of the leading gas transit service provider to Europe.

Many citizens in the EU countries have recently found out how Turkey has been actively preparing for the role of a transit country when sudden waves of refugees overflowed Europe with the direct Turkish assistance that led many of us here to unpleasant consequences interfering much of a usual way of life.

According to the International Organization for Migration (IOM), this year more than a million migrants and refugees came to Europe. To have a clearer perception of the scope and the depth of this humanitarian crisis it is worth reminding that, in 2014, before the refugee mass exodus into Europe, for example, in Austria number of people with migration background had already accounted for an average of 1,715 million that was 20.4% of the entire population.

Apparently, it is not a proper place to delve into such a dramatic and highly sensitive issue. But, the question that arose consequently: why should not this humanitarian transit have been mutually agreed upon between the EU and the executing country - Turkey?

The practical implication of this was that now almost anyone in Europe hardly would doubt that a poorly controlled transit of migrants and refugee without proper mutual guidance through Turkish territory became a bad prologue to Turkey's introduction as a future gas transit service provider. In other words, this situation reveals that in addition to Ukraine in future the EU may have to include Turkey in the list of difficult gas transit service providers. Indeed, despite some undeniable differences these countries have a great deal in common.

Why does the European Union place itself in a vulnerable situation acting of its sovereign will to make a choice between difficult gas transit service providers?

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